Typically, closely held business owners have an estate plan that is designed to reduce their estate tax burden, rather than eliminate it. Why? Because their professional estate tax planners tell them estate tax reduction is the best they can hope for. In our office, reduction is the wrong target. We aim for the estate tax bull’s eye: elimination!

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A husband and wife — readers of this column — from Indiana (let’s call them Joe and Mary) sent us their personal financial statement that lists the following assets:

Asset Value Tax Strategy*

Residence $400,000 QPRT

Profit-sharing plan $355,000 RPR

Success Co. (family business) 4,600,000 IDT

Other assets (cash, real estate, stocks, etc.) 4,520,000 FLIP

Total $9,875,000

* Used to eliminate the estate tax

Now you might ask, “What is all that alphabet-soup stuff under the words, ‘tax strategy?’” Well, in the order listed they mean “qualified personal resident trust” (QPRT); a special strategy called a “retirement plan rescue” (RPR) used when you have significant dollars in a qualified plan, like a profit-sharing plan, 401(k) or rollover IRA; “intentionally defective trust” (IDT), and “family limited partnership” (FLIP).

Sound complicated? It isn’t. It’s no different than a watch: You don’t have to know how to build one to tell time. You don’t have to know how to draft the pile of documents Joe and Mary had to sign to build a transfer/estate plan that eliminates every cent of their estate tax on a $9.875 million estate.

The QPRT. The house was transferred to the QPRT, which allows Joe and Mary to live in the house (rent free) for a period of years. After the QPRT (remember, it is a trust) terminates, the house will be owned by two of their children — Jack and Jill. (Joe, Jr., the third child, is active in the business.) The QPRT allows the value of the house to be substantially reduced (to under $150,000) for tax purposes, yet Joe and Mary will live there for as long as they live.

The RPR. Joe decided to use the funds in his profit-sharing plan to buy $3 million of second-to-die life insurance (on Joe and Mary). The premiums will be paid using plan funds. When both have passed on, the $3 million in insurance proceeds will go to their kids tax-free.

If you have $200,000 or more in a qualified retirement plan or a rollover IRA, a RPR may be the best tax move you ever make. Joe also invested a portion of the plan funds in Life Settlements (LS), an investment that has paid an average of 15.83 percent per year for the 16 years the company that offers LS has been in business. The company is public and sells on the NASDAQ. The minimum LS investment is $50,000 for accredited investors.

The IDT. The IDT is a wonderful strategy that Joe used to transfer his business (Success, Co.) to his 38-year old son, Sam, who has been managing the day-to-day operation of the business for five years. The way an IDT is structured, Joe will stay in absolute control of Success Co. for life. The transfer, under the tax law, is tax free to Joe and Sam. You actually save $825,000 in tax per each $1 million of the value of the business being transferred. Want to transfer your business to your kids (or employees)? Check out an IDT.

The FLIP. Joe and Mary will be general partners; their three children will be limited partners. The assets transferred to the FLIP can be dealt with (by Joe and Mary for as long as they live) in almost the same way as before the transfer (really complete control). All the partners share in the income, but the value of the assets transferred is reduced — for tax purposes — by about 30 percent. Result: About $800,000 in immediate estate tax savings; more each year.

Yes, Joe and Mary’s plan is a true real-life story. No, we did not tell you every detail of the overall plan. Space does not permit. But now that their entire plan has been put into place, Joe and Mary will transfer over $11 million (including the insurance from the RPR) to their family — all taxes, if any, paid in full. Instead of losing a portion of their wealth to the IRS, the plan actually increases the after-tax wealth to be left to the kids.

Take another look at your own transfer/estate plan. If it does not target eliminating all of the potential estate tax liability, get a second opinion.

Or, if you are typical, you may just want more information.