TAX MATTERS ABUSIVE INSURANCE PLANS GET RED FLAG

By Lance Wallach
Journal of Accountancy January 2008

The IRS in Notice 2007-83 identified as listed transactions certain trust arrangements involving cash-value life insurance policies. Revenue Ruling 2007-65, issued simultaneously, addressed situations where the tax deduction has been disallowed, in part or in whole, for premiums paid on such cash-value life insurance policies. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposes severe penalties for welfare benefit plans that primarily and impermissibly benefit shareholders and highly compensated employees.

Taxpayers participating in these listed transactions must disclose such participation to the Service by January 15. Failure to disclose can result in severe penalties--- up to $100,000 for individuals and $200,000 for corporations.

Ruling 2007-65 aims at situations where cash-value life insurance is purchased on owner/employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the ruling may also be listed transactions. A business in such an arrangement cannot deduct premiums paid for cash-value life insurance.

A CPA who is approached by a client about one of these arrangements must exercise the utmost degree of caution, and not only on behalf of the client. The severe penalties noted above can also be applied to the preparers of returns that fail to properly disclose listed transactions.



Prepared by Lance Wallach, CLU, ChFC, CIMC, of Plainview, N.Y.,
516-938-5007, a writer and speaker on voluntary employee’s beneficiary associations and other employee benefits. www.vebaplan.com

DISCLAIMER: The information provided herein is not intended as legal, accounting, financial, or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Selling Life Insurance Policies for Profit

By Lance Wallach
Accounting Today – January 8-28, 2007

Insurance policies with rising or re-appearing premiums can often cause their owners problems, especially when those owners’ financial needs or obligations change.

Is it a better investment to continue paying a policy that you have already paid into in hopes of a gain at maturation, or to recoup some of the investment by trading the policy for its cash surrender value? Corporate policyholders often face additional dilemmas when dealing with departing executives with key-man or split-dollar policies, or insurance purchased as part of a buy-sell agreement.

Another option is to sell the policy for cash. With a life settlement, the policyholder realizes an amount much greater than the cash surrender value in exchange for the ownership of the policy, thus increasing immediate revenue for companies holding unprofitable policies.

You can also sell term insurance policies. Life-settlement transactions involving key-man or buy-sell policies can provide businesses with increased cash flow to solve immediate financial problems, while transactions concerning split-dollar policies typically involve retirement planning and charitable giving issues.

An individual can also sell their policy for cash. In a recent advisor survey, nearly half of the respondents had clients who had surrendered a life insurance policy, many of whom might have qualified for a life-settlement transaction and subsequent lump-sum cash payment.

A primary reason why an accountant should be well-versed in the life-settlements field is the importance of their fiduciary responsibility to clients. When providing financial advice and strategic information, being able to identify a way to eliminate an asset that burdens the client with unnecessary expenses can be very helpful. Offering more options can satisfy more clients.

The life-settlement process takes about a month, is confidential, and the proceeds can be used for anything.

A recent settlement example is a 66-year-old male with a $2 million universal life policy with $4,200 of cash surrender value. The owner, who could no longer afford the increasing premiums, was paid $194,992 for the policy.

If one still needs life insurance, but does not want to continue the existing policy, the insurance swapoutsm should be compared to the life-settlement offer for the best results. That involves the exchange of insurance, elimination of taxable “paper” gain, or credit against a new policy of basis in an old one.

The alternatives to the above are keeping unwanted insurance, canceling and paying taxes, or canceling insurance and losing credit for the taxable loss.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He speaks at more than 70 national conventions annually and writes for more than 50 national publications. For more information and additional articles on these subjects, visit www.vebaplan.com or call 516-938-5007.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice

Get a Large Deduction With a 412(e)(3) Retirement Plan

By Lance Wallach
California Broker Magazine, June 2008

Successful business owners need big deductions and benefits, which can only be accomplished through a defined benefit plan. Any business can use a 412(e)(3) plan to provide benefits and reduce taxes substantially. The 412(e)(3) plan allows the owner to get the largest legal deduction. At 45, an owner could deduct more than $200,000 per year for himself and more than $300,000 per year at age 55.

Most accountants have never heard of these types of plans, which were defined by the Pension Protection Act of 2006 and are regulated by the IRS and the Dept. of Labor.

The best fit is with companies that have highly taxed owners, but few employees, such as doctors, commercial real estate salespeople, consultants, and other small business owners. A larger business would be better off with a cash balance plan, which also allows owners and key employees to make large contributions. A 412(e)(3) is easy to administer and simple to explain. Other benefits can include asset protection and the ability to deduct life insurance.

Care must be taken with respect to who administers the plan. There have been abuses with the operation of some of these plans and the IRS has disallowed deductions for some abuses. It is important to know whom you are dealing with and that the administrator has the experience and integrity to run the plan correctly. Just because an insurance company may be involved does not make the operation of the plan legitimate.

There are many benefits of using a 412(e)(3) plan. In addition to the large tax deduction, the plan can even be combined with a 401k. This may be the ideal tax deduction for the profitable small business owner or professional.

Lance Wallach, speaks and writes extensively about retirement plans, estate planning, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for more than 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516-938-5007 or visit http://www.vebaplan.com/

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly

By Lance Wallach
NSA: Member Link; May 14, 2008.

Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.

Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings.

The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.

Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.

The result has been thousands of audits and an IRS task force seeking out tax shelter promotion.
For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.

Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company.
Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.

While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies.
Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.

A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.

The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above. Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.


Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516.938.5007 or visit http://www.vebaplan.com/.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.