Showing posts with label section 79 scams. Show all posts
Showing posts with label section 79 scams. Show all posts
Section 79 Plans: March 2012
By Lance Wallach May 14th
Every accountant knows that increased cash flow and cost savings are critical for businesses. 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.
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 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.
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Section 79 Plans are insurance plans sold to small business owners that the IRS considers abusive and will audit. Before you buy into this type of plan, captive ...
Section 79 by Lance Wallach
Section 79 Plans: Section 79 by Lance Wallach, expert witness.: For businesses with 10 or fewer employees, the law prohibits full medical underwriting of the policies that are issued ("group" un...
Did you know the lawsuit industry is $233 billion dollars strong in the USA?
The number of lawsuits is rising, too. When economic times get tough, some people see a civil suit as an easy way to get rich. Lawsuits always target those who have money and not just big corporations, either.
Small businesses, successful entrepreneurs, physicians and wealthy individuals all fall into the crosshairs of litigation lawyers. As every law student learns at some point: “commercial success spawns litigation.” Everyone wants their money.
Fortunately, we’ve got some great solutions for you (and one solution offers a way to turbo-charge your investment profits). So whether you are just beginning your journey to personal financial freedom or you’ve already secured the fortune of your dreams this article can be beneficial for you. A legitimate question to ask is: how do you safeguard your hard earned wealth?
Many times I’m asked if a trust or trust fund can protect my wealth. This is a good question ... and the answer is more complicated than a simple “yes” or “no.” Here’s why:
It comes down to how the trust is set up, basically whether the trust is revocable or irrevocable. Whoa. Those are big lawyer-speak words, so let’s simplify it.
Revocable = you can change the terms of the trust (or dissolve it) whenever you like. It is completely flexible.
Irrevocable = you cannot change the terms or dissolve it (at least not until the terms or purposes of the trust have been completed).
Most trust funds that people set up are called “Revocable Living Trusts.” As already mentioned, the “Revocable” part means that the terms of the trust can be changed. The “Living” part means that the trust is in effect while the trust creator is still alive. A Revocable Living Trust has many nice features. It’s relatively easy to set up, and it is becoming a popular replacement for a will in the United States. There is one little problem: the revocable living trust offers no asset protection.
The courts are very clear about what money is protected in a lawsuit and what is not. Revocable trusts have no protection whatsoever. If you are sued, any money you have in a revocable trust is vulnerable.
So if you’re looking for asset protection (or any potential tax sheltering), a revocable trust won’t cut it. For protection against lawsuits, you need an irrevocable trust. But the protection you get with an irrevocable trust comes with significant trade-offs and you must follow some stringent rules. Below are two iron-clad rules of an irrevocable trust.
The first is if you are sued, lawyers will try to attack the legality of your trust. Your only line of defense is to make sure the trust is set up as clearly irrevocable.
The second iron-clad rule is that you must set up the irrevocable trustbefore anyone sues you (or even before someone threatens to sue you). If you try to set one up after a lawsuit is initiated, no (competent) lawyer will touch it. That’s because lawyers can then be sued too under state "fraudulent conveyance laws." If you attempt to hide or move assets to avoid creditors it’s a fraudulent conveyance. The courts will rule against the trust in a lawsuit.
Setting up an irrevocable trust for asset protection isn’t cheap. Domestic asset-protection trusts cost around $3,000 to $10,000 in attorney's fees, plus yearly asset management fees of roughly 1 percent.
A much lower cost alternative to a trust, depending upon your needs, is an Indexed Universal Life (IUL) that might serve as a viable replacement for an asset-protection trust. The “IUL” is what I like to call a Self-Directed Banking System. It’s a foundational strategy in a wealth protection and income plan.
An “IUL” and an irrevocable trust are not identical, but an “IUL” is much easier to set up. No lawyers are needed; it has a lower startup cost; and includes a host of additional benefits. For example, an IUL can provide:
• A guaranteed annual return (you’ll receive a set amount of interest each year)
• No risk of principal (which means the amount will never drop)
• Indexed growth at a competitive annual rate of return (6-10% or more)
• The ability to take out your money whenever you want, without penalty
• Protection against creditors due to a lawsuit or bankruptcy (in most cases)
• Liquidity so you can have your money in your hands within a few days
• Access to your money in the event of a disability.
• The ability to buy your home, cars, and other large purchases from yourself, so you earn the interest instead of a bank.
• TAX FREE withdrawal of your money when you decide to retire
Basically, you protect your money from a lawsuit without giving up control of the money.
• A guaranteed annual return (you’ll receive a set amount of interest each year)
• No risk of principal (which means the amount will never drop)
• Indexed growth at a competitive annual rate of return (6-10% or more)
• The ability to take out your money whenever you want, without penalty
• Protection against creditors due to a lawsuit or bankruptcy (in most cases)
• Liquidity so you can have your money in your hands within a few days
• Access to your money in the event of a disability.
• The ability to buy your home, cars, and other large purchases from yourself, so you earn the interest instead of a bank.
• TAX FREE withdrawal of your money when you decide to retire
Basically, you protect your money from a lawsuit without giving up control of the money.
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