Lance Wallach Life Insurance
Wednesday, April 30, 2014
Why You Should Stay Away from Section 79 Life Insurance Plans
I’ve had several calls lately from doctors who are being pitched Section 79 plans and are wondering if these plans are any good. The doctors are being told that Section 79 plans are the best wealth-building tool they can use to reduce their income taxes and create a tax-free retirement income
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Must Read
Friday, March 28, 2014
Life Insurance
In many of Lance Wallachs CPE books he discusses 412i or 412e3 and listed transactions.
One day when you were complaining about what you pay the government, your cousin Tilly suggested that she knew a life insurance agent who could help you with your taxes. You met with him, you listened to his pitch about a deferred benefit plan, and you asked a lot of questions. He suggested a 412i plan, whatever that is. From the initial description it sounded as if you would have to fund retirement for your rotating staff which you weren’t interested in doing, but he told you that he could arrange an executive carve out. You really didn’t have the income to fund it initially but he convinced you to sell your investment real estate, declare your gain as ordinary income, and then buy the plan to offset that.
You’ve been hearing that the IRS is after “listed transactions” and you’re worried. Suddenly you’re having a tough time having cousin Tilly’s friend return your calls. The insurance company whose products fund your plan has taken your calls, but for the fourth time in as many months a representative has promised to get back to you. Honest he will!
You have gone to a new accountant and you learn that the plan was unsuited for you, it was formed improperly, and it’s going to cost you a lot more money than you have to pay the IRS not to mention the accountant and the actuary to sort it all out. Now you are worried that the problems may wipe out your retirement nest-egg and keep you working years longer than you intended.
Fortunately, there are ways to provide for your retirement that can afford you tax benefits while creating a solid retirement fund for your future so that you won’t have to be “that doctor”. However, getting there doesn’t necessarily start with cousin Tilly’s insurance agent friend or the “financial planner” you met on the golf course. If you want to avoid problems in your retirement plans, there are some things you should do.
- Educate yourself. When you need a new car, do you go to your dry cleaner’s brother who is a car salesman to tell you what you want? Of course not. You choose some cars that interest you, you study them, and then you work with dealers to get the best car for you at the best deal. Why should your retirement planning be different? There are many types of financial advisors. There are also different types of retirement plans available and one is probably more suitable for your current financial capabilities and retirement needs. A great and easy tool is the IRS Retirement Plans Navigator.www.retirementplans.irs.gov.
- Then find a financial advisor. There are lots of folks who want to sell you their retirement services: insurance agents, accountants, lawyers, stockbrokers and financial planners. Do research about them, search the internet, read about them, contact local professional associations, and use similar resources.
- Interview potential advisors. There are a number of things you will want to find out, but one question is paramount – are you a fee-only advisor? A fee-only financial advisor is compensated solely by you the customer and not by some mega insurance company or broker for selling you their products. Advisors paid by insurance companies or brokers are not necessarily bad. But they do have a built-in conflict of interest you should recognize going into the relationship – they are only paid when they sell you something marketed by a company they write for. The National Association of Personal Financial Advisors provides an easy way to search for fee-only advisors. www.napfa.org.
- When you choose an advisor, ask to see plan alternatives. Not all retirement plans are created equal. It’s nice to have options and supporting data to help you make a choice. For example, some retirement plans have significant and complicated administration requirements like IRS form 5500 filings and census testing that are additional costs to you. After you have met with your financial advisor and explained your financial capabilities and retirement needs and goals, ask your financial advisor for a comprehensive analysis of why one retirement plan is more suitable for you than some of the others (same goes for the funding products).
- Consult with your accountant. There may be certain tax obligations and/or deductions that may make one retirement plan more or less attractive than the next. While a financial advisor can explain those to you as a part of any analysis, your accountant, who already knows your financial situat
As an expert witness Lance Wallach side has never lost a case
ReplyDeleteTHURSDAY, MAY 29, 2014
Why You Should Stay Away from Section 79 Life Insurance Plans
I’ve had several calls lately from doctors who are being pitched Section 79 plans and are wondering if these plans are any good. The doctors are being told that Section 79 plans are the best wealth-building tool they can use to reduce their income taxes and create a tax-free retirement income.
Unfortunately for these unsuspecting doctors, what they don’t know is that not only are Section 79 plans not the best wealth-building tool they can use, they are not even a good wealth-building tool.
I have problems with Section 79 plans for several reasons:
1. You have to lie to employees to implement them. Most try to exclude workers.
2. The life illustrations given by ignorant or crooked insurance agents are not realistic. Most use today’s historically low lending rates with 2 percent to 3 percent loan spreads on variable loans on EIUL policies (ones that do not have a fixed lending rate).
3. You have to be a C-corporation to use them. Many agents don’t inform their clients of this.
4. The life policies sold in these plans are so bad that the companies don’t want them sold unless they are in Section 79 plans. (The policies are designed to have poor performance so the deduction is increased.) This is similar to the springing cash value problems with the 412i and 419 plans that got people audited and sued.
5. Another very good reason not to use these plans is because there are better alternatives.
6. Another reason not to use a Section 79 plan is because when you run the real numbers, the client would be better off not funding the plan, taking his/her money home after taxes, and funding a good no load EIUL policy.
7. The IRS audits many of them and unless you properly file under IRS 6707A the fines are very large.
ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s “All Things Considered” and others.
Copyright Lance Wallach, CLU, CHFC
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.