VEBA Trusts

July 1, 1997
I attended a seminar where the speaker recommended using various vehicles such as a funded welfare-benefit plan (IRC Section 419) and leveraged split-dollar life insurance plans to save pretax dollars through a professional corporation.

Charles Blair, DDS and

John McGill, MBA, CPA, JD


I attended a seminar where the speaker recommended using various vehicles such as a funded welfare-benefit plan (IRC Section 419) and leveraged split-dollar life insurance plans to save pretax dollars through a professional corporation.

One of the major selling points is that funds can be withdrawn at retirement tax-free through loans. If the loans are never repaid, at the doctor`s death, his heirs would receive the proceeds, net of the loan amount, tax-free. According to this group, since the money is never taxed, the incorporated doctor accumulates retirement assets much faster than any other route available.

A few years ago, I was presented with a similar product by a life insurance salesman, using a vehicle called a VEBA trust. Huge whole-life insurance policies were to be purchased on the doctor by the corporation, with excess funding by the corporation to result in rapidly building value within the policy. In later years, the doctor was to take out loans against the policy to avoid paying taxes on the accumulated buildup.

Are the plans legitimate, and, if you enter into them, do you risk IRS penalties and higher audit risk? What is your recommendation?


The Voluntary Employee Bene-ficiary Association (VEBA) trusts have been touted over the past 10 years or so as an effective vehicle to convert after-tax dollars into pretax savings for incorporated doctors. In most cases, these vehicles have been aggressively pushed by life insurance salesmen looking to sell high-commission, whole life insurance policies.

While VEBA trusts are specifically authorized under the tax code, there are stringent limitations to their use. One requirement, for example, is that they be used only by organizations with a large number of doctors within a given geographic area through a collective trust. Therefore, setting up individual VEBA trusts for a particular doctor is not allowed under the Code.

More importantly, the IRS has specifically ruled against the VEBA trust as a means to fund huge severance-pay benefits for the doctor with pretax dollars, as a second retirement plan. Since this is the primary benefit touted by VEBA trust salesmen, the concept lacks economic substance for most dentists when this option is thrown out.

Likewise, while funded welfare-benefit plans are specifically sanctioned under IRC Section 419, and leveraged split-dollar plans have been sanctioned under various revenue rulings, it is the aggressive use of these plans that the IRS has successfully attacked in recent years.

As a result of the aggressiveness with which the IRS is attacking these types of plans, the high level of audit risk and the potential penalties involved, we do not recommend utilizing any of these arrangements. Rather, the doctor should place his primary emphasis on maximum funding of qualified retirement plans that have been specifically approved by the IRS. Says Joe Davis, a pension expert with Horizon Benefits, Inc.,(704) 531-2911: "Given current IRS regulations and new plan strategies, such as the cross-tested retirement plans, 80 percent of dentists in the United States can establish and operate these plans on a basis which is very favorable to them (the doctor receives at least 70 percent of all benefits allocated )."


I have been incorporated for several years now and have been deducting certain business expenses such as dues, licenses, subscriptions, business car and travel and entertainment, on Schedule A of my individual income-tax return. However, my income has gone up recently, and my accountant says that fewer and fewer of these expenses now are deductible. I had no idea that the government could take away my deductions as my income grew larger. What`s going on?


Your accountant is correct. Business expenses can be deducted on Schedule A of your individual income-tax return, but only to the extent that the total of these expenses exceeds two percent of your individual adjusted gross income (AGI). Accordingly, as your AGI increases, the amount of expenses that can be deducted will decrease because of this limitation. We recommend that all incorporated doctors pay all of their business expenses through their corporation and deduct them on their corporate income tax to assure full deductibility.

Dr. Blair is a nationally known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($149 a year) and consulting information are available from Blair/McGill and Company, 4601 Charlotte Park Drive, Suite 230, Charlotte, NC 28217; or call (704) 523-5882.