Whole life: a bad financial move

A life insurance agent recently recommended that I stop contributing to my retirement plan, terminate it and begin taking distributions. He indicated that this is the only way to effectively avoid federal and state income and death taxes of 80 percent on my retirement-plan funds. He recommended that I invest all of the funds withdrawn, after taxes, in a whole life insurance policy that would build up tax-free until retirement. What do you think of this strategy?

Apr 1st, 1998

Charles Blair, DDS

John McGill, MBA, CPA, JD

A life insurance agent recently recommended that I stop contributing to my retirement plan, terminate it and begin taking distributions. He indicated that this is the only way to effectively avoid federal and state income and death taxes of 80 percent on my retirement-plan funds. He recommended that I invest all of the funds withdrawn, after taxes, in a whole life insurance policy that would build up tax-free until retirement. What do you think of this strategy?

We vehemently disagree. For starters, the Taxpayer Relief Act of 1997 eliminated the 15 percent excise tax applicable to "excess retirement-plan distributions" as well as the companion 15 percent "excess retirement accumulation" excise tax at death. Accordingly, your retirement plan and IRA balances will not be subjected to a total tax bite of as much as 80 percent, as stated by your life insurance agent. What`s more, with many doctors in the combined federal and state marginal income-tax bracket of approximately 50 percent, and deductions scarce as hen`s teeth, stopping future contributions to your retirement plan generally makes no sense. The tax-deductible contributions to the plan remain vital to minimizing your federal and state income taxes, while the tax-deferred accumulation within the plan is an even greater benefit. Terminating a retirement plan also can be extremely costly and staff members often ask for a salary increase as a result of the elimination of plan contributions on their behalf.

Finally, investing on an after-tax basis in a whole life insurance policy is an extremely poor substitute. Typically, such policies are subject to high commissions, fees and other expenses, excessive insurance costs and poor investment returns. Overall, this would be one of the worst financial moves of your life, We recommend that you run, don`t walk, from this advice.

Over a year ago, I purchased some AT&T stock near its low of $36 per share. Now that I have a sizable gain in the stock (trading at $66), I am contemplating gifting the shares to a charitable organization, in lieu of a cash donation. I want to make sure that I follow the appropriate rules, so that I receive a charitable-contribution deduction equal to the full fair-market value of the shares gifted and no federal and state income taxes are owed on the unrealized appreciation. Since the long-term capital-gain holding period has been extended to 18 months, does this mean that I have to wait until that time period has elapsed before making this charitable gift?

No. The IRS has issued clarifying language indicating that shares of stock held for at least 12 months will continue to qualify for this favorable tax treatment when transferred as a charitable gift. Accordingly, there is no requirement that you delay your charitable gift until the holding period has been extended to 18 months.

Some time ago, my CPA indicated that I must begin transmitting my payroll- tax deposits to the IRS electronically at the end of 1997. I understand that this provision has been repealed. Right?

Wrong. Under the Taxpayer Relief Act of 1997, the period under which no penalty will be assessed by reason of the doctor`s failure to electronically transmit federal payroll taxes and income-tax withholdings has been extended from July 1, 1997, to July 1, 1998.

Last year, I read about the child tax credit which begins in 1998. However, my accountant tells me that the credit is not available to me, despite the fact that my wife and I have five children. What gives here?

While the new tax law added a $500 ($400 for 1998) tax credit for each qualifying child, the credit is not available for high-income doctors. The tax credit is reduced by $50 for each $1,000, or portion thereof, that the doctor`s modified adjusted gross income exceeds $110,000, if married, or $75,000, if single. Thus, your accountant may be correct.

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.

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