Beware of abusive insurance plan

Recently, a life insurance agent recommended something called a "leveraged split-dollar" insurance plan. He told me that my professional corporation should borrow $100,000 to fund an upfront deposit of a split-dollar life insurance policy owned by the corporation. Once the deposit was made, the funds within the life insurance policy would grow on a tax-deferred basis, while the corporation would be able to fully deduct the interest paid on the loan taken out to make the initial deposit.

Jan 1st, 1998

Charles Blair, DDS

John McGill, MBA, CPA, JD

Recently, a life insurance agent recommended something called a "leveraged split-dollar" insurance plan. He told me that my professional corporation should borrow $100,000 to fund an upfront deposit of a split-dollar life insurance policy owned by the corporation. Once the deposit was made, the funds within the life insurance policy would grow on a tax-deferred basis, while the corporation would be able to fully deduct the interest paid on the loan taken out to make the initial deposit.

The agent went on to claim that the insurance company would make the loan to the corporation, and that an 18 percent interest rate would be used. The high interest rate would help maximize the tax-deferred buildup within the policy and would maximize the leverage since the interest would be deductible by the corporation. Do you see any problem with this?

We do. The IRS has been attacking these abusive leveraged split-dollar arrangements in court with some success. In addition, the 1996 Tax Act reduced the deduction allowable on a debt under a life insurance policy covering an individual who is an officer or an employee or the corporation. The law allows interest only on the first $50,000 of the policy debt to be deductible. As a result of these changes, we do not recommend this technique.

Your June question and answer regarding the new SIMPLE retirement plans left me somewhat confused. In your example, you indicated that for doctors whose compensation was in excess of $200,000, the practice`s matching contribution would be 3 percent of only $160,000, rather than the full $200,000 salary. I have talked with several mutual funds and they have indicated that the matching contribution is limited to $6,000 and is computed without regard to the $160,000 limit that otherwise applies to retirement-plan contributions. Is this correct?

It is. Our example, which indicated that the practice`s matching contributions was limited to the salary of no more than $160,000, was incorrect. The actual dollar limit is $6,000 and thus compensation of up to and including $200,000 can be taken into account to provide the maximum matching contribution based upon a 3 percent matching rate.

Several years ago, I established a Uniform Gift to Minors Act (UGMA) account for my three children, naming myself as custodian. Over the years, I have contributed substantial amounts to these accounts annually to build up their college funds. Now, my oldest child is 15 and says he plans to buy a car with this money when he gets his hands on it at age 18. What can I do?

Once the child reaches the age of majority in your state, all funds in the UGMA account legally belong to that child. That child is free to do with those funds whatever he or she pleases.

One option is to use a portion of the funds in the account for certain expenses of your children. The general rule is that parents are responsible for providing the basics (food, clothing, shelter, public-school education, etc.) for their children, but not for extras such as private school, special talent lessons, camps, computers, etc.). You can tap into the account to pay for expenses of this nature on behalf of the child, thereby reducing the funds available over which your children will have discretion at age 18.

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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