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 situation, may be able to give you deeper insight.
- Consider the future. Consider estate planning to make sure any retirement plan you choose is meeting your estate planning goals as well.
- Stay informed. Laws and taxes can and do change. Make sure that you are informed through your financial advisor and accountant of any changes that may affect your retirement plan.
So, you say, where was this sage advice when you were setting up your existing plan? That was a few years ago and you are having problems. Now what do you do?
- See your accountant, unless your accountant set up your plan in which case see a new accountant. Find out what the problems mean to you financially. What’s does the tax man want? Interest? Standard penalties? Listed transaction penalties? Wrap your arms around the tax consequences.
- Come up with a plan for addressing the problems. Must previous years’ tax returns be amended? What about interest and penalties? Interest will most likely be applied, but a waiver for penalties may be possible. If your staff should have been included in the plan but were not, do you have to fund it for them?
- If the IRS has already been to see you about your plan, you can’t wait. Hire a tax lawyer who can help you work your way through the issues in a way that you can hopefully afford.
- Can you afford the fix? Paying an accountant, possibly an actuary, and the IRS may be more than you can handle, even if you can come to terms with the IRS. If you are in a position where you cannot afford to fix your plan, then it is time to consider how to fund the solution. You may be in a place where you’ve got to come up with some funds you don’t have to solve your problems. Or perhaps you have paid out funds to solve your problems and you think that the people you hired to help you in retirement planning should be responsible because they didn’t to it the right way.
- You may have been the victim of retirement plan malpractice. See an attorney experienced in representing financial fraud victims and victims of pension plan malpractice. Be prepared to seek a recovery from those who should have been looking out for you. The professional who sold you the plan is the logical person to look to, but that person is likely to have limited resources and malpractice coverage that is insufficient to solve your problems. So who else do you look to? There’s the broker for whom the professional worked that is supposed to review and supervise the work of its agents. There is also the third party administrator for the plan whose obligations included making sure the plan was appropriately set up and administered. Finally, the insurance company sponsoring the plan or that issued the insurance policies and annuities that fund the plan has complex and comprehensive obligations under state laws and federal regulations to ensure compliance. Booking financial products produced by unacceptable practices is something that it should never do.
Be careful. Don’t be “that professional” whose retirement assets are wiped out because of cousin Tilly’s friend. But if you are “that professional”, then make sure you protect yourself. You put yourself in the hands of others to properly protect you and to make sure that the 412i plan, the 419 plan, or the VERA plan that they recommended to you were appropriate and properly set up. When they fail, they need to pay to solve the problems they caused.
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