Tax Planning

Tax Planning Means Different Things to Different People

A CPA, accountant, or Enrolled Agent typically thinks of tax planning as doing a tax return for a client and sending them the bill for the taxes due. Some might recommend a SEP IRA or SIMPLE Plan, but they typically do not deal with real tax planning.

An attorney thinks of tax planning as doing someone's living trusts so the client can maximize estate tax exemptions. A financial planner/insurance advisor typically thinks of tax planning as the use of a 401(k) plan.

Our firm strives to create a better tax plan covering many different topics and making sure we are being PROACTIVE, not REACTIVE, when it comes to tax planning. Tax planning tools come in many forms: correct corporate structure, captive insurance companies, family limited partnerships, "freeze" partnerships, Retirement Life™ (a tax-free wealth-building tool), Roth IRA and Roth 401(k) plans, qualified retirement plans, charitable remainder trusts, charitable gift annuities, family foundations, intentionally defective grantor trusts, long-term care insurance, HSAs, single premium life insurance with an LTC rider, and Roth IRA conversions.

What we want to impress upon potential clients is that if you are not using a firm that knows the above topics and more, you may not be receiving the best advice possible — which means you are likely paying too much in income taxes and capital gains taxes, and ultimately that your heirs will pay too much in estate taxes upon your death.

Don't do what everyone else does (the do-nothing position) — be proactive to protect your money from the IRS and state government. Remember, your most likely creditor every year is the IRS. Only you, with the help of qualified advisors, have it in your power to protect your money.

Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.

Health Savings Accounts (HSAs)

Health Savings Accounts are a significantly underutilized tool for trimming health insurance costs for the small employer. An HSA is a separate account set up alongside your company's health insurance plan that lets the employer or employee contribute money tax-deferred into a savings account, used later for a variety of health care costs. Individuals and the self-employed can also open an HSA.

Money in an HSA can cover an employee's deductible and co-pays, along with a number of expenses not normally covered under a traditional small-employer health plan — contact lenses, prescription glasses, dental treatment, orthodontics, and more.

Why use an HSA?

• There's a real possibility you can lower your health insurance premiums, sometimes substantially.
• Your business can offer added benefits to employees without extra out-of-pocket cost.
• Unused money rolls over year to year and, at age 65, can be used as supplemental retirement income — much like an IRA.

HSAs are built around high-deductible health plans. Raising the deductible understandably makes both employer and employee nervous at first — the key to making it work is funding the HSA to cover the gap. If the money isn't used, the employee keeps it as their own for future medical expenses; once enough has accumulated to cover the deductible, the employer can scale back contributions and meaningfully reduce ongoing costs.

Given the benefits, why doesn't every business have one? Three main reasons: many insurance agents dislike HSAs because lowering a client's premium cuts their own commission and they make nothing on money contributed to the HSA; employers are often reluctant to raise employee deductibles even though, fully explained, employees should welcome the trade-off; and businesses with several employees who reliably hit their deductible every year will find the HSA concept harder to make cost-effective.

Tax-Deductible Long-Term Care Insurance

Under HIPAA (the Health Insurance Portability and Accountability Act of 1996), long-term care insurance (LTCI) premiums are treated like health insurance premiums for the self-employed. That means the owner of a C-Corporation, S-Corporation, P.C., or LLC can take a tax deduction for LTCI premiums (the deduction is limited for owner/employees in non-C-Corps) — there's no good reason for a C-Corporation owner to pay for LTCI on an after-tax basis.

Would you purchase long-term care insurance if it were free? Nothing is truly free, but set up correctly with a return-of-premium rider, LTCI can come close. Consider a business owner worried about paying well into six figures over their lifetime for long-term care coverage, funding a limited-pay LTCI policy through their business in a tax-deductible manner, with a return-of-premium rider. If they never need long-term care, their heirs receive the entire premium back, income-tax-free. If they do need care, the policy's benefit can be many times what was paid in — and the estate never has to absorb the actual cost of care. By purchasing LTCI through the corporation with pre-tax dollars, a business owner can protect their estate from LTC costs while also preserving the premium for their heirs.

This example is for illustrative purposes only and does not take into account your particular investment objectives, financial situation, or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.

Tax-Favorable Charitable Planning

What many people do not understand is that charitable giving can be donor-focused, not just charity-focused. Would you like to use a wealth-building tool that can increase your discretionary income, reduce or even eliminate income, capital gains, and estate taxes, provide a tax-free inheritance for your heirs, and leave a lasting family and social legacy?

There are many different charitable plans, but one worth focusing on is the simple but beneficial Charitable Gift Annuity (CGA) — a "triple threat" of benefits:

• Guaranteed benefit income protection — a CGA provides beneficiaries a guaranteed lifetime income, immediate or deferred.
• Substantial tax benefits — transferring a highly appreciated asset to a charity in exchange for a CGA avoids a lump-sum capital gain, provides a substantial immediate income tax deduction (with any surplus carried forward), and removes the asset from your taxable estate.
• Charitable benefit — beyond the direct gift, a CGA can be set up so the charitable funds are directed by your heirs, teaching them about giving while continuing your own values.

One related strategy, sometimes called "wealth replacement," uses some or all of the income stream from a CGA to purchase a life insurance policy inside an Irrevocable Life Insurance Trust (ILIT) — so the death benefit passes to your heirs income- and estate-tax-free, alongside the charitable gift and its deduction.

Charitable giving sounds simple: give property or money away, receive a deduction, and provide wealth replacement for your heirs. In practice, setting up a charitable giving program deserves the same care as buying life insurance — the wrong advisor can set up a plan that's in their own best interest rather than what's best for you and the charity you're trying to benefit.

Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.

Frequently Asked Questions