Who Should Engage in Asset Protection?

Asset protection is a legal method of reducing your exposure to various types of risks by placing assets into various protected structures. In addition, these structures are typically organized in a manner to minimize the negative impact of a particular event. For example, did you ever wonder why both Pepsi and Coca-Cola have bottling divisions? It minimizes liability. If there is a problem with the physical product, the bottling division will be the target of litigation. However, the intellectual property is owned by a separate structure keeping out of the defendant’s chair if the bottling division is sued. However, all businesses should consider their actual structure from the perspective of being potential litigation, which is the essence of asset protection.

In general, there are two negative situations asset protection seeks to minimize. The first is bankruptcy. Here, planners work with the bankruptcy code to help clients survive bankruptcy. However, it’s important to realize there is only so much a planner can do in this area. The bankruptcy code exemptions are very clear — and also fairly limited. The second negative event planners work at minimizing is litigation. Here we have far more flexibility (so long as there are no fraudulent transfer issues). By using various structures, it is possible to greatly reduce the negative impact of litigation. Other events that are considered in the plan are divorce (both of the client and the client’s children) death (but this falls more under estate planning) and incapacitation. 

It’s also important to understand what asset protection isn’t. Asset protection cannot create a bullet proof strategy that is unassailable in all situations – and don’t let anyone tell you differently. The most striking example is bankruptcy; as mentioned above, the bankruptcy exemptions are very clear and very narrow; anything that falls outside them is swept up in the bankruptcy estate to pay creditors. In addition, if a person does not maintain the plan, trouble can emerge. For example, a person that forms a corporation that does not keep up with corporate formalities could have the court “pierce the corporate veil,” meaning the person will become personally liable for the claim. 

Who Should Engage in Asset Protection?

All businesses should have an attorney who specializes in asset protection look at the overall business structure at least once every few years to make sure their overall structure provides maximum protection. In addition, all high net worth individuals (people with at least $1 million in net worth) should have a plan in place, as their wealth is a natural litigation target. There are also several professions that naturally benefit from asset protection planning. Doctors lead the pack, followed closely by other licensed professionals (accountants, lawyers and engineers etc..).

Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330
 www.vebaplan.com

National Society of Accountants Speaker of The Year

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

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Listed Transactions-Excerpt from Protecting Clients From Fraud, Incompetence, and Scams

Protecting Clients From Fraud, Incompetence, and Scams

By: Lance Wallach

Published by John Wiley and Sons, Inc.

Copyright 2010.  All rights reserved.

Excerpts have been taken from this book about:

Bruce Hink, who has given me permission to utilize his name and circumstances, is a perfect example of what the IRS is doing to unsuspecting business owners.  What follows is a story about Bruce Hink and how the IRS fined him $200,000 a year for being in what they called a “listed transaction”.  In addition, I believe that the accountant who signed the tax return and the insurance agent who sold the retirement plan will each be fined $200,000 as material advisors.  We have received a large number of calls for help from accountants, business owners, and insurance agents in similar situations.  Don’t think this will happen to you?  It is happening to a lot of accountants and business owners, because most of these so-called listed, abusive plans, or plans substantially similar to the so-called listed, are currently being sold by most insurance agents.

Bruce was a small business owner facing $400,000 in IRS penalties for 2004 and 2005 for his 412(i) plan (IRC6707A).  Here is how the story developed.

In 2002 an insurance agent representing a 100-year-old well-established insurance company suggested he start a pension plan.  Bruce was given a portfolio of information from the insurance company, which was given to the company’s outside CPA to review and to offer an opinion.  The CPA gave the plan the green light and the plan was started for tax year 2002.

Contributions were made in 2003.  Then the administrator came out with amendments to the plan, based on new IRS guidelines, in October 2004.

The business owner’s agent disappeared in May 2005 before implementing the new guidelines from the administrator with the insurance company.  The business owner was left with a refund check from the insurance company, a deduction claim on his 2004 tax return that had not been applied, and without an agent.

I took six months of making calls to the insurance company to get a new insurance agent assigned.  By then, the IRS had started an examination of the pension plan.  Bruce asked for advice from the CPA and the local attorney (who had no previous experience in such cases), which made matters worse, with a “big name” law firm being recommended and more than $30,000 in additional legal fees being billed in three months.

To make a long story short, the audit stretched on for more than two years to examine a two-year old pension with four participants and $178,000 in contributions.

During the audit, no funds went to the insurance company.  The company was awaiting IRS approval and restructuring the plan as a traditional defined benefit plan, which the administrator had suggested and which the IRS had indicated would be acceptable.  The $90,000 2005 contribution was put into the company’s retirement bank account along with the 2004 contribution.

In March 2008, the business owner received an apology from the IRS agent who headed the examination.  Even this sympathetic IRS agent thinks there is a problem with the IRS enforcement of these Draconian penalties.  Below is one of her emails to the business owner who was fined $400,000.

From:  XXXXXXXX XXXXX <XXXXXXXX.XXXXX@irs.gov>

Date: Tue, Mar 4, 2008 at 7:12 AM

Subject: RE: Urgent

To: Bruce Hink  <brucehink@XXXXXXX.com>

Thanks Bruce – yes – please just overnight then to the Grand Rapids address.  Once again, I’m sorry about this.  Basically, our Counsel told us that we needed language specific to the IRC 6707A penalty in order for that statute to be extended.  I will ask the Reviewer to hold off an extra day.

I’m also very sorry that this is getting you down.  Deeply sorry.  It’s very difficult for me as well – before I started working on this project (412(i)) I was doing audits of 401(k) and profit sharing plans.  If there was an error on the plan, the employer would just fix it and the audit was over.  There wasn’t anything controversial about it – and I felt like I was helping people – employers and plan participants.  I really liked my job.  In two years time, that has completely changed.  I know it’s not very “professional” to make such confessions – so forgive me.  But I guess I just wanted you to know that I really sympathize with your situation – and have been doing whatever I can to help.  I know that having this hanging over your head can’t be fun – but as this project goes forward – I think that the IRS is going to have to soften their position somewhat – so these delays may be to your benefit.

Also, I’m not really supposed to be sending emails to you – but when I went through the file I couldn’t find a good phone number for you.  Could you just send me a note or an email with a current phone number?

Looking to receive the signed 872s on Thursday.  If you have any questions at any time – please call me at XXX-XXX-XXXX. I’m usually in the office in the mornings.

The IRS subsequently denied any appeal and ruled in October 2008 that the $400,000 penalty would stand.

Could You or One of Your Clients Be Next?

Some of the areas SB/SE will be examining include pass-though entities, high-income filers, and abusive transactions.  S corporations are likely to receive particular scrutiny.  Further review would not be limited to S corporations, but would extend to pass-through entities like partnerships, which can expect to receive a “significant amount of attention” because SB/SE has found an area of abuse and would like to curb what is called a growing trend of abusive high-income filers, typically classified as those with an adjusted gross income of more than $200,000.

The IRS has been cracking down on what it considers to be abusive tax shelters.  Many of them are being marketed to small business owners by insurance professionals, financial planners, and even accountants and attorneys.  I speak at numerous conventions, for both business owners and accountants.  And after I speak, I am always approached by many people who have questions about tax reduction plans that they have heard about.

I have been an expert witness in many of these 419 and 412(i) lawsuits and I have not lost one of them.  If you sold one or more of these plans, get someone who really knows what they are doing to help you immediately.  Many advisors will take your money and claim to be able to help you.  Make sure they have experience helping accountants who signed the tax returns.  IRS calls them material advisors and fines them $200,000 if they are incorporated or $100,000 if they are not.  Do not let them learn on the job, with your career and money at stake.

Lance Wallach, a member of the AICPA faculty of teaching professionals and an AICPA course developer, is a frequent and popular speaker on retirement plans, financial and estate planning, reducing health insurance costs, and tax-oriented strategies at accounting and financial planning conventions. He has authored numerous books including The Team Approach to Tax, Financial and Estate Planning, Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, and Sid Kess’ Alternatives to Commonly Misused Tax Strategies: Ensuring Your Client’s Future, all published by the AICPA, and Wealth Preservation Planning by the National Society of Accountants. His newest books CPAs’ Guide to Life Insurance and CPAs’ Guide to Federal and Estate Gift Taxation by Bisk CPEasy, and Protecting Clients from Fraud, Incompetence, and Scams, published by John Wiley and Sons, Inc.

Mr. Wallach, CLU, CHFC, is a leading speaker on accounting and taxation topics and the author of numerous AICPA CPA exam publications.  In addition to developing CPE courses, he is also a member of the AICPA faculty of teaching professionals, and has been featured in the Wall Street Journal, the New York Times, Bloomberg Financial News, NBC, National Pubic Radio’s All Things Considered, and other radio talk shows.  Mr. Wallach is listed in Who’s Who in Finance and Business.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Apply to Join FinanceExperts.org

Apply to join FinanceExperts.org, the leading organization for accounting, legal, insurance, finance, and other experts in related fields. If approved by our board,you will be allowed to co author articles written by our experts which appear in 51 national publications, be quoted in best selling books that our experts author and much much more.. In addition, business owners and high income people are referred to our experts by zip code. No more than 1000 experts are accepted as members, and no more than one expert per zip code.There are currently 17 openings. You do not have to be a member to use the financeExperts.org message forum. Email your bio to lanwalla@aol.com. If approved you will be notified.All the experts share the cost of running the organization, which is about $97 per member per year. That cost will go down for renewals, as the sponsors start paying more.

Good luck.

 

Don’t Give the IRS Every Last Drop

By Lance Wallach

Have you seen the commercials where certain companies advertise that they can settle an IRS debt for “pennies on the dollar”? Usually the offer is too good to be true. Besides, you never want to have the problem in the first place.

The chances of an individual being audited have approximately doubled since 2000. So you need to be careful with your tax return.

IRS officials say research has shown that tax “noncompliance” typically is highest among people who work for themselves, who deal in large amounts of cash, who don’t have taxes withheld from their pay and whose income isn’t reported separately to the IRS, such as by their employer.

Another area that IRS has been focusing on for noncompliance is S corporations. With a typical S corporation, profits or losses flow through to the individual owners, who in turn are supposed to report those items on their individual returns.

Another are that could command attention is capital gains taxes. The reason: IRS officials suspect the government is losing billions of dollars in tax revenue because many investors inflate the cost basis, or the price they originally paid for stocks and other securities, in order to report lower capital gains when the securities are sold.

There have been some significant changes in the way the IRS targets businesses for audits and how it conducts them. Audits are up this year and will continue to increase,

But the numbers are very misleading, because the IRS is getting much smarter about how it chooses returns for audit and how its examiners conduct their audits.

Over the past few years, the IRS has dramatically stepped up efforts to study specific industries, and to educate examiners about business practices, terminology, accounting methods and common industry practices. It has also identified areas of inquiry that produce audit results.

Examiners are told specifically to look for certain red flags to get at what is really going on in a business or transaction. The result: examinations are more sharply focused on potential areas that will generate increased taxes, penalties and interest. Fortunately, there is a positive side to all of this; it’s very easy to obtain a free copy of this information from the IRS.

When you have a certain medical problem, you go to a specialist. The same rule should be applied to financial problems. Always engage an accountant who specializes in your type of business. One of our long-term retirement plan clients recently retained our firm to perform a self-audit. The client, a successful businessman, was concerned when one of his colleagues was found liable for back taxes and penalties because of some mistakes by his accounting firm. Nervous that he might become an IRS target as well. Our client hired us to do an audit of his income taxes for the last three years, both personally and for his various businesses. What we found was shocking. Even though this client had used an accounting firm for his various returns, the taxes he had paid were far from what he owed. Luckily for him, it was an overpayment. This client will get a refund of almost $200,000

Now let us turn to more positive alternatives, things that you can take the initiative on.

  • Cash balance plan: A cash balance plan is a retirement plan that allows large contributions for owners. The deduction for owner sometimes can exceed salary. It can be combined with a 401(k) plan.
  • SEP-IRA or basic profit-sharing plan? Think K instead. Many small business owners have used a SEP-IRA or basic profit sharing plan for their retirement needs due to the simplicity and low cost of these designs. However, recent changes to the Internal Revenue Code have made these designs virtually obsolete. The K is a retirement plan for the small business owner that allows him or her to achieve: greater potential contributions; “catch up” deferrals at age 50+; increased current tax savings; plan loans up to $50,000; expand survivor benefits; complete flexibility; and low costs. Unlike SEP-IRA, a K will allow you to borrow up to 50 percent of your account balance (not to exceed $50,000) as long as you pay yourself back. And whereas a typical 401(k) plan may cost $1,000 or more to establish and perhaps more to administer each year, a K can be established and administered for a fraction of that cost.

_________________________

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters.  He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com and www.taxlibrary.us

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Captive Insurance – Buyer Beware!

Parts of this article are from the book by John Wiley and Sons, Protecting Clients from Fraud, Incompetence and Scams, authored by Lance Wallach.

September 24, 2010

Herol Graham has turned defensive boxing into a poetic art. Trouble is, nobody ever got knocked out by a poem.

—Eddie Shaw

Every accountant knows that increased cash flow and cost savings are critical for businesses in 2009. What is uncertain is the best path to recommend to garner these benefits.

Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions range from traditional pension and profit sharing plans to more advanced strategies.

Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90 percent of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.

The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.

Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much. A captive insurance company would be an insurance subsidiary that is owned by its parent business(es). There are now nearly 5,000 captive insurers worldwide. More than 80 percent of Fortune 500 companies take advantage of some sort of captive insurance company arrangement. Now small companies can, too.

These so-called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS Code Section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the United States and in certain parts of the world have adopted a series of laws and regulations that allow small non–life insurance companies, taxed under IRC Section 831(b), or as 831(b) companies.

Captives can be a great cost-saving tool, but they can also be expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection or tax deferral vehicles, or other benefits not related to the true business purpose of an insurance company, face grave regulatory and tax consequences.

A recent concern is the integration of small captives with life insurance policies. Small captives under Section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.

The IRS is aware that several large insurance companies are promoting their life insurance policies as investments within small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.

Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. Some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters.  He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others.  Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit http://www.taxadvisorexperts.org or http://www.taxlibrary.us.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity.  You should contact an appropriate professional for any such advice.

When Key Personnel Dies

The Hartford Courant

Business

Life Insurance Policies on Critical Employees Can Ease Succession

As Akamai Technologies workers grieve the death of the company’s co-founder and chief technology officer in the Sept. 11 attacks, the Cambridge, Mass. Internet services firm has something to cushion the financial blow from his loss: a $2 million life insurance policy it maintained on him.

Faced with a leading employee’s sudden death, companies can use money from life insurance policies on their executives to make up for vital lost sales or to help finance the search for a replacement. Called “key man” or “key person” life insurance, these policies have been around for years. But they are attracting new attention from some firms as they draft fresh crisis plans in the aftermath of the terrorist attacks.

Business advisers said the destruction of the World Trade Center jolted clients into thinking hard about their future. And they say key person insurance can be an important ingredient in those plans.

Kathleen F. Bornhorst, head of the wealth preservation practice at Hartford’s Pepe & Hazard law firm, said making a plan in the event of a death in the business now “has a higher priority” among her clients.

Since Sept. 11, Lance H. Wallach, at 516-938-5007, the president of an estate planning firm on Long Island, N.Y., has received as many as eight calls a day inquiring about his business succession-planning seminars.

When clients tap him to help prepare for the sudden loss of a worker, Wallach said, finding out whether they have key person insurance “is one of the first questions” to address.

Akamai’s co-founder, Daniel M. Lewin, 31, was a passenger on American Airlines Flight 11, which hijackers rammed into the north tower of the World Trade Center. Public companies such as Akamai routinely buy key person policies for their top executives and mention them in regulatory filings.

Small firms with few workers have an even more compelling need for the insurance, said Patrick C. Smith, director of advanced marketing for Simsbury’s Hartford Life Inc. When a small company loses one of only a handful of top salespeople or scientists, “it has a proportionately larger impact on earnings, on relationships with existing customers” than at a larger firm, Smith said.

Still, only about one in seven small businesses – those with fewer than 100 workers – holds key person life insurance, according to LIMRA International, an insurance research organization in Windsor.

Smith said small businesses makeup a “woefully underinsured market.” New companies usually focus on selling more products, not on planning for the future, he added. Younger firms usually don’t worry about insurance issues – until the unexpected hits.

It doesn’t take a terrorist assault to trigger a leadership crisis at a company. In 1980, a hotel fire killed 13 top officers at Arrow Electronics, which was then based in Greenwich. Two months later, a corporate jet crash crash killed eight employees of Stamford-based Texasgulf, including the oil and mining firm’s chief executive and its treasurer. A french conglomerate bought Texasgulf the next year.

At some companies, key person insurance can serve not only to soothe pain of losing a major employee, but also to help compensate the employee’s family. West Hartford lawyer Edward F. Rosenthal said that under so-called “split dollar” arrangements, key person insurance can double as a kind of employee benefit, and is gaining popularity.

Of course, a key person policy doesn’t fix all problems and is only one piece of an overall corporate disaster plan.

Businesses afraid that the death of a leading worker will sink them with unpaid debts could be better off buying creditor’s insurance designed to handle the problem. Closely held businesses should devise a buy-out plan to purchase ownership shares from the heirs of a co-owner instead of using money from a key person policy to serve that purpose, Hartford Life’s Smith said.

In light of Sept. 11’s events, shareholders are going to demand more information about such plans from the firms they invest in, said Neil Minow, editor of the Corporate Library.com website on corporate governance issues. Now, because of terrorism, “there are a lot of risks that previously were beyond contemplation, “she said.

Firms, especially those that are publicly traded, could decided to assemble new corporate committees responsible for elements of emergency planning, from life insurance purchases to computer data backup arrangements, Minow added.

“Companies that are smart will not wait for additional (regulatory) requirements, but will start talking to their investors about this now,” she said.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters.  He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com and www.taxlibrary.us

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.