The role of The Wealth Preservation Institute (www.thewpi.org) is to educate advisors on how to provide their clients with the ?best? advice. That may be advice on Medicaid planning through the Certified Medicaid Planner (CMP?) course or through the only ?advanced? education course in the industry, the Certified Wealth Preservation Planner (CWPP?) course.
The WPI is unique because we educate not only on how to provide the best advice but also how to avoid providing bad or even terrible advice (which is also one reason I published my most recent book: Bad Advisors: How to Identify Them; How to Avoid Them (click here to learn more about the book)).
419 Welfare Benefit Plans (WBPs)?back in the day (1996-2000), WBPs used to be all the rage as a way for profitable business owners to reduce their taxes and build a tax-favorable nest egg under the cover of an ?employee benefit plan.?
With an ambiguous tax code and some favorable tax court rulings, promoters of WPBs became emboldened and far too high profile in the late 1990s. This was amplified by the life insurance industry’s internal marketing of WBPs because they were funded mainly with Cash Value Life Insurance (CVL).
Without fully explaining how these plans worked, I will simply state that an employer could take deductions of $25,000-$300,000+ where all of the money would go into a WBP and into a CVL insurance policy where it could grow tax free for years.
Depending on how aggressive the third-party administrator of these plans were, clients were told the money would either come out and be taxable when in retirement or some even touted that business owners could get the money out tax free (which in my opinion was total nonsense, but that?s how they were sold).
The IRS steps in ?because of the aggressive marketing of these plans, the IRS put it on the top of its hit list. 419A(f)5 and A(f)6 plans, 419(e)3 plans as well as VEBA plans (which are also WPBs) all got hammered by the IRS in 2007 when it issued three Revenue Rulings. To read these rulings, please click here. WBPs were also put on the tax transaction list. To read a past newsletter I did on the abuses of 419(e)3 single-employer plans, please click here.
U.S. Attorney goes after 419 plan promoter?one 419 plan promoter who has been around since the 1990s just had a complaint filed against him, his spouse, and several related companies. It?s a 43-page complaint with request for a permanent injunction barring him and several companies from dealing with these plans. To read the complaint, click on the following link.
If you are in the advanced markets, and even if you are not, I strongly recommend you read the U.S. Attorney?s complaint. It should give you pause the next time someone promotes a tax strategy that either sounds too good to be true or one that the promoters are flaunting in the face of the IRS (the consequence of both usually is not good for clients or their advisors).
419 plans are still being promoted today?amazingly, there are some administrators still promoting 419 plans. It really defies logic to me that sales people will sell something they know or should know will not hold up under IRS scrutiny just so they can sell Cash Value Life Insurance. But what am I saying? The insurance industry has a history of having advisors sell products simply so they can make a commission notwithstanding how it will affect their clients.
When I saw the complaint that was filed by the U.S. Attorney last week, I figured it was a good excuse to send a cautionary newsletter about 419 plans (because they are still being promoted) and, in general, about tax avoidance plans. The bottom line is that, if it looks too good to be true, it probably is; and you should proceed (if you choose to proceed) with extreme caution.