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By Lance Wallach, CLU, ChFC, CIMC

The familiar problem! Your client owns a very profitable company (a doctor, dentist, manufacturer, etc.). After pension and business expense deductions, the Federal taxes are still large. As his or her advisor, what can you recommend to reduce your client's taxes?

Benefits of a VEBA

Imagine a program that allows large, flexible, tax deductible contributions that accumulate and compound tax deferred. Distributions at any age are without penalties regardless of the amount. Assets are protected from the claims of creditors. There are income and estate tax-free survivor benefits. The program is fully insured, and, by a favorable letter of determination, IRS has granted a tax exemption to the 501 (C) (9) trust.

The program can also acquire tax deductible life insurance, provide funds to pay estate taxes, and provide tax deductible educational benefits for

The above describes some of the benefits of a VEBA.

What Is a VEBA?

A VEBA (Voluntary Employee's Beneficiary Association) is a tax-exempt organization that is described in IRC section 501 (C) (9) and has received a tax exemption letter from the IRS. The VEBA usually provides for the payment of life, accident, sickness, and other benefits to the participants in the VEBA or their dependents or beneficiaries. A VEBA is a trust, generally having a bank as its trustee. The earnings of the VEBA trust are tax exempt during the period of time that the fund is accumulating. By joining an existing multiple employer VEBA, the employer gains the advantage of using a VEBA that has been preapproved by
the IRS with a favorable letter of

A VEBA can be established by almost any business for the benefit of its employees, including owner-employees. An employer with one employee (even a spouse) can have a VEBA.

A VEBA cannot provide retirement or deferred compensation benefits, so it is not subject to the rules for qualified retirement plans. It is subject to many ERISA rules. The distribution can be taken from a VEBA prior to age 591Ž2 without penalties, and you do not have to take distribution at age 701Ž2. You can contribute and deduct much more than $30,000 per year. In 1992, the U.S. tax court allowed a physician to deduct contributions in excess of $400,000 in a single year, and over $1,100,000 for a three-year period for a two-person VEBA (Schneider vs. Commissioner). Dr. Joel Schneider had one employee. Plan benefits attributable to Dr. Schneider exceeded 95% of the aggregate benefits. The benefits included life and disability benefits and an education benefit for Dr. Schneider's three children. (His employee had no children.)

The investments of a VEBA are safe and are held by major insurance companies that are highly rated. If a VEBA is terminated, all assets held under the VEBA are allocated to those people who were active participants in the plan on the date of termination. There is no vesting for employees who terminate

Unlike a pension plan, a VEBA's death benefit is income tax free.

Estate Conservation

A VEBA can be designed so that the death benefits paid from the VEBA will not be subject to estate taxes. This is because the participant can make an irrevocable designation of the beneficiary to avoid estate taxes.

Who Should Consider Having a VEBA?

Because of the tremendous benefits of a section 501 (C) (9) VEBA plan, the following businesses and business owners should consider establishing a VEBA:

* Profitable businesses that want a way to reduce their tax liabilities.

* Companies that can no longer make contributions to their qualified retirement plans because the plans are overfunded or the plans no longer favor the business owner.

* Individuals who have estate tax problems and wish to reduce or eliminate estate and inheritance taxes.

* Businesses and individuals that would like to protect their assets from creditors, especially individuals who are in high-risk businesses.

* Physicians and other highly compensated individuals.

VEBA Look-Alikes

There are trusts available that look like VEBAs but are not VEBAs. They have not received a determination letter from the IRS stating that they are a Voluntary Employee's Beneficiary Association. The trust sponsor may not have taken the additional costly step to file with the IRS as required by IRC section 501 (C) (9). By acquisition of a favorable letter of determination from the IRS, the VEBA program has the approval of both Congress and the IRS. By joining an existing multiple-employer VEBA, these approval steps are avoided.

The VEBA organization that I am involved with provides continuing professional, educational seminars about VEBAs for various state CPA societies. By providing continuing professional education seminars and CPE credits at large CPA accounting shows and conferences, accountants become better educated about VEBAs.

You should discuss the benefits of a VEBA with your physicians and business owner clients before someone else does. *

Sheldon M. Geller, Esq.
Geller & Wind, Ltd.

Avery E. Neumark, CPA
Rosen Shapss Martin & Company

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