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Retirement Plan Too Good To Be True; IRS Disallows VEBA Tax Avoidance Scheme Involving Life Insurance
Kirwan Financial of Pennsylvania, along with two insurers, InterAmerican Insurance (now collapsed) and Commonwealth Life Insurance (now owned by Dutch insurance giant Aegon) duped 28 small businesses and individuals, mostly doctors, into investing in a retirement plan, purportedly in which contributions were tax deductible and withdrawals were tax-free.
The IRS recently disallowed the plans, imposing substantial back taxes, interest and penalties upon the investors. The IRS promises more crackdowns, especially targeted towards professional partnerships.
The scheme involved a VEBA, or voluntary employee benefits association, that used a variant on an old ploy called springing cash value. Springing cash value means that investors pay extraordinarily large premiums for term life insurance (which, by definition, has no cash value), which they then deduct as a business expense. Typically at the sixth year of the policy, the term policy converted to a whole life policy, with enormous cash value due to the large premiums. The variant used in this scheme simply postponed the springing cash value until the time of retirement.
Source: Forbes, September 18, 2000
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Sponsored by James J. Eccleston, an attorney representing stockbrokers, financial planners and
investors nationwide in arbitration, litigation and regulatory matters, and a shareholder with the law firm
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