5 tax plans for a top producer's practice

By Nick Paleveda MBA J.D. LL.M

National Pension Partners


Today, with only a life insurance license, a top producer can create amazing tax plans for their clients. This blog will explore tax plans every producer should know about and could use in their practice.

1. The max-funded non-MEC UL (or IUL or WL) policy.

This plan can be done for everyone. The producer places the maximum cash amount into a life insurance policy that does not trigger the 7702 MEC rules. Each year, the client funds the policy. When the client goes to retire, tax-free income for life will come out of the plan. Like a Roth IRA, but with guarantees and a death benefit for the survivor.

2. The pension rescue, IRA rescue, or profit sharing rollback

The producer creates a profit sharing plan for the client (assuming they have a business and otherwise qualify). The IRA is rolled back into the profit sharing plan, which then acquires a life insurance policy. After a period of funding the policy, the policy is distributed out of the plan (at a lower value as surrender charges are taken into account) and accumulates tax-free outside of the plan. Generally, at distribution time, the policy values are lower. This low value generates a tax savings at distribution — but wait a minute, didn't the IRS attack these transactions?

Yes, they did, and they lost in tax court! In Schwab v. Commissioner TX Ct. No. 10525-07, the IRS challenged this plan and lost. Next, the IRS lost again on appeal in the 9th Circuit on April 23d 2013, see Schwab v. Commissioner 111 AFTR 2d 2013-667. This is a bitter pill for the IRS to swallow, so look for them to attack this in other jurisdictions. In addition, this plan will not work if the surrender charges are artificial and do not reflect FMV.

3. The Section 79 plan

This allows for group term to be deductible. To allow a 100 percent tax-deductible benefit, the death benefit is limited to $50,000. However, there are creative ways to use a Section 79 plan and you should work with a Section 79 TPA.

4. Pension and profit sharing plans

Pension plans may purchase life insurance up to 100 times the monthly earnings or 50 percent of the contribution, if a whole life policy is in the plan. If the side account is an annuity, the plan may qualify under section 412(e)(3). The contribution amount is actuarially calculated and could be as high as $350,000 a year on a tax-deductible basis. 401(k) plans are limited to $17,500, and profit sharing plans are limited to $51,000.

5. Combination plans

One CPA firm recently advised a client to set up a 401(k)/profit sharing plan with a pension plan and a section 79 plan along with a max-funded non-MEC IUL policy. I think producers should examine the opportunity working with CPA firms. In each of the two cases the CPA firm did this for their clients, they saved $26,000 in taxes and $100,000 in taxes.

Finally, the producer needs to educate himself on these techniques and work with CPA firms and their clients, TPAs for assisting in section 79 and actuarial firms for assisting in pensions.