Sell Your Receivables for a Secure Future

Physician's Money Digest, May 2006, Volume 13, Issue 5

For maximum savings, manyadvisors today pitch definedbenefit plans such as 412(i)plans, which can work toput more money away taxdeferred,sometimes over $100,000 ayear. But the problem with defined benefitplans is that staff must be includedin the plan, and physician-owners haveto pay 20% to 40% of their own contributioninto the staff plans, which isvery expensive.

Other income-tax reduction planspitched to physicians are either not onthe up-and-up, or are so complicatedthat their accountant or attorney willnot approve the plans. But there is asolution that is particularly viable forphysicians called a WealthBuilder Annuity(WBA).

Factoring for Notes

With a WBA, a practice sells anamount of accounts receivable (A/R) inexchange for a deferred installmentnote. This selling of A/R is called factoring.How does a WBA work? A medicalpractice sells a specific amount of A/R(usually $25,000-$100,000 or more) toa factoring company (FC). The FC takesa 5% factoring fee on the factored A/Rand issues an installment note for paymentof the remaining 95% to the medicalpractice. This installment note hasrepayment terms as dictated by themedical practice selling the A/R.

When the medical practice collectsthe factored A/R, the money is transferredto the FC. The FC then investsthis money, minus the 5% factoring fee,typically in indexed annuities that haveminimum guarantees and growthpegged to the S&P 500. The FC paysback to the medical practice the initialamount factored (minus the originalfactoring fee) plus any growth on themoney when the installment note comesdue to pay the medical practice. Themedical practice then can use this moneyfor any business purpose, includingas a bonus to the physician-owner.

Representative WBA

Assume that Dr. Smith, age 40, worksfor XYZ Orthopedic Clinic, makes$600,000 a year, and has an extra$100,000 in income this year. Furtherassume that the medical practice at anygiven time has $700,000 of real A/R onthe books, and Dr. Smith's patients represent$200,000 of that A/R.

XYZ Orthopedic Clinic contractswith the FC to sell $100,000 of A/R inexchange for an installment note thatwill be payable in 21 years as a lumpsum when Dr. Smith is age 61. The FCtakes a 5% factoring fee and invests$95,000 in indexed annuities. If this$95,000 grew at 8% for 21 years, itwould become $5,173,392. The medicalpractice would then receive$371,000 a year as an installment notein a lump sum at the end of the 21styear. Dr. Smith would receive thisamount as taxable income each year for20 years starting at age 61.

Annuity Advantages

One of the most beneficial aspectsof the WBA is that there is no annualfunding requirement. You can decideeach year if you would like to contributeto the plan and for what dollaramount. WBA as a deferred fundingvehicle is much less expensive than adefined benefit plan, 412(i), or even aprofit-sharing plan. The load with aWBA is only 5% a year vs the 20% to40% an employer pays for its staff toparticipate in a qualified plan.

If you're looking for a simple incometax deferral solution that your accountantand attorney will approve with variableannual funding each year and norequired staff contribution, you shouldstrongly consider a WBA as an integralpart of your investment strategy.

, speaks at

more than 70 conventions a year and writes

for over 50 publications. For more information,

call 516-938-5007 or visit www.veba

plan.com. The information provided herein is

not intended as legal, accounting, financial, or any type of

advice for any specific individual or other entity. Contact an

appropriate professional for any such advice.

Lance Wallach, CLU, ChFC, CIMC