For physicians who have foundthat qualified and nonqualifiedplans insufficiently meet theirretirement planning expectations andasset protection needs, they may wantto look off the beaten path and considernontraditional plans. While nontraditionalplans may provide you theright pieces to fulfill those financialneeds, it is important to be knowledgeableabout the specifics of each plan orconsult a financial advisor.
Compliant Split Dollar Plans
Split dollar plans have been the primarytype of nontraditional plans in thecorporate workplace for the past 40years. Although it is not an insurancepolicy, it is an arrangement between anemployer and a chosen employee thatsplits the premiums, death benefits,and proceeds of permanent life insurance.But over the past 3 years, the IRShas changed the rules significantlyregarding them. Unfortunately, manyadvisors who do not practice in thisarena on a daily basis operate underthe misconception that split dollarplans are now dead. Nothing could befurther from the truth.
Under these new rules, it is certainlymore difficult to implement a splitdollar plan for public companies.However, for private businesses likemedical practices, it can still be aviable option. In fact, given the lowinterest rate environment that we currentlyenjoy, now may be a perfecttime to implement a split dollar planfor your medical practice. Physicianscan take advantage of this low interestrate and enjoy significant retirementwealth accumulation without offeringit to any employees. These types ofplans can be structured to handlemany of the buy-out and buy-in issuesbetween the younger and older partnersin a practice. If you want topotentially have more income inretirement and explore tax-efficientways to transition ownership of apractice, consider the advantages anddisadvantages of a compliant split dollarnontraditional plan to determine ifit's right for you.
Asset Protection Possibilities
In many circumstances, the centralgoal of a nontraditional plan may beasset protection for your practiceassets. The employee's ownership canbe organized in an irrevocable trust orother similar legal arrangements,which can be used in a number ofestate planning and asset protectionplans. Many physicians are concernedthat one of their partner's or employee'smistakes could result in a lawsuitthat decimates all of their practice realestate, equipment, and accounts receivable.They are delighted to hear that asolution to their concern can also offerretirement and tax benefits.
Most popular in this arena forphysicians are those that asset-protecta practice's accounts receivable. However,in this type of nontraditionalplan, it is crucial that both asset protectionand tax issues be properlynegotiated. In most of the plans thereare common pitfalls lurking. If thistype of plan is of interest to you,work with a financial advisor wellversed with this method of planning.
Financed Nontraditional Plans
Financed nontraditional plans, when properly structured, can providethe greatest after-tax investmentreturn to participating physicians.Because an outside lender supplies theinitial capital to fund the plan inexchange for a fixed return, the physiciansgain the use of other people'smoney compounded on a tax-deferredbasis. Furthermore, the plansare typically structured for substantialasset protection against the creditorsof both the medical practice and theindividual physicians.
Based on their personal experience,every successful physician should considera nontraditional plan or a nonqualifieddeferred compensation(NQDC) plan, which includes anyplan, agreement, or arrangement thatprovides for the deferral of compensation.Qualified plans are burdened witha host of restrictions, costs, and tax limitations.This often makes them expensivefor physicians, and they may notallow for significant retirement wealthaccumulation. NQDC plans have muchfewer restrictions and, therefore, canbe relatively inexpensive to implement.Nontraditional plans are more flexible,provide asset protection, and can likelyprovide the best return for physicianparticipants. If building your retirementwealth is an important goal for yourfinancial plan, investigate NQDC andnontraditional plans to see if they maybe right for you.
David B. Mandell, JD, MBA, is an attorney,lecturer, and author of Wealth Protection,MD (Guardian Publishing; 2004). He is also acofounder of The Wealth Protection Alliance(WPA), a nationwide network of elite independentfinancial advisory firms whose goal it is to helpclients build and preserve their wealth. Robert Davenport,MSFS, CFBS, is president of Partners Financial Group, andprovides sophisticated business planning to physiciansaround the country. Partners Financial Group is a chartermember of the WPA, and can be reached at 800-554-7233.For a 40% discount on Jarvis and Mandell's new book,Wealth Protection, MD, or for an audio CD on asset protection,call 800-554-7233 or e-mail email@example.com. The information contained in this article isgeneral in nature and should not be construed as comprehensiveadvice. Please consult a qualified tax, legal, orfinancial advisor before taking any action.