Financial Literacy: Year-end Issues for Physicians

The last quarter of the year is historically an active time for physicians and their tax, legal, and financial advisors. Given increased regulatory issues,  Internal Revenue Service scrutiny, and increased fraud, it’s vital that physicians do some basic due diligence before they act.

Doctors are heavily solicited for a variety of tax and investments schemes at the end of every year. Since many physicians receive a high-income and thus, are high-tax bracket professionals, this planning makes sense. However, it has to be done right, it can be very dangerous when done outside the law or by inexperienced advisers and promoters. Remember, no matter whom you rely on for this planning, the legal exposure is ultimately yours as the taxpayer and, “The salesman said it was legal…” is not a valid defense in the eyes of the law. In this discussion and over the next few weeks, we’ll provide some insight on issues that doctors commonly face under significant time and sales pressures at year-end.

You May be Asked to Buy Life Insurance.

Many retirement plans are funded with life insurance or actually use life insurance itself as the retirement vehicle because it offers both certain tax benefits by law and the traditional benefits most readers are familiar with. While insurance can be a great tax and retirement planning tool (and also offers unlimited dollar value creditor protection on policy cash values by law in more than half the sates in the U.S.), there are very specific rules on how and when it can be used. One of the most basic screening methods for any plan utilizing life insurance is the traditional “rule of three.” If it goes in tax free, grows tax free and then comes out tax free, be careful and get a third-party opinion from your own advisors, not the promoter’s buddy. This holds true for both cash contributions to investment and retirement plans and premium you may be paying to an insurer.

Finally, know exactly what you are buying.  As pro-life insurance as I am when used in the right way, there are significant differences between policy structures, benefits and commissions paid to advisors that may affect what is recommended. I’ve previously provided Physicians Practice readers a list of opening due diligence questions to ask about every life insurance policy being proposed. You should probably review these questions to understand the insurance you may already have in place as well.

You May be Asked to Consider a Captive Insurance Company

I’ve covered Captive Insurance Companies (captives) in significant detail before. We discussed the very real benefits a professionally established and run captive can provide and some specifics on what a captive is, how to pick a qualified captive provider, where it should be established, and perhaps most importantly, my own basic checklist of the questions I ask to determine if a medical practice meets the minimum qualifications captives require for legitimacy and a valid business purpose.   

The main issue I’d like you to take away about this issue today is the negative view the IRS has taken on captives that are openly sold and structured as tax shelters over those that are legitimate risk and cost management tools. Over the last 18 months captives across the U.S. have been increasingly audited as basic patterns of abuse have emerged, creating significant expense as well as legal and financial liability for their owners. To be clear, for those who fit the fact pattern and have a real business need for it, captives remain a legitimate and effective tool.  However, many captive “promoters” are abusing or encouraging their clients to abuse captives and these audits often start at the offices of such unskilled promoters. If you are being pressured to implement a captive before year-end for primarily for tax savings by those who have not advised you on these issues before and you are being presented with sales materials, websites, and brochures that emphasize tax planning over risk management, carefully reconsider who you’re in business with. Many doctors have been penalized for doing the right thing with the wrong people.