Working Smart and Building More: Best Practices in Corporate Structure, Tax Reduction & Wealth Protection. David B.

Transcription

1 Working Smart and Building More: Best Practices in Corporate Structure, Tax Reduction & Wealth Protection David B. Mandell, JD, MBA

2 Faculty Disclosure In compliance with ACCME Guidelines, I hereby declare: I do not have financial or other relationships with the manufacturer(s) of any commercial services(s) discussed in this educational activity. David B. Mandell Society for Clinical Research Sites, Inc. is accredited as a provider of continuing nursing education by the American Nurses Credentialing Center s Commission on Accreditation. Earn up to 13.5 CEUs, Nursing CEUs and CMEs (7.5 for Summit attendance & 2 per Master Workshop). 2

3 DISCLAIMER OJM Group, LLC ( OJM ) is an SEC registered investment adviser with its principal place of business in the State of Ohio. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which such notice filing and registration is required. OJM may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. For additional information about OJM, including fees and services, send for our disclosure brochure using the contact information provided in this presentation or refer to the Investment Adviser Public Disclosure web site ( Information contained in this presentation has been obtained from sources we consider reliable, but its accuracy is not guaranteed. Any opinions expressed are based on the interpretation of data available to OJM and are subject to change at any time without notice. This presentation is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or the rendering of investment advice. 3

4 DISCLAIMER No client or prospective client should assume that any information presented or made available on or through this presentation, is a receipt of, or a substitute for personalized investment advice. Such advice may only be rendered after the following conditions are met: 1. delivery of our disclosure brochure to you, and 2. execution of an Investment Advisory and/or Financial Planning Agreement between us. This presentation contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this presentation will come to pass or that any particular investment strategy or asset class will be profitable. OJM is not engaged in the practice of law and does not provide legal advice. Always consult with an attorney regarding your specific legal situation. The information contained in this presentation is general in nature and should not be acted upon in your specific circumstances without further details and/or professional advice. Contact your personal tax advisor for specific advice related to your tax situation. These recommendations are not intended as a thorough, in-depth analysis of specific issues nor are they sufficient to avoid tax-related penalties.. 4

5 TODAY S PRESENTATION 1. Ideal corporate structure for clinical research sites 2. Benefit planning - including the use of qualified and non-qualified plans to save taxes 3. The optimal use of captive insurance arrangements for to manage risks and reduce taxes 4. Corporate and personal asset protection planning 5

6 PRACTICE CORPORATE STRUCTURE

7 CHOOSE YOUR MEDICINE Proprietorship/General Partnership No good tax reason LLP/LLC taxed as partnership flexibility, but no Medicare tax savings LLC taxed as disregarded entity Saving cost of return? S Corporation Spread income between reasonable salary/distributions Save 3.8% Medicare tax on distributions Are you an S acting like a C? C Corporation Lose the S salary/distribution play Gain write-offs not available with S corporations.

8 YOU RE NOT COMMITTED No excuse for proprietorships or general partnerships Analyze which type of entity is best for you. You can easily convert from one entity to another (so long as you haven t already changed from an S to a C within 5 years) Multiple entities?

9 CONCLUSION: CORPORATE STRUCTURE Do you know why you employ your existing corporate structure? If you would like to save taxes in 2015/16 and beyond, while protecting assets, does it make sense to examine a different structure, including a two-entity structure?

10 BENEFIT PLANNING

11 WHAT IS A RETIREMENT PLAN For many physicians and business owners, they mean a qualified retirement plan (QRP) Many different types At OJM, we see a QRP as one bucket in a multi-bucket plan Other benefit plans, after-tax assets, securities/real estate, other asset classes Tax Diversification is Key

12 TAX DIVERSIFICATION 39.6 Federal State + 3.8% ACA 50% Tax Withdrawal: $100,000 Less Taxes: $50,000 Net After Tax: $50, Federal State + 3.8% ACA 30.4% Tax Withdrawal: $100,000 Less Taxes: $30,400 Net After Tax: $69,600 0% Tax Withdrawal: $100,000 Less Taxes: $0 Net After Tax: $100,000 *Once funded, the policy values grow tax-deferred and can be accessed tax-free under normal life insurance tax rules IRC Secs. 72(e)(1) and 72 (e)(5)(c)

13 QRP GROUND RULES 2 different categories Asset protection is excellent Must cover all eligible employees Full deduction for contributions/income taxation on withdrawals Penalties on withdrawals before 59 Funds left in estate taxed up to 70%

14 DEFINED CONTRIBUTION PLANS IRS defines the contribution amount 401(k)s, 403(b), and 457 plans 18,000 employee deferral amount PS: Defined contribution maximum $53,000 Flexibility on funding No penalties for underfunding or termination Proper plan design is key

15 DEFINED BENEFIT PLANS Actuarially-determined contribution amount Clients contributing $200,000+ annually Employee costs can be high Penalties for underfunding or termination Planning design/commitment is key

16 SEP IRAs Similar rules to the defined contribution plan $25% or $53,000 whichever is less in 2015 Flexibility on funding Asset protection not as strong in some states as with QRP

17 QRP GROUND RULES: REVISITED Full deduction for contributions/income taxation on withdrawals You are trading today s tax rates for tax rates in retirement QRPs are a bet that your tax rate will be lower (or at least the same) as it is today: Do you believe this? Value of tax deferral is significant Example: Charles Mandell, MD

18 QRPS: A GOOD BET TO TRADE TODAY S DEDUCTION FOR TOMORROW S TAX? Top Marginal Federal Income Tax Rate > Year >

19 TRADING ORDINARY INCOME FOR CAPITAL GAINS TAXES Nearly all clients use after-tax investments as part of their retirement plan Securities Closely-held businesses, artwork, commodities Real estate Rents taxed as Ordinary Income Sales may trigger depreciation recapture (ordinary income) Home: special tax treatment

20 WHAT WILL CAPITAL GAINS RATES BE? Top Federal Capital Gains Tax Rate > Year >

21 USING BENEFIT PLANS TO HEDGE YOUR LONG-TERM TAX BET Roth IRA Contributions after-tax; tax free growth and distributions Non-qualified plans; 162 bonus plans Contributions after-tax; tax free growth and distributions Life Insurance as a retirement plan

22 NON-QUALIFIED PLAN AS OPTION No limitations on contributions reasonable compensation In addition to 401k, profit-sharing, pension Owners can vary how much/if they participate Employee participation not required No tax deduction, tax-free growth and on withdrawal Ideal hedge against future income/cg tax increases

23 ASSUMPTIONS FOR CASE STUDY Example taken from Actual OJM Group Client: 45 Year Old Male Ohio Resident $100,000 Annual Contribution for 10 Years Growing at 6.5% annual gross rate of return Investment management fee of 1% Assuming taxed at 20% Short Term Rates/ 80% Long Term Rates 39.6% Federal & 6.0% State 20% Long Term Capital Gains & 3.8% ACA Tax Distributions at age 65 for 20 years

24 AFTER TAX RETIREMENT DISTRIBUTION $4,000, $3,500, $1,542,329 $3,000, $2,500, $2,204,251 $2,000, $1,500, $3,746,580 $1,000, $500, $0.00 After Tax Investment Non-Qualified Plan

25 TAXES & FEES VS. POLICY EXPENSES $1,400, $1,200, $1,000, $844,300 $800, $600, $1,193,099 $400, $348,799 $200, $0.00 After Tax Investment Non-Qualified Plan

26 CONCLUSION: BENEFIT PLANS Realize the tax bet of QRPs Make sure your QRP is maximized, if you have one Understand personally-held assets like securities and real estate are subject to capital gains taxes Consider other benefit plans/buckets which are hedged against ordinary income and capital gains tax rate increases

27 SMALL CAPTIVE INSURANCE COMPANY

28 SMALL CAPTIVE Asset protection Risk Management Presently uninsured risks Excess, deductibles, litigation expense, etc. Buy-out fund/estate planning fund Taxation $1.2 million non taxed premium income 831b

29 SMALL CIC I.R.C. 831(b) Thousands in operation today Code designed to make insurance available Made better by changes to law in 2004 Positive PLRs recently Yet, there is abuse.

30 CAPTIVE INSURANCE COMPANY OWNERS Provides insurance coverage for various risks OWNERS CIC SITE/ OTHER BUSINESSES $$ for Insurance Premiums CIC

31 TYPES OF CIC POLICIES Everything a business currently self-insures: Deductibles; excess losses above coverage limits Loss of income as a result of: Losing key employee/salesperson Rising interest rates/economic factors (developers, real estate) Loss of license/professional risks (professionals) Loss of a key contract (Gov t. contractors) Weather, terrorism, etc. Liability defense expenses: Employee lawsuits sexual harassment, wrongful termination, discrimination, etc. Professional claims Anything that might be consider a Lloyd s risk

32 KEY ROLES 1. Law Firm / Insurance Manager / Actuarial Firm Handle the formation of the CIC, its tax treatment, all tax & legal issues related to the transaction on an ongoing basis Make sure that the CIC is compliant with all state insurance department rules and procedures on an ongoing basis Draft all insurance policies by the CIC to practice and related entities and value the proper pricing of each policy Represent the client in any audits by the state insurance dept. or the IRS 2. OJM Manage the CIC reserves from an investment perspective Propose, explain and implement any benefit plans for the CIC s owners and executives

33 CONCLUSION: SMALL CAPTIVES Does your business have litigation, economic, regulatory and other risks not covered by insurance or present policy exclusions? Does your practice generate $3 to $5 million+ in revenues? Would you be interested in a tool that provides tremendous risk management, asset protection, recruitment/exit strategy and tax benefits?

34 ASSET PROTECTION: BACKGROUND

35 COMMON LIABILITY TRAPS Employer liability Sexual harassment (hostile work environment) Wrongful termination (protected classes) Violation of fiduciary duty (qualified plans) Malpractice/Product liability Premises liability Contractual liability Personal liability Car accidents

36 36 ASSET PROTECTION: SLIDING SCALE

37 CHOICE OF ENTITY: PROTECTION Inside vs Outside risks Inside: created by the business activity Product liability Malpractice Employee claims Outside: created by owners activities, unrelated to the business Car accident Other personal liability

38 CHOICE OF ENTITY: PROTECTION Inside Protection Corporation LLC LP Yes. General corporate law principles. Yes. General corporate law principles. None for the LP general partner. Outside Protection None, unless licensure for professional corporations. Charging order protections available. (+2) Charging order protections available. (+2)

39 MULTIPLE ENTITIES: BUSINESS PURPOSE BUSINESS ENTITY COMMON OWNERS Common Paymaster Services Agreement MANAGEMENT CO. ) COMMON OWNERS

40 PERSONAL ASSET PROTECTION

41 TITLING ASSETS: DOES IT PROTECT? Spousal Basics: Tenancy in common, joint tenancy Tenancy by the Entirety (TBE) Community Property

42 START WITH EXEMPT ASSETS (+5) (+5) Federal or state exempt asset No gifting, compliance, accounting fees or special taxes Protection cannot be matched by any other planning Federal bankruptcy exemptions for QRPs and IRAs Common state exemptions Vary widely

43 LLCs/FLPs (+2) Inside Creditors Isolates their lawsuit damage only to FLP/LLC property Outside Creditors Creditors can only get charging order against the FLP interest (+1 to +3) depending on use, compliance Should tie into your estate plan

44 KEYS TO PROTECTION: FLPS/LLCS Proper partnership/operating agreement Compliance with annual formalities Non-asset protection purpose: estate planning/ gifting Key: experienced attorney who has annual monitoring/gifting plan

45 PROTECTING THE HOME Homestead protection is best Tenancy by the entirety (TBE) Debt Shield Legal structure

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