The benefit plan you've never heard of that saves, shelters, and showers you with tax-free money.
When something sounds too good to be true, it usually is-but there just may be an exception. A VEBA, which stands for Voluntary Employees Beneficiary Association, is a tax-exempt trust through which a business owner can get current tax deductions by making discretionary contributions that may be withdrawn tax-free for qualifying benefits such as post-retirement medical and long-term-care costs. If you think it's just another garden variety benefit plan, hold onto your stethoscopes.
"A VEBA, which you can have in addition to a retirement plan, provides a number of significant business planning opportunities," says Lance Wallach of Plainview, NY, who specializes in VEBAs, pension plans, and tax-reduction strategies. "It allows owners and highly compensated employees to take tax-deductible dollars and obtain many benefits including life, health, and disability insurance." It can also be created so that funds used in a practice buy-out will be tax-deductible.
"Many physicians are drawn to the asset protection advantages that VEBAs offer," explains tax attorney Roccy DeFrancesco, author of The Doctor's Wealth Preservation Guide (Triarc Advisors, 2006). "If you had a judgment against you-as the result of a malpractice, divorce, or other type of lawsuit-any money in an ERISA-qualified VEBA would be protected against seizure."
As indicated earlier, you can contribute to a qualified retirement plan and a VEBA simultaneously. So if you've already fully funded your retirement plan for the year, you can make additional contributions to the VEBA. Another plus, you can withdraw money from the VEBA for qualifying benefits before age 59½ without penalty and don't have to make withdrawals after 70½ unlike a retirement plan. (VEBAs are subject to some portions of the Employee Retirement Income Security Act of 1974, but not by the rules covering qualified plans.)
If properly constructed, a VEBA can also be an advantageous estate-planning tool. "It's one way wealth can pass tax-free to the next generation without limitation," says Wallach. "With a retirement plan, once the estate reaches a certain amount, the inheritance will be subject to income as well as estate taxes, but not so with a VEBA."
There are, of course, qualifications. In order to be exempt from estate tax, there must be no "incident of ownership," meaning you must be willing to forgo a degree of control, such as having the right to change the beneficiary. If you named your children or an insurance trust as the irrevocable beneficiary, proceeds would go directly to the beneficiary and avoid all taxes.
How a VEBA is set up
First, discuss your goals and specific circumstances with a VEBA specialist. Then a plan administrator-a professional with extensive tax expertise-will custom-design a plan to meet your needs. "A VEBA can't arbitrarily discriminate among employees," cautions Wallach. "For example, benefits have to be based on objective criteria like salary or length of service, not on subjective reasons or no reason at all."