Let the government bail you out

January 1, 2009

The recent developments in 2008 have left many of us with less wealth than we had just a year ago. The purpose of this article is to highlight a few tactics for regaining some of your lost wealth.

Key Points

The recent developments of 2008 have left many of us with less wealth than we had just a year ago. Our home and stock market investments are likely worth a lot less, and it may be years until the values of these assets return to previous levels. The federal government has agreed to spend hundreds of billions of dollars to bail out poorly run or mismanaged corporations. These bailouts ultimately will result in significant tax increases for all of us, and it is natural to feel frustrated and upset that you will have to pay for other people's mistakes.

What you didn't know, until now, was what you could do to get the government to help bail you out with some tax savings. Though our firm has strategies for managing investments in this type of market, the purpose of this article is to highlight a few tactics for regaining some of your lost wealth. The strategy has two simple steps to help you make up for lost wealth. First, you will reduce your taxes now so you have more to add to your short-term investment portfolio. Second, you will focus on building future wealth more tax-efficiently for the long-term. Let's examine both ideas.

Reduce taxes now

A. Utilize the right entity for your practice.

Many physicians today are using the wrong ownership form for ideal tax planning. Choosing the right entity among "S" or "C" corporations, or limited liability companies, could turn into tax savings of $10,000 to $45,000 annually.

B. Consider non-qualified plans, in addition to pensions/401(k)s.

Non-qualified plans are relatively unknown to many doctors, despite the fact that most Fortune 1000 companies make non-qualified plans available to their executives. This type of plan should be very attractive to doctors, however, because employee participation is often limited and inexpensive. Further, nonqualified plans generally allow larger annual contributions for the owners than traditional qualified plans do. Some plans can offer annual contributions as large as $100,000 to $200,000 per participating owner or executive.

C. For larger practices, consider captive insurance companies.

Closely held captive insurance companies (CICs) are great tools for successful medical practices looking for liability protection, risk management, tax, and wealth accumulation benefits. The CICs we are discussing here are very small insurance companies that primarily will insure your practice. These companies enjoy beneficial tax treatment (made even better by a 2004 law signed by President Bush), allowing the owners an opportunity to build wealth, as opposed to giving profits up to insurance companies.

Any of the above techniques, as well as numerous others, could help you reduce taxes for 2008 or 2009. By doing so, you might recover a percentage of the wealth you've lost as soon as this year. For longer-term wealth recovery, longer-term tax strategies must be employed. We will discuss this next.

We spread our investments across different classes of investment so that, in the event something bad happens that affects one company or one industry, the total portfolio is not significantly affected by the event. With tax diversification, a similar theory applies. If you have some investments that may be taxed as ordinary income, some that may be taxed at capital gains or dividend tax rates, and some assets that may not be taxable at all, you have flexibility.

The concept is quite simple-a properly tax-diversified portfolio minimizes the risk of loss when taxes increase and provides flexibility that can afford savvy taxpayers the opportunity to minimize total taxes paid over a lifetime of investing. For this reason, we advise our clients to have their wealth in multiple tax "buckets"-each with its own tax treatment. This provides flexibility that allows clients to minimize long-term taxes paid. In your case, this strategy may make up for the wealth you may have lost recently -if you apply it properly.

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