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Over the past two years, I have had calls from dozens of physicians who have either contributed to or are thinking of contributing to an Equity Disability Trust (hereinafter EDT) as a way to reduce income taxes, add supplemental disability insurance coverage, plan for retirement, and protect their assets. If done right, an EDT can be a great way to accomplish all four goals.

Disability Insurance

Almost every physician I have talked with in regards to disability insurance tells me the same thing, "I can't get more the $10,000-$15,000 in monthly disability coverage and, typically, the company limits the "own occupation" coverage to a maximum of $10,000 a month." Physicians rightly worry about something physically happening to them that would preclude them from earning a living. Thus, almost all surgeons look to purchase disability insurance and most opt for "own occupation" disability insurance.

With an EDT, a physician can pay premiums through the corporation as a deduction to fund significant amounts of surplus or secondary disability coverage.

Income Tax Reduction

The number one complaint I hear from physicians around the country is that physicians pay far too much in income taxes each year and that there are no solutions out there besides funding the medical office's pension plan. Over the past two years, I have outlined several alternative ways to reduce income taxes; and the EDT is another income tax reduction tool that allows for an unlimited corporate deduction.

Very simply, a corporation is allowed to deduct premiums to fund "supplemental" disability insurance benefits for an individual physician(s) through the corporation.

Return of Premium

Depending on the EDT used, the medical practice can ask for a "return on the premium" paid (plus all growth on the premium) anytime after the 5th year (assuming no disability benefits were paid). However, unlike a traditional pension plan, the deductible disability premiums can be returned to the practice and, in turn, to the individual physician(s) who funded the EDT before age 59 1/2.

Supplemental Benefits Similar to a Qualified Pension Plan (401k plan)

When I give seminars on income tax reduction, I ask the audience how many physicians would like to deduct an extra $50,000-$100,000 to their 401k plans. Almost universally all the hands in the audience go up. I am sad to say that there is no way to do that, but the EDT is very similar. How?

For an owner in a medical practice to "max out" their pension plan, the medical practice itself has to pay for the administrative expenses of the pension plan AND has to fund into the pension plan a significant amount of money for the staff. A conservative number is that, for every dollar an owner puts into the pension plan, the medical office puts an additional 20% of that amount in for the staff. That is extremely painful and one of the reasons most offices do not "max out" their pension plans.

The EDT functions similar to a pension plan in that the office can deduct disability premiums (contributions) that will go into an account for growth purposes and have that premium and its growth returned to the practice and then, in turn, to the key physician(s) via the Return of Premium Rider at a later date. The "load" to fund an EDT is roughly 6%; so that on every $10,000 a practice funds, $9,400 of that money is going to a surplus account for growth purposes. If the key physician(s) do not become disabled and with good claims experience, after the 5th year, the premiums paid and their growth can be returned to the medical practice and, in turn to the key physician(s) at the discretion of the practice.

Discriminatory Plan

An EDT is not governed by ERISA; and, therefore, there is no requirement to include staff members and no IRS reporting is required (unlike a pension plan). As stated above, an office can choose who is going to be covered under the EDT; and, therefore, one doctor in an office of 30 could have an EDT funded on their behalf without cost or involvement of the other physicians or staff.

Golden Handcuff

For practices (or hospitals) looking to entice key individuals, either partners or associates, to stay with the practice for at least 5-7 years, funding an EDT as a "bonus" program works very well. Since the refund technically comes back to the corporation and not the key individual, an EDT could be setup to reward key individuals for staying with the practice or to punish that key individual for leaving the practice prematurely.

I receive many calls from doctors who work in hospitals or educational institutions that are frustrated with their ability to take advantage of some of the advanced income tax and estate tax reduction topics. The EDT can be implemented without restriction in either a hospital or an educational institution for the benefit of one or many physicians.

Looking at the numbers:

The money contributed to an Equity Trust is typically invested in the market via mutual funds, stocks, or bonds with the expectation that the money will grow very similar to money in a 401k plan or any qualified plan. The following example is for a 40-year old who contributes $100,000 a year into the EDT for 10 years where the money grows at the rate of 8%.

*The money in the EDT is also Asset Protected from lawsuits.

Caution: As with all the "advanced" topics, there are EDTs around the country that I would not recommend. EDT can be a conservative way to lessen your taxes and fund supplemental retirement benefits, but using an EDT that is not in compliance with all the state's insurance laws will cause physicians a significant amount of grief.

If you like the idea of putting away an extra $25,000-$250,000 into your 401k plan, then you should consider using an EDT to fund a plan with similar characteristics but with more flexibility and no requirement to contribute for the staff.

For more information on the EDT, please give me a call at 269-469-0537.

Roccy DeFrancesco, J.D., is the President of Financial Management Group, LLC a company devoted to help small business owners (specifically physicians) on asset protection, income and estate tax reduction. He can be reached via email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Purchase Roccy's Book "The Doctor's Wealth Preservation Guide".