Surplus Disability Insurance: Income Tax Reduction and Supplemental Benefit are all Aspects of a well run Equity Disability Trust
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.
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.