According to the US Census Bureau, the average American family earns less than $49,000. That translates to an income tax liability of less than 12%. 98% of American families will NEVER be worth more than $2,000,000 and owe an estate tax. Lastly, the average American is an employee, not an employer, and doesn’t have the government determine how much income they receive for their work. As a result, most people will never be sued because of work-related activities and don’t have to worry about their income dropping substantially each year. Therefore, there is no need for most people to address protection from lawsuits or to take advantage of every possible tax benefit when times are good. Does the situation above sound like your life? Of course it doesn’t.

As authors of books and articles, we regularly interact with publishers and talk show hosts. Radio and television stations, book & magazine publishers, and internet content editors are looking for content for their “average” reader. They fear “alienating” their readers and listeners by including content for only the higher income audience. What this means for physicians is:

Financial and legal advice you get from television, radio, newspapers and the internet is most likely NOT APPROPRIATE FOR PHYSICIANS!

By listening to this advice, you are like the patient who trusts his own self-diagnosis from his 10-minute internet search rather than trusting the experience of a specialist with decades of experience in his field.

Unless your advisors spend all of their time working with high income and high liability physicians, they won’t be familiar with the techniques in our articles, free audio CDs or books (like For Doctors Only). These techniques are appropriate for less than 1% of the population. It is okay if they sound strange to you at first. They should. Once you embrace that you are different and you require “different” planning than your neighbors, you will be on your way to financial freedom.

A couple of mistakes many physicians make by listening to bad advice include:

Mistake #1 – Listening to a CPA or Attorney who says, “You Don’t Need a Corporation for Your Medical Practice.” Despite what the CPA says, in most cases the cost and aggravation of the corporation are far outweighed by the asset protection and tax benefits the corporation offers physicians. Though these solutions can often help reduce taxes by $5,000 to $25,000 per year, these particular strategies are outside the scope of this brief article. If you are interested in learning about these techniques, a copy of our book, For Doctors Only: A Guide to Working Less and Building More, is free ($75 value) to readers like you. Call (877) 656-4362 and pay only $9 S&H.

Mistake #2 –Owning Any Assets in Your Own Name, Jointly with Your Spouse, or in Your Spouse’s Name! We know that this is the most common ownership structure for real estate and bank accounts. This is ok for 90% of Americans. You have potential lawsuit risk, probate fee liability, and estate tax risk. If you don’t want to unnecessarily lose assets to lawsuits or taxes, you need to consider alternative ownership structures. Something as simple as a living trust or a limited liability company can often solve these problems.

These two mistakes above are commonly addressed by savvy advisors and concerned doctors. If you have followed the advice above, please call the authors for a free discussion. This is basic, but important, planning that you must understand before moving on to more powerful solutions. The remainder of this article (which is in two parts) will focus on three additional mistakes doctors make when they rely on “Off the Rack” planning that is appropriate for Average Americans – but often very detrimental to doctors who have unique needs, circumstances and goals.

Mistake #3 – Wasting Time and Money on Retirement Plans.
This is perhaps the single most important area of planning for doctors to address once they understand that they are UNIQUE. Typical retirement plans are great for rank-and-file employees because they force employees to put away funds for retirement. In addition, the employers may match some percentage of those funds. The money grows tax-free for employees and is available after age 59½. When the employees pass away, there may be a very modest amount remaining, if any, for their heirs.

As “the employer,” you are responsible for those matching contributions. These can be very significant if you have a large or highly compensated (like techs or other doctors) employee base. You are also the person who will be responsible (in other words, “liable”) if employees do not get the proper allocations or contributions from your practice. Even if the plan administrator made the mistake, you ultimately may feel the wrath of the Department of Labor if your employees are not fairly treated under the plan. Further, a hypothetical $40,000 per year of pension contributions from ages 35 through 60 growing at 7% will only be worth $2,750,000 at retirement at age 60. If you want this income to last until your 90th birthday, you will start drawing monthly retirement distributions of $12,564 (pre tax per month) and increase those withdrawals by 3% each year to account for inflation. That $12,654 withdrawal in 25 years will be worth only $6,000 in today’s dollars – and that is a PRE-TAX number! After taxes, your $1,000,000 of retirement plan contributions over 25 years will be worth only $4,000 per month of after tax, inflation-adjusted dollars. Since most doctors will not be happy working so hard for 25 years (after a decade of training) and only having $4,000 per month to enjoy in retirement, it is imperative that doctors use supplemental planning tools if they want to reach a decent quality of life in retirement.

There is another problem with traditional retirement plans. Let’s say that you accumulate significant non-pension assets to supplement your quality of life in retirement. If you make the mistake of taking only “minimum” distributions from your retirement plan, you could pass away with $1 million or more of retirement plan assets. Upon your death, these plan assets can be taxed at income tax and estate tax rates. It is possible, in some states, for this “double tax” to be as high as 70% to 80% of the total value. In other words, if you don’t spend these plan funds before death, most of these funds will be lost to taxes. On top of that, we are in an economic crisis where taxes are almost certain to increase. It was not long ago when distributions from retirement plans with balances over $1,000,000 were subject to an ADDITIONAL 10% excise tax. We don’t recommend that you count on the government to make law changes to support your best interests in retirement. I am sure you didn’t pay all that money to fund your employees’ retirement plan only to lose 40%-50% of your distributions to taxes during your lifetime and lose an additional ¾ of the balance to taxes at death. This is yet another problem with “Off the Rack” retirement planning that threatens doctors and doesn’t impact Average Americans.

Suggestion – Do Not Rely on Traditional Retirement Planning to Support Your Retirement. Non-traditional planning can offer higher income physicians opportunities to contribute significantly larger annual contributions. If you want to increase your chances of having monthly retirement income in excess of $4,000, you must consider these options. Whether you are using non-qualified plans, “hybrid” plans, or even a tool primarily designed for risk management benefits, like a captive insurance company, you could possibly deduct $100,000 to $1,000,000 or more annually. Most of these tools allow you access to the funds before 59½, will not force you to take withdrawals at age 70½ if you don’t need the money, and will not be taxed at rates up to 70% or 80% when you pass away. For these reasons, savvy doctors utilize nontraditional plans more than traditional retirement plans.

Note: Non-qualified or “hybrid” plans vary significantly in their design, their scope, and their applicability. Some plans work great for smaller practices with one or two partners. Others work best in practices with 3 to 20 partners. Still others may work best for the larger practices. To determine which one is right for you, contact the authors for a free no-cost consultation offered to readers.

Don’t Miss Part 2 of this Article
This is the first of a two part article. More tips on tax reduction and other elements of financial planning that are specific to physicians and unnecessary for Average Americans will come in the subsequent part of this continuing article. The authors welcome your questions. You can contact them at (877) 656-4362 or through their website http://www.ojmgroup.com.

In Part 1 of this article, we explained that physician families have substantially greater liability risk and retirement challenges than Average American families do. This segment of our article will focus more on tax, investment and insurance issues that differ greatly for physicians and non-physicians. If you missed the previous part of the article, please feel free to contact the authors (Mandell@ojmgroup.com) for your copy. For now, let’s get right to some of the mistakes that doctors make and offer you some helpful hints to avoid these pitfalls.

Risk #4 – Paying Full Price when the Government Offers to Pay Half. Technically, the government (Internal Revenue Service) is not paying half of anything. However, if they offer you a tax deduction and your combined state, federal and local marginal tax rate is close to 50%, you can think of a tax-deductible purchase as being ½ as expensive for you because the government will allow you to deduct this purchase. Let’s look at an example.

Suggestion – Buy Long Term Care insurance (LTCi) through your Practice and let the Government Pay Half. Over 60% of American households will require some sort of Long Term Care assistance. This can be a short-term, relatively inexpensive proposition or a devastating long-term liability that may cost hundreds of dollars per day for a decade or more. In either case, without long term care insurance, you will have to pay for this assistance from your savings. If you purchase Long Term Care insurance through your medical practice, you do not have to offer this for your employees. Further, you can cover you and your spouse through the practice even if you are not both physicians. Lastly, you get a tax deduction for 100% of the premiums if they are paid by your practice if your practice is a C corporation.

We understand that you will not practice medicine forever. This is not a problem. You can pay your entire life’s premiums over a 10 or 20 year period so that all premiums come from your operating practice (before you retire) – and are 100% tax deductible. This way, when you retire, your premiums are paid in full and the government will have subsidized all of your payments. Unlike traditional retirement plans where contributions that are tax-deductible and benefits are taxable, Long Term Care insurance premiums can be tax-deductible and the benefits are 100% tax-free. Because most doctors recognize the increasing costs of healthcare, this is a very popular strategy for our physician clients.

There are also non-traditional non-qualified retirement plans that also allow physicians to make contributions of $100,000 to $1,000,000 per year, discriminate to only include the doctors or key employees, and access the funds before age 59½ without penalty. These plans can be set up to be very important pieces of a family’s estate plan without sacrificing tax deductions or control of the assets by the doctor. For further information on these plans that are beyond the scope of this article, please contact the authors at (877) 656-4362 or Mandell@ojmgroup.com.

Mistake #5 – Wasting Money on Taxes and Term Insurance Premiums. A famous female financial advisor with her own TV show is one of many advisors to tout, “Buy term insurance and invest the difference.” This is excellent advice for the “Average American” family who earns $42,000 per year, pays 12% in federal income taxes, and has no liability or estate tax risk whatsoever. The average family pays very little tax on investment income. It is possible that their tax on investment gains ranges from 10% to 15%. The average family is not worried about having its assets taken through a lawsuit. Further, the average family buys insurance solely for temporary income protection against the premature death of the breadwinner. The Average American family also has no interest in long term liquidity for estate planning purposes because it will never have an estate large enough to warrant any estate tax. Does this sound like the typical physician situation? Of course, it doesn’t. This is a perfect example of how “Off the Rack” planning doesn’t work for you when it seems so popular for most people.

Suggestion – Buy Cash Value Life Insurance for Tax-Savings and Asset Protection. If you are skeptical of this advice, ask yourself whether you are skeptical because you did the calculations yourself (or reviewed a careful analysis by an expert) or because you have heard, “Buy term insurance and invest the difference” so many times that you have just accepted it as fact.

Both authors have MBA degrees in finance and one has a degree in applied mathematics, so we feel our calculations are reliable in our proof that this advice is incorrect. To spare you the pain of a long mathematical proof, let us offer the following simplified analysis.

1. Mutual funds growing at 8% (taxable) are worth 5%-6% (after taxes) to high income taxpayers like you and worth 7% or more to Average Americans.
2. Investment gains within cash value life insurance policies are not taxed.
3. For relatively healthy insureds, the annualized cost of all internal expenses within a life insurance policy range from1% to 1.5%.
4. For families in high marginal tax brackets, the cost of the insurance policy is less than the cost of taxes on the same investment gains within mutual funds.

Without even factoring in the cost of the term insurance (which would reduce the total amount in the mutual fund portfolio), the cash value insurance investment outperforms buying term insurance and investing the difference. Yet another benefit is that life insurance is protected from creditors, and even from bankruptcy creditors, in many states. This is a benefit that may interest a physician family, but be seen as worthless to Average American families who have no real financial threat of a lawsuit.

EXAMPLE: Consider a 45-year-old healthy male who wants to invest $25,000 per year for 15 years before retirement and then withdraw funds from ages 61 to 90. Assume this individual’s tax rate on investments is 31% (50% from long term gains and dividends, 50% from short term gains, plus 6% state tax). Assume the gross pretax return of both taxable mutual fund investments and cash value life insurance are 8% per year.

• The individual who invests in mutual funds on a taxable basis will be able to withdraw $37,000 per year after taxes (without factoring in the costs of purchasing ANY term life insurance or the cost of creating legal structures for asset protection – which a doctor may need to do to protect assets from lawsuits).
• The individual who invests in cash value life insurance withdraws $42,500 per year (no taxes on policy withdrawals and loans) and has $1,000,000 of life insurance protection.

In the example above, it is obvious that buying term and investing the difference in taxable investments WAS NOT BETTER than investing in tax-efficient life insurance for a highly compensated physician in a high tax bracket. The authors welcome your questions. You can contact them at (877) 656-4362 or through their website http://www.ojmgroup.com.

SPECIAL OFFER: For a free (plus $9 S&H) copy of For Doctors Only: A Guide to Working Less and Building More, please call (877) 656-4362.

David B. Mandell and Christopher Jarvis are principals of the financial consulting firm O’Dell Jarvis Mandell LLC. Mandell and Jarvis have co-authored seven books for doctors. They are speakers for Guardian Publishing (http://www.guardpub.com) who offer CME seminars and other programs for groups, hospitals and societies.