Privatize Your Social Security A strategy that has been used for many, many years, has been the use of dividend or profit distribution from "pass-through" entities in order to decrease social security costs. An example of this would be as follows: You have a current business that pays fees to a limited liability company or some other pass-through entity (such as a partnership or S corporation) in return for services which are provided by that pass-through entity. An example of the services would very obviously be the services of management by an owner of this company. For many years in a properly constructed asset protection plan we have seen the separation of valuable assets from the corporate entity. This is because many people over the years have accumulated large numbers of assets in their corporations not realizing that they were in fact creating a target for a lawsuit. It is not uncommon at all for the young entrepreneur to start his corporation to shield his personal assets and yet as the business grows he buys real estate, he accumulates accounts receivable (this is a very common occurrence in medical practices where the largest single asset of the practice is these accounts receivable), as well as patents, licenses, and other valuable assets. By adding a limited liability company, it can pay income to a family limited partnership created through the estate planning of the principals. As money travels from the corporation, fees are paid to the limited liability company, where the consultant takes a salary of some dollar amount, the rest of the fees being treated as a dividend or as a distribution of profits. When this occurs, there is a difference between the income received that is subject to FICA and the total distribution of profits. In other words, to use a rough example, if two-thirds of the distribution of profits is made not subject to FICA, there will be a decrease in the payments for social security. Let us always be aware that by invoking this strategy will now most assuredly result in a lowering of the social security benefit. Only for those persons who are philosophically attuned to the fact that this will occur and ultimately will take responsibility for this action, save that money, invest it prudently, and allow this to serve as their barrier to poverty at retirement age. This is not a program designed to produce money for the vacation to Cancun, this is not money that is designed for a new automobile, this is sacred retirement money and should be treated as such. One of the main elements of this whole plan is clearly the element of self reliance and of social responsibility. We don't want a population dependent on the government as we have now. Any citizen who can take personal responsibility for their own financial well being should be encouraged to do so. Now, many questions come up as to what to do with the excess. Certainly investments accounts would be a logical place for this money to rest. If we are looking for a tax deferred environment, then it is quite obvious that typical tax deferred/asset protection vehicles like insurance and annuities would be a perfect example. With the new products available, including variable life and variable annuities which allow for the investment into tax deferred vehicles of money, historically going into mutual funds, one can either provide a financial safeguard to a family using life insurance, or one can use an annuity. In certain cases there is an advantage ultimately in the investment realm to using the life insurance because of the peculiar tax treatment of the life insurance vehicle. What this specifically is, is what is called washed loan accounting. When a person makes an investment into a life insurance policy and gains are created, the tax deferred nature builds these up at retirement, when a person starts to draw down from the insurance policy. In these cases, people draw a long and expansive income stream because of the tax treatment of the withdrawal. The first monies withdrawn from the policy are considered to be a withdrawal basis therefore non- taxable. The rest of the capital gains is taken out of the policy under a washed loan program, which means that your account is credited the same or similar interest rate as the loan applied to the withdrawal, so you have a "wash loan". The value in this is that because it is a loan, it is not treated as a taxable event. There is no reason to believe that in the future that this will exist for a long period of time. Taxpayers should get information on these programs as soon as possible. As has happened in many, many changes in the tax law, they tend not to be retroactive, but they tend to be grandfathered, so the purchase of such a contract today in many ways can be quite advantageous. This FICA reduction program is not one that can be done in a cookie cutter fashion. Each individual case requires separate and distinct analysis from two perspectives. One, there can not be an unreasonable alteration of the tax positioning. Secondly, there must be other reasons for this to take place than simply to effect a tax result. There are numerous cases on both of these situations that give the taxpayer guidance, however, it is imperative in this exercise that knowledgeable and experienced legal counsel be at least consulted in constructing this or what we don't want to happen will and that will be the Internal Revenue Service will disallow this program and one will have to make back payments to social security. Very few financial planners are even aware of the possibilities for FICA reduction. For more information, and referal to people in your area who can help, write to FICA Reduction Program, P. O. Box 540, Upper Marlboro MD 20772.