Welfare Benefit Trusts and Long Term Care Planning

It is no secret that multi-employer welfare benefit trusts under IRC 419A(f)(6) suffered a terrible beating at the hands of the IRS in what has been years of tax audits. Inevitably, the life insurance industry likes to find ways to sell life insurance. Better yet, it likes to sell life insurance with pre-tax dollars. Nothing wrong with that. However, sometimes the forest gets lost between the trees, i.e. the legislative purpose and planning purposes of these trusts gets lost in the process 

As I look at single employer plans under IRC Sec 419(e) or VEBAs (what ever happened to these?),these  plans have largely avoided the audit lottery by focusing  on post retirement medical benefits. What exactly is that? Isn’t that something that large corporations worry about particularly under-funding?

After the federal government shutdown which was mostly about Obamacare, healthcare is suddenly very relevant. Lost in the translation is the discussion about long term care costs such as nursing home. the long term care insurance market missed the mark and many insureds have discovered that their coverage was underwritten at the time of claim. 

People are living longer but the quality of life is diminished. Alzheimer’s has reached epidemic proportions. How does the business owner pay for his wife’s nursing home care without spending every dime that he earned over forty years and leave his children an inheritance? Nursing home costs around the country vary from $90,000-120,000 per year. Alzheimer’s patients frequently outlive the healthy spouse. Medicaid is virtually impossible to qualify for and most people do not attack the funding problem early enough. Wouldn’t be nice to pre-fund on a pre-tax basis?

At the same time, children with autism and other related illnesses has also become an epidemic. The issues of qualifying for Medicaid exist for this problem as well especially if you are wealthy or moderately wealthy. Every parent worries about their special needs child outliving the parents and not becoming a burden on the siblings. How does a parent set aside money? it is certainly cheaper if it can be done on a pre-tax basis. 

The welfare benefit trust – single employer plan under IRC Sec 419(e) or VEBA has huge planning relevance for these issues and may present an excellent pathway towards providing a solution on a pre-tax basis. Financial advisors and insurance agents no longer need to stretch to discover a legitimate planning basis to sell life insurance in these plans. Of course, there is no problem using life insurance as a funding vehicle! Contributions need to be determined using reasonable actuarial assumptions. The funding numbers need to be real!

I will be writing more about this in the future. As we reach year end, this is a plan to consider. 

Don’t forget to count your blessings today! 


About gerrynowotny

I am a tax and estate planning attorney with a JD and LL.M in estate planning from the Univesity of Miami School of Law. I have worked in the life insurance industry for twenty three years and the last eleven in private placement life insurance.
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