Since its inception in 1960, The Dolgoff Plan – which is a method for companies to improve their tax deductions – has been used by major players, from the American Basketball Association to Merrill Lynch. In 1987, when Merrill Lynch no longer held the exclusive rights to the plan, it became available through Peter Dolgoff himself. Then, 15 years later, Highland Capital Brokerage became the distributor.
So how can The Dolgoff Plan benefit your clients? Unlike other nonqualified plans, this is a proven alternative that allows your client’s business with current and deferred tax deductions that can exceed the corporate contributions, providing exceptional flexibility. This is accomplished through a seven-step process:
- Step 1: The corporation moves money – always after tax dollars, as this is a non-qualified program – from cash on hand into a brokerage account. The annual corporate contribution is used to purchase mutual funds or other asset allocations or investments, but this asset is always owned and controlled by the corporation.
- Step 2: By using the full corporate account value as collateral, your client’s corporation can leverage the account and take a margin loan. This allows the brokerage firm to lend its own money to the corporation, while the full value of the asset always stays invested and owned by the corporation.
- Step 3: With the proceeds of the margin loan, the corporation can provide the participant with a compensation bonus. Such a bonus is considered a tax-deductible expense for the corporation, and it will be sent to a life insurance company. The policy – usually whole life – is immediately owned by the participant, while the company retains no ownership of the policy.
- Step 4: The participant has a tax liability on the full premium, a portion of which may be surrendered from the policy – though not borrowed – to pay for the participant’s tax liability. This portion would come from a paid-up additions rider and provide the participant a policy with immediate cash values with no cost out of pocket.
- Step 5: The corporation is assessed with an interest charge for the margin loan – the second tax-deductible expense. This is because the corporation is not using the borrowed money for compensation, as opposed to purchasing a life insurance policy.
- Step 6: At the specified age of retirement or distribution, a percentage of the net asset value of the investment account is distributed to the participant as supplemental retirement income, which is a tax-deductible business expense for the corporation.
- Step 7: On top of the life insurance death benefit, the life insurance contract can be used to supplement retirement income on a tax favored basis. As long as the policy is not surrendered, cash values can be taken against basis or as a loan with no income tax due.
Of course, this isn’t an easy undertaking for your clients to take on by themselves. That’s why The Dolgoff Plan provides corporations with current and deferred tax deductions, no limits on contributions, full control of corporate-owned plan assets and no IRS filings or approvals. Plus, corporations can choose its participants and always stop the plan if necessary.
Each plan participant receives two streams of income – whether that’s at retirement or another designated date. They will also have immediate ownership of their life insurance policy, not be responsible for paying penalties for early distributions from the investment account and may even receive supplemental income in the event of a disability. Most importantly, there is no out-of-pocket cost to participate.
Candidates for The Dolgoff Plan
So what makes a successful prospect for The Dolgoff Plan? The corporation should fall under the umbrellas of C corporations, S corporations or partnerships. It’s also possible for LLCs to participate, but only if they are taxed as a C-corp, S-corp or partnership organizations. These corporations should be established, financially healthy and on the lookout for additional tax deductions. They should also want to provide an additional plan on a selective basis and customize that plan, all while avoiding the considerable costs that come with a traditional NQ plan.
Of course, there’s no such thing as a cookie-cutter company, which is why The Dolgoff Plan is adaptable to virtually any kind of C-corp, S-corp or partnership. For example, if your client has a partnership but only a couple of the partners want to participate, and those partners will realize a substantial tax benefit, they will have the option to recalculate the distributions on the K-1. Under this plan, only the participating partners would receive tax benefits.
What’s most important to emphasize to your clients is that they need the proper guidance through this process. You are their financial professional because you have the know-how and the discipline to ensure your clients are taking the right steps toward securing their financial future.
Download now The Dolgoff Plan FAQs.
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