Consultant and tax strategist Lance Wallach says “the initial reaction to this is ‘Wow, this is unbelievable,' but it's not for everybody.” He's referring to a Voluntary Employees Beneficiary Association or VEBA, a way for business owners to save money — and to recoup money — tax-free.

Although similar to a retirement plan, a VEBA is really an IRS-tax-exempt trust, to which a business owner can make discretionary contributions of pre-tax dollars, which in turn reduces the company owner's tax burden. A VEBA differs from a retirement plan in that withdrawals for certain benefits are not taxed, even for beneficiaries, and money can be withdrawn anytime during your life — or that of your beneficiaries —without penalties.

You can choose where the money is invested; however, since the money must be there when you need it, investments are limited to safe and secure vehicles such as annuities and insurance products.

A part of the U.S. tax code since the 1920s, the VEBA has traditionally been used by large corporations as a way to offset costs in providing benefits to employees. You can have a VEBA in addition to a 401(k) or another plan, and the VEBA contribution doesn't reduce contributions to another plan.

A VEBA works well for small-business owners (even the self-employed) if they are making a profit. Contributions, which can be substantial, are calculated by the plan administrator. A VEBA accomplishes several things:

  • It makes large, tax-deductible contributions possible.
  • Contributions are protected from the claims of creditors.
  • It can make non-deductible expenses, such as life insurance, tax deductible. It can even make certain business exit strategies and business succession plans tax deductible.
  • If you're contemplating estate planning, there are ways to coordinate that with a VEBA to make estate planning tax deductible.
  • You can have a buy-sell agreement be tax deductible, and in this way provide for what will happen in the event that your business partner dies or leaves the business.

    • For example, if your business partner dies, you may not want to work with his or her heirs — or more likely, they won't want to work in a remodeling business. The VEBA would provide, on a tax-deductible basis, the money to take care of the buyout.

    There's also a living buy-out, whereby you can buy your partner out using the money that you have been putting into a VEBA. “The VEBA is the only way to make these things tax deductible,” Wallach says.

    So why haven't you heard about VEBAs before? “It's a niche, and you can get in trouble if it's not done correctly,” says Wallach, who is one of a handful of people with expertise in the strategy. (Wallach will be speaking at the World of Concrete 2006 conference, www.worldofconcrete.com, and the Surfaces 2006 conference, www.surfacesexpo.com, both of which take place next month in Las Vegas.) Other experts include Ron Snyder, an employee retirement attorney in Salt Lake City; Ira Kaplan in Plainview, N.Y.; and Roccy DeFrancesco, a tax attorney in New Buffalo, Mich. Wallach suggests researching VEBAs on the Internet and contacting an employee benefits specialist before seeking further consultation.

    The World of Concrete and the Surfaces conferences are produced by a division of Hanley Wood, the company that publishes REMODELING.