Part
One: the history of VEBAs
from 1928 to the 1980's
The
Voluntary Employees’
Beneficiary Associations
or "VEBAs" for short, was first created in the year 1928 in response to demands from workers'
associations. The IRS
code was amended to
make VEBAs, which is
a form of a welfare
benefit plan, tax exempt
entities as well as
allowing employers
to provide benefits
for their employees.
Although welfare benefit
plans had been available
for some time, VEBAs
gave employers the
opportunity to fund
employees’ benefits
through the association
and make contributions
to the association
tax deductible.
In
the 1970's and early
1980's, the VEBA became
a popular tool for
tax reduction and asset
protection among the
wealthy. VEBAs were
used to purchase benefits
in the form of luxury
cars, yachts, jets,
islands, etc. The entire
cost was written off
entirely as a VEBA
benefit.
In
the mid-1980's, the
abuse of VEBA’s by
the wealthy came to
a halt. Rumor has it
that VEBA abuse was
stopped by a senior
IRS agent. According
to the story, the agent
was standing on a dock
of a yacht marina when
he noticed a large
and beautiful yacht
passing by. On the
back of the yacht,
he noticed the name
of the craft, "My VEBA." This incident exposed the excesses that VEBAs were being used for. With IRS
encouragement, in 1984
Congress passed the
Deficit Reduction Act,
part of which limited
the use of VEBAs.
These
new laws limited the
amount of deductions
an employer could take
for benefits supplied
through VEBAs. With
numerous tax shelter
options still available,
both taxpayers and
their advisors ignored
the VEBA, including
the two exceptions
Congress had intentionally
left intact that would
allow for unlimited
deductions. The IRS
never followed Congress'
direction to issued
regulations giving
taxpayers guidance
to interpret the 1984
laws. Without IRS guidance,
taxpayers were left
to interpret the laws
themselves, and work
through the tax courts
to learn what a post-1984
VEBA could and couldn't
do.
If
you would like more
information regarding
asset protection, trusts,
family limited partnerships
or the subject of this
article please call
or email our office.
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