BRYN MAWR, Pa. — More than 3,500 attendees at a conference of insurance and financial professionals gathered to discuss opportunities under the Tax Reform Act of 1986, but instead they learned about the Hazzards.
The fictitious Hazzard family was created to provide a better understanding of how the new act applies to individuals and businesses.
The scenario described Walter Hazzard, 57, who is president of Par-For-The-Course Inc., a manufacturer of golf equipment. Through the lives of Walter and his family, the financial services professionals learned how tax reform affects retirement plans, corporate dealings, investment options and estate planning.
"Their lives may seem like an episode of 'Dynasty,' but the facts cover all the topics that the typical executive must consider when making business and personal plans," said William W. Fenniman Jr., moderator of the conference and immediate past president of the American Society of Certified Life Underwriters. Fenniman is branch manager of Manufacturers Financial Group in Boston.
Fenniman was joined by three other panelists: Andrew J. Fair, an attorney specializing in corporate, pension and estate planning; Harold W. Gourgues Jr., publisher of the Gourgues Report, a financial planning newsletter, and Martin J. Satinsky, a partner in the Philadelphia tax department of Coopers & Lybrand.
Satinsky suggested that Par-For-the-Course Inc., like other profitable closely held corporations, should consider converting to an S corporation. In an S corporation, income is passed through to the individual shareholders and taxed at lower individual rates, Satinsky explained.
"The top rate for corporations will be 40% in 1987 and 34% in 1988, so it makes sense to shift income to the individual, who will be taxed at a top rate of 38.5% in 1987 and a flat 28% in future years," he said.
Satinsky warned, though, that companies seeking to elect S corporation status must meet stringent requirements, such as no more than 35 shareholders, only one class of stock and a fiscal year ending Dec. 31.
Gourgues told the conferees that the Hazzards must note that the new law recognizes three types of income: active income, portfolio income and passive income. With few exceptions, only passive losses can offset passive income from investments in which the investor has no active interest in the assets' management.
Small-business owners deferring income in qualified or unqualified retirement plans should examine those strategies as part of their business review, according to Fenniman and Fair.
"Rules for defined contribution plans, in which a predetermined amount of salary is contributed each year to fund retirement, have been changed very little," said Fair. "However, the distribution rules for all forms of tax-deferred compensation have been modified by (tax reform), and that's something business owners must consider," he noted.
"Most unqualified salary continuation or income deferral plans were attractive for businesses because the interest paid on policy loans was fully deductible," explained Fenniman. "Under (reform), deducting personal policy loan interest has been eliminated, and interest deductions for business-owned life insurance policies have been limited to $50,000 per employee."