Loan out corporations are common ways for entertainers to protect wealth and mitigate taxes. However, relatively few of them are using them as effectively as they could.
With a loan out corporation, the celebrity is an employee of the firm. The loan out corporation contracts with other firms such as production companies. His or her services are then lent to the production company.
There are a number of powerful advantages of loan out corporations. Included here are:
• Wealth enhancement by leveraging qualified retirement plans and related financial products.
• Asset protection directly as the loan out corporation is a separate legal entity and because certain asset protection strategies can be layered in.
• Employee benefit plans aside from qualified retirement plans such as medical reimbursement plans.
• Income tax mitigation where there are meaningful tax arbitrage opportunities.
According to Rick Flynn, managing partner of FFO Business Management & Family Office, and the author of The High-Functioning Single-Family Office, “We work extensively with very successful entertainers and almost all of them have loan out corporations. However, they commonly are failing to make optimal use of these entities. We regularly find that a number of wealth management strategies can be used because of the loan out corporation, and they have multiple benefits for the protection and growth of a celebrity’s net worth. For example, the use of captive insurance companies cannot only be effectively used to add substantial ‘protection’ for celebrities, they also can potentially deliver some very significant tax benefits.”
What is unfortunately characteristic of many successful celebrities is the degree to which they fail to maximize their wealth. Having a loan out corporation is usually a wise move, and combining them with sophisticated wealth management strategies will often result in significant wealth preservation or growth.