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HomePW OnlineNews OnlineRuss Prince: This Tool Will Shield Your Celebrity Client's Wealth From Lawsuits

Russ Prince: This Tool Will Shield Your Celebrity Client’s Wealth From Lawsuits

Sophisticated financial advisors and other professionals set up loan-out corporations for entertainer clients such as actors and musicians to insulate their wealth from unfounded and frivolous lawsuits. Loan-out corporations can also be used to mitigate taxes.

The way it works is that the entertainer—an actor, for instance—is an “employee” of the loan-out corporation. The corporation then enters into contracts with other businesses wanting to use the entertainer’s “brand” to market their services or products. Then the loan-out corporation “loans out” the services of the actor to the production company.

The loan-out corporation receives revenue from contracts with other businesses and pays a salary to the entertainer for services performed. Meanwhile, the loan-out corporation provides essential services to the entertainer, such as accounting and legal services. All business expenses incurred by the entertainer are deductible because he or she is legally an employee of the company.

“Loan-out corporations are being extensively utilized as vital components of asset protections strategies for high-profile affluent celebrities," said Evan Jehle, partner in FFO Business Management & Family Office. "Wealth and fame make entertainers particularly attractive targets for financial predators and frivolous lawsuits. Because loan out corporations are separate legal entities, the personal wealth of the entertainers is protected from liability connected to the corporation. Additionally, there are ways to structure loan-out corporations to take advantage of other asset protection strategies and entities.”

Loan-out corporations are easy to establish and maintain while offering a wide array of tax-mitigating possibilities. However, while most successful celebrities have loan-out corporations, only a minority of them are taking full advantage of their companies' tax mitigation potential. For example, entertainers can use loan-out companies to set up qualified defined-benefit plans whose deductions can, for some clients, exceed $1 million. That's just one of many tax strategies that can be implementd with loan-out companies.

It is important to make sure loan-out corporations are not misused. Exploitive professionals promote tax strategies in conjunction with loan-out corporations that are very questionable at best. The most common result is to unwind the transactions and correct government filings to ensure compliance when stress-testing these tax strategies. It is often a labor-intensive process, but an essential process. The end result is a happy, informed celebrity with reduced tax and legal liability.

The effective use of a loan-out corporation is usually a necessity for successful celebrities. However, because of the potential complexity of some of the legitimate wealth planning strategies that can be employed, it is critical that celebrities work with a morally grounded tax specialist.

In sum, business-savvy financial advisors use loan-out corporations to mitigate taxes, protect themselves from unjust lawsuits and significantly boost the net worth of their celebrity clients.

Russ Alan Prince, president of R.A. Prince & Associates, is a consultant to family offices, the ultra-wealthy and select professionals.
 

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