Solutions for S-Corp Owners

 

We spend a lot of time in our business talking about all the creative solutions that are out there for business owners and executives.  The unfortunate truth is the majority of our clients will never be able to use them.  Why is that?  How many of your small business owner clients are C-Corps?  Go ahead and count.  I’ll wait.

Is the number fairly modest?  I’ll bet it is, and that means that non-qualified deferred compensation and a myriad of other concepts based on a separate tax paying entity are out the window as well.  In addition, many of these are truly small businesses, and the expense of administration and compliance with the associated regulations can be a bit of a barrier to entry for this kind of work as well.

Of course, in our business there is no lack of creativity, and there are some solutions for owners of pass-through tax entities.  In fact, the rise of the Indexed UL product has unlocked many of these through a diverse selection of product features.  Combine these features with the ever-growing body of information around controlling your own destiny and future tax rates by funding Indexed UL contracts and we start to see a path through the maze these business owners face.

The issue, however, is tax.  If we are focusing on pass-through entities, how can we find some tax relief for the business owner?  I’m not sure we can without involving his employees and all of the complicating factors that come along with that.  But what if there was another way to approach the tax issue?  What if, instead of avoidance or deferral, we just make it easier to pay, and perhaps even put these dollars to work for us even while we are writing the check to Uncle Sam?  Now we’re cooking with gas, as they say, right?

How do we execute on this?  Simple.  Take the money the business owner is already taking out of the business.  Buy an Indexed UL.  Over fund it to the hilt.  Use the maximum non-mec premium, increasing face amount during the premium payment period and then level it out once we are done paying premiums.  Stay with me if you think you have heard this before, because this is where it gets interesting.  Take a loan.  That’s right.  Take a loan in the first year.  In fact, take one in every year the business owner makes a contribution.  Make sure it is a participating loan.

Now that I have your attention, let’s talk a bit more about the loan.  Specifically, how much do we take out and why?  Ask the accountant what the tax bill is on the money taken from the corporation to pay the annual premium.  There’s your amount, and you probably already know the answer to the “Why:” to pay the income taxes on the withdrawal from the corporation.  If you are still a bit fuzzy on how this benefits the client, it is all in the type of loan.  Participating loans remain in the indexed accounts.  Over the long haul, there could be a positive spread between the loan interest and the indexed interest.  Sure, the client is still paying the tax, but they are using leveraged dollars from their life insurance policy to do it, and their cash value should continue to grow, creating a nice source of future income.  Add to the equation a reasonable fixed, simple interest rate charged on the loan versus the compounding effect associated with the 100% of the cash value growth and this strategy sounds even better.   This is not tax avoidance; it is tax planning.