Tax advice can come from some odd places once in awhile. Recently there was a story on the radio about a technique large corporations were using to lower their borrowing costs and lower their tax bill. Normally this would cause major eye glaze, but it proved to be worth listening to and follow up.
Without trying to fully describe the process, the fundamentals are as follows:
Step 1. The corporation buys a special whole life policy on key employees. The nature of the policy is not so much directed towards life insurance (although there is insurance), but is more a way for the company to inject funds into the policy that build up cash value.
Step 2. After the policy has been funded properly, the company can then 'borrow' funds back for whatever they normally would have gone to outside sources for. They can do this because, as the owner of the policy, they have control over these decisions.
Step 3. They pay the policy back in the same manner that they would have if it were to have been a third-party lender. But, they can choose the rate and terms.
Step 4. The insurance company used will have had a long standing policy of returning the earning on the investment of the cash value to the policy owner through the use of dividends. Dividends receive special tax treatment.
Step 5. Funds placed in an insurance policy are not at risk to outside litigation like any other assets the corporation may have. So they avoided that risk as well.
In the final analysis, it is a somewhat controversial technique since they are using their employees to accomplish this. However the good news is that a smart tax advisor can give you similar tax advice that will allow you to duplicate closely all the same benefits. Sometimes tax tips do come from strange places, but it is worth listening to.
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