Captive insurance firm - Reduce Taxes and Build Wealth

For business owners paying taxes within the us , captive insurance companies reduce taxes, build wealth and improve insurance protection. A captive insurance firm (CIC) is analogous in some ways to the other insurance firm . it's mentioned as "captive" because it generally provides insurance to at least one or more related operating businesses. With captive insurance, premiums paid by a business are retained within the same "economic family", rather than being paid to an outsider.

Two key tax benefits enable a structure containing a CIC to create wealth efficiently: (1) insurance premiums paid by a business to the CIC are tax deductible; and (2) under IRC § 831(b), the CIC receives up to $1.2 million of premium payments annually income-tax-free. In other words, a business owner can shift taxable income out of an operating business into the low-tax captive insurer. An 831(b) CIC pays taxes only on income from its investments. The "dividends received deduction" under IRC § 243 provides additional tax efficiency for dividends received from its corporate stock investments.

Starting about 60 years ago, the primary captive insurance companies were formed by large corporations to supply insurance that was either too expensive or unavailable within the conventional insurance market.

Over the years, a mixture folks tax laws, lawsuits and IRS rulings has clearly defined the steps and procedures required for the establishment and operation of a CIC by one or more business owners or professionals.

To qualify as an insurance firm for tax purposes, a captive insurance firm must satisfy "risk shifting" and "risk distribution" requirements. this is often easily done through routine CIC planning. The insurance provided by a CIC must really be insurance, that is, a real risk of loss must be shifted from the premium-paying operating business to the CIC that insures the danger .

In addition to tax benefits, principal advantages of a CIC include increased control and increased flexibility, which improve insurance protection and lower cost. With conventional insurance, an outdoor carrier typically dictates all aspects of a policy. Often, certain risks can't be insured conventionally, or can only be insured at a prohibitive price. Conventional insurance rates are often volatile and unpredictable, and traditional insurers are susceptible to deny valid claims by exaggerating petty technicalities. Also, although business insurance premiums are generally deductible, once they're paid to a standard outside insurer, they're gone forever.

A captive insurance firm efficiently insures risk in various ways, like through customized insurance policies, favorable "wholesale" rates from reinsurers, and pooled risk. Captive companies are compatible for insuring risk that might rather be uninsurable. Most businesses have conventional "retail" insurance policies for obvious risks, but remain exposed and subject to damages and loss from numerous other risks (i.e., they "self insure" those risks). A captive company can write customized policies for a business's peculiar insurance needs and negotiate directly with reinsurers. A CIC is especially well-suited to issue business casualty policies, that is, policies that cover business losses claimed by a business and not involving third-party claimants. for instance , a business might insure itself against losses incurred through business interruptions arising from weather, labor problems or computer failure.

As noted above, an 831(b) CIC is exempt from taxes on up to $1.2 million of premium income annually. As a practical matter, a CIC makes economic sense when its annual receipt of premiums is about $300,000 or more. Also, a business's total payments of insurance premiums shouldn't exceed 10 percent of its annual revenues. a gaggle of companies or professionals having similar or homogeneous risks can form a multiple-parent captive (or group captive) insurance firm and/or join a risk retention group (RRG) to pool resources and risks.

A captive insurance firm may be a separate entity with its own identity, management, finances and capitalization requirements. it's organized as an insurance firm , having procedures and personnel to administer insurance policies and claims. An initial feasibility study of a business, its finances and its risks determines if a CIC is acceptable for a specific economic family. An actuarial study identifies appropriate insurance policies, corresponding premium amounts and capitalization requirements. After selection of an appropriate jurisdiction, application for an insurance license may proceed. Fortunately, competent service providers have developed "turnkey" solutions for conducting the initial evaluation, licensing, and ongoing management of captive insurance companies. The annual cost for such turnkey services is usually about $50,000 to $150,000, which is high but readily offset by reduced taxes and enhanced investment growth.

A captive insurance firm could also be organized under the laws of 1 of several offshore jurisdictions or during a domestic jurisdiction (i.e., in one among 39 US states). Some captives, like a risk retention group (RRG), must be licensed domestically. Generally, offshore jurisdictions are more accommodating than domestic insurance regulators. As a practical matter, most offshore CICs owned by a US taxpayer elect to be treated under IRC § 953(d) as a domestic company for federal taxation. An offshore CIC, however, avoids state income taxes. the prices of licensing and managing an offshore CIC are like or but doing so domestically. More importantly, an offshore company offers better asset protection opportunities than a domestic company. for instance , an offshore irrevocable trust owning an offshore captive insurance firm provides asset protection against creditors of the business, grantor and other beneficiaries while allowing the grantor to enjoy benefits of the trust.

For US business owners paying substantial insurance premiums per annum , a captive insurance firm efficiently reduces taxes and builds wealth and may be easily integrated into asset protection and estate planning structures. Up to $1.2 million of taxable income are often shifted as deductible insurance premiums from an operating business to a low-tax CIC.

Warning & Disclaimer: this is often not legal or tax advice.

Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) concerning federal taxes that's contained during this communication isn't intended or written to be used, and can't be used, for the aim of (1) avoiding penalties under the interior Revenue Code or (2) promoting, marketing or recommending to a different party any transaction or matter addressed herein.