A POWERFUL TAX AND ESTATE PLANNING STRATEGY THAT IS IRS-APPROVED AND INCORPORATES ASSET PROTECTION
THE BOTTOM LINE: The business-owner or successful professional deducts up to $1.2 million annually; converts current taxable income into long term capital gains; creates a war chest against possible litigation or other disaster; is insulated from attachment by creditors or predators and is fully asset protected.
A captive insurance company ("captive") is essentially a self-owned and restricted insurance company that only insures all or part of the risks of its parent or affiliate. For example a stockholder of a business forms a captive to provide insurance coverage for risks that are not presently insured by a traditional 3rd party insurance carrier. Typically these are exposures for which no coverage is available at commercially feasible cost.
The use of captives is specifically approved by the IRS and so long as the detailed requirements are meticulously complied with, this as close as one gets to an IRS-sponsored free lunch. When correctly structured, annual premium payments into the captive are deductible as an ordinary and necessary business expense - and not taxed in the hands of the captive. Ultimately the assets in the captive are returned to the owner and taxed as a long term capital gain - comprising both the premiums and the accumulated tax-free earnings.
Ideal candidates for the use of captives are entrepreneurs or professionals with annual profitability in excess of $600,000. Up to $1.2 m in premiums can be deducted annually, tax-deferred and ultimately be converted into a long term capital gain when the funds . There are also wealth transfer and estate planning opportunities where the captive insuring entity is owned by a suitably structured trust.
Typical exposures and risks that are covered by a captive insurance policy :
- Business interruption
- Earthquake, hurricane
- Malpractice
- Employee /Executive/Professional Liability
- Loss of income
- Litigation Expense
- Directors and officers
- Kidnapping/Ransom
- Sexual Harassment
(Note: If coverage is already in place, the captive can be used to provide additional coverage in excess of current policy limits).
The past two decades have seen significant expansion of the number of captive insurance companies so that today we estimate that there are over 5,000 captives worldwide writing in excess of $20 Bn in annual premiums. Captive insurance can be arranged either domestically in the USA (where Vermont is the state with the most facilitators) or offshore where the leading providers are located in Bermuda, the Cayman Islands, Guernsey and Anguilla.
