Post on 23-Jul-2020
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Agenda
• Background – Key Statistics
• Captive Basic Structure
• Captive Benefits and Qualifications
• Captives and the IRS
• Surgical Captive Services
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Captive Strategy: Transfer Uninsured Risk to Captive
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Captive Insurance Company Illustration
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Captive Basic Structure
• Non-Corps (LLC, S-Corp, Sole Proprietorship, etc.)
• Up to $1.2 million in Annual Insurance Premiums [IRC 831(b)]
• Premiums deductible to the Business & not taxable to the Captive
Shareholders
Operating
Entities
Sub Sub Sub
Shareholders Family
Key
Employees
Estate Plan
Trust
Captive
Deductible Premiums
Insurance Policies
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Captive Insurance Company Benefits
• Ownership & Control
• Asset Protection
• Insurance Coverage Flexibility
• Reduced Insurance Costs
• Tax Savings
• Improved Cash Flow
• Wealth Accumulation & Preservation
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IRS “Safe Harbors” for Captives
• Three IRS Safe Harbor Rulings
• Single Parent Captive (Rev. Ruling 2002-89)
• Multiple Subsidiaries (Rev. Ruling 2002-90)
• Group Captive (Rev. Ruling 2002-91)
• As part of a Captive Feasibility Study, the Captive Manager will
analyze which IRS Safe Harbor is best for your business.
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What Qualifies as Risk Shifting vs. Risk Distribution?
• Revenue Ruling 2002-89: > 50% of risk exposure is derived from unrelated parties
Business 49% of Risk
51% of Risk
Unrelated
Parties
Captive
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IRS Compliant Captive – Rev. Ruling 2002-89
More than 50% of unrelated risk
$2.2 Premium (2017)
Business
Captive
$1,200,000
Premium
$1,200,000
Reinsurance Premiums
Insurance Pool
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President Signs New Tax Act with Small Insurance Company (Sect. 831(b)) Changes
• President Obama signed into law on December 18, 2015.
• Captive Insurance Changes Take Effect on January 1, 2017.
• Raised Annual Premium Limits on 831(b) election from $1.2 Million to $2.2 Million.
• Put two Diversification Tests in place to try to prevent some of the estate planning abuse around the 831(b) Captive.
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Asset Protection
• Wealthy businesses and owners are litigation targets
• Creditors have no legal claim on the Captive’s assets
• Only owners of the Captive can make an insurance claim
• The Captive structure creates independent wealth & investment
diversification
• Foreign Captives may have an extra layer of protection
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Parent
LLC
#1
LLC
#2
LLC
#3
Asset Asset Asset
Captive
Investment Structuring
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Surgical Captive Services
Captive Formation
• Feasibility Studies
• Cost Benefit Analysis
• Strategy Sessions
• Captive Structure & Domicile Selection
• Turnkey Captive Formation
• Financing
• Benchmarking Studies
Captive Management
• Accounting
• Actuarial
• Compliance
• Claims Management
• Legal
• Audit
• Taxation
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