831(b) Captives: Financial Benefits Through Comprehensive ... · 831(a) large captives with...
Transcript of 831(b) Captives: Financial Benefits Through Comprehensive ... · 831(a) large captives with...
831(b) Captives: Financial Benefits
Through Comprehensive
Risk Planning
831(b) Captives: Financial Benefits Th h C h i Ri k Pl iThrough Comprehensive Risk Planning
June 5th, 2015
VIP + Capstone AssociatedVIP + Capstone Associated + Your “Right Fit” Clientg
What is a Captive?
“A limited purpose insurance company licensed inA limited purpose insurance company, licensed in a U.S. state, or foreign jurisdiction, whose focus is insuring the risks of the captive’s owners.”
Here a P&C company, not a life insurer.
Captives are formed in the U.S., Bermuda, the Caribbean and other locations We do all of theCaribbean, and other locations. We do all of the above.
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Single Parent Captive vsGroup CaptiveGroup Captive
A group captive is an insurer owned by multiple unaffiliated companies often within a specific industry for the purpose ofcompanies, often within a specific industry, for the purpose of insuring the group.
Group captives are generally used to provide a market for difficult lines of coverage. Oil Insurance Limited (OIL) is such an example.
Group captives may provide help for a specific situation, but they lack the strategic planning benefits of a single owner captive. They are comparable to mutual insurance companies and reciprocalsare comparable to mutual insurance companies and reciprocals.
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Why Should You Include a Captive Discussion?
Open doors to new prospects by showing them how to
Captive Discussion?
integrate risk management more fully into their overall strategic plan.
More fully integrate agency financial products such as life and health insurance, wealth management consulting, and banking relationships.banking relationships.
Bring new ideas to existing clients, thus protecting your important clients from competition and solidifying yourimportant clients from competition, and solidifying your position as their primary financial advisor.
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Broker Comment - Marsh
Midsize companies like the small captive concept. As the p p peducation process continues and an increasing number of firms investigate the creation of a captive, the captive industry has once again adapted to the marketplace. With a sharpened focus on the small captive market and resources dedicated to supporting small captives, Marsh is ready to assist our clients and prospects in determining whether a small captive is the right h i f th i i k t dchoice for their risk management needs.
• Innovative Uses of Captives: The Small Captive Concept, SPublished: December 14, 2013 – Marsh USA
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How is Capstone Different?
Capstone is not owned by nor affiliated p ywith any insurers or brokers. For over 17 years we have been theFor over 17 years we have been the leading provider of turnkey alternative risk planning services to middle marketplanning services to middle market companies. We are independent of every conventional insurer.conventional insurer.
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Comparison of IRC 831(a) and 831(b)
831(a) large captives with premiums in excessof $1 2 millionof $1.2 million
• Focus on reduced insurance expense & enterprise risk management
• Loss reserves are tax deductible• Increased income tax efficiencies – deferral of revenue
831(b) intermediate captives with premiums less831(b) intermediate captives with premiums lessthan $1.2 million• Focus on enterprise risk management w/ income tax &
ownership benefits• Underwriting profits are not taxed per statute• Increased income tax efficiencies – permanent difference
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Ideal 831(b) Captive Clients
Closely held profitable businessClosely-held, profitable business
Pre-tax profits of $2,000,000+ per year
Significant retained risks
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Reasons to Form an 831(b) Captive( ) p
Insurance needs – without this, no need for a captive
Business considerations – reduced total cost of risk
Concern over coverage exclusions and retained risks
Ancillary considerations
• Tax planningTax planning• Asset protection• Estate planning
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831(b) Captive Ownership
Individuals/Spouses Families
Trusts LLCs
Partnerships Corporations
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Tax Considerations
0% Federal Income Tax on underwriting profits0% Federal Income Tax on underwriting profits
I t t i t d t l C C tInvestment income taxed at regular C Corp rates
State tax Implications
Dodd Frank considerations
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Onshore vs. Offshore?
Regulatory domicile only – 831(b) captive is aRegulatory domicile only 831(b) captive is a US corporation
Variations include capital requirements, investment limitations, regulatory restrictions and expedited formations
Client has total control over the assets. Captive investment & bank accounts are US based. Held at bank, brokerage, money manager, etc.
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Sample Retained Risks Written By Captives
Loss of C
Loss of Key Professional Customer Employee Liability
Directors & Officers
Environmental Liability
Product Liability
Large Deductibles or Medical Stop Regulatory Deductibles or
Retentionsp
Lossg y
Changes
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Big Picture
Common Ownership Group
Captive
100% owned
CoveragesCaptive
(Always a U.S. Company)Insurance Premiums
Operating Business(es)
A Captive’s predominant function is to insure the risks of its affiliates
Premiums deductible to Operating CompanyPremiums deductible to Operating Company
Premiums not taxable to the Captive – IRC §831(b)
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Insurance Loss
Common Ownership GroupCommon Ownership Group
100% owned 100% d
Claim Payment
100% owned 100% owned
Operating Business(es) CaptiveInsurance Claim
Claim Payment
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Secured Loan/Asset Protection
Common Ownership GroupCommon Ownership Group
100% owned
$$ Secured Loan $$
Operating Business Captive(Always a U.S. Company)
Insurance Premiums
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Return of Qualified Dividends
Common Ownership Group DividendsCommon Ownership Group Dividends
100% owned 100% owned
Coverages
100% owned 100% owned
Operating Business(es) Captive(Always a U.S. Company)
Insurance Premiums
g
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Estate Planning Overlay
Ownership Group Heirs
Senior Generation Lower Generations
100% d
Coverages
100% owned 100% owned
Operating Business Captive (Always a U.S. Company)
Coverages
Insurance Premiums
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Multiple CaptivesMultiple OwnersMultiple Owners
Existing Captive OwnersExisting OwnersOwnership Group Existing OwnersFLP – Trust – Executives
Coverages
Operating Business #1 Captive A Joint (50%/50%)
Underwriting
g
Captive B
Agreement
Insurance PremiumsOperating Business #2
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Our Background and Expertise
Capstone Associated Services, Ltd.T k i id di t i k l l d i il Turnkey services provider, coordinates risk manager, local domicile counsel, actuary, independent auditor, third-party re-insurer, professionals engaged in policy design and pricing, and others. 175 + ti f d 17 S b t ti l i f t t B t 175 + captives formed over 17 years. Substantial infrastructure. Best practices.
Affiliated law firm. 10+ business (tax, corporate, regulatory, litigation) l t i ilawyers strong in experience. Optimize captive ownership Does not disclaim tax & legal
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Our Background and Expertise
The Feldman Law Firm LLPThe Feldman Law Firm LLP• 10 Attorneys: Tax, corporate and business planning; M&A
and financings.• Combined 50+/- Team Members -- Staffed Offices in
Houston, Delaware, & the British Territory of Anguilla• Captives since 1998• Captives since 1998• Does not disclaim tax & legal
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Questions?Questions?
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Life Insurance Overlay
Business owneras grantor of trustOwner TraditionalgOwner
ILIT
100% owned
100% owned Loan
by captive
C ti
owned owned
Operating Business Captive(holds tax exempt $$)Premiums
ILIT established by Business OwnerOption: Move Captive’s ownership outside of estate
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Asset Protection Overlay
Common Ownership GroupCommon Ownership Group
100% owned100% owned
$$ Secured Loan $$
Operating Business Captive(Always a U.S. Company)
Insurance Premiums
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State Tax Issues
(State) Independently procured premium (IPP) tax
Historically similar to “use” tax. The tax was imposed on insurance “used” in the state of Texas but acquired from non-admitted insurers, with no Texas tax assessed on outnon admitted insurers, with no Texas tax assessed on out of state activities.
• Tax in Texas is 4.85% of premiums. Generally lower in th t tother states.
• Tax was inconsistently applied. Confusing. • Dodd–Frank implications
Still h t i fl• Still somewhat in flux
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Pool Structure
1 2 3 4 5 6 400 401 402
Insureds Your Operations
1 2 3 4 5 6 400 401 402
P l R 50% 50%
. . . . . . . . . . .
Pool Re(blends risks)
50%
direct written premiums to captive
50%
to pool
1 2 3 . . . 4 5 6 80 81
50%
from pool
. . . . . . . . .
CaptivesYour Captive
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YourInsureds
ClaimYour Captive
Claim
Dozens of Captives- - - - - - - - - - - - - - - - - Capped at 160% of
Split 80/20
- - - - - - -Your Captive
Pool ReCapped at 160% of total premiums
Captive
Deductible 29
IRS Definition of Insurance
The IRS and the courts have historically required:The IRS and the courts have historically required:
Risk Shifting: the transfer of risk to a separate party
Risk Distribution: enough independent risks are being pooled to invoke the “actuarial law of large numbers”numbers
Recent rulings suggest that an insurer should h lti l i d d lti l li ihave multiple insureds and multiple policies.
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