Combining Captive Insurance Companies With Estate Planning For Business Owners Can Provide Powerful Hot

First, every successful business pays for various types of insurance, normally to a commercial insurance carrier. These payments may be for property coverage, employee disability, worker’s comp, business interruption and a myriad of other risks. Often these premiums represent a large portion of the business overhead and the premiums can vary unpredictably and greatly from one year to the next. The good news is that most insurance premiums are tax deductible to the business as an ordinary and necessary business expense.

While insurance is a necessary cost of doing business, it can also be a source of frustration for the business owner. However, what if the business owner could establish his own insurance company that would insure some of the risks of his particular enterprise and what if that company paid out less in claims and other costs than it took in premiums (like most insurance companies)? Then the profit would accrue to the new insurance company and its owner. This essentially is what Captive Insurance is. Obviously, it’s a little more complicated both in structure and by regulations but the concept is like all other insurance.

What makes Captive Insurance intriguing for the appropriate client? There are several reasons. First, as said before, insurance is a necessity for every business. If it’s possible to take on some of the lower risk items and retain some of the profit that would otherwise go to a commercial carrier, then there is a compelling economic incentive and another profit center.

Next, the Captive Insurance Company is a new, separate business entity. As an estate planning and wealth accumulation tool, a new Captive Company may be unsurpassed. To establish a new Captive Insurance Company, a new business entity must be formed. If wealth transfer to heirs is a desired goal, then when the company is being formed, ownership interests can be given to children or trusts for children or other heirs so that wealth from profits can inure to their benefit. The premium payments, which are deductible to the business, are not subject to gift tax limitations and the Captive Company can be outside of the business owner’s estate from the very beginning of its existence.

Furthermore, many businesses can take advantage of a special provision for “small” Captives, those with annual deposits up to $1.2 million. In this instance, even though the premiums are deductible by the paying corporation or business entity, the Captive does not pay income tax on the premium deposits it receives. Once again, this allows for a great wealth building tool for the business owner. This means that along with all of the other estate planning tools a business owner can use, it is possible to transfer as much as $1.2 million a year in addition. While some expenses occur annually and some claims will necessarily be paid, the potential wealth transfer can still be quite powerful.

With all of these potential benefits it would seem that every business should utilize some form of this structure. Unfortunately, Captives aren’t for everyone. Normally, a business should have $15 million in sales and have enough net profit to comfortably deposit $500,000 per year into the Captive Company. Set up and operating costs currently limit the marketplace to somewhat larger concerns.

There are many additional considerations regarding the Captive structure that are beyond the scope of this article. Where will the Captive be located, onshore or offshore? What risks will be insured and at what level? How much will capitalization be in order to provide economic substance? Who will administer the Captive and pay the claims?

Obviously many questions need to be answered before undertaking such a major commitment. However, the resources have been developed to make this process less cumbersome and threatening than it appears. Finding the expertise to help you through this new territory can provide huge benefits for many business owners and is certainly worth the effort.