InKnowVision September 2013 Captive Insurance Powerpoint

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CPA CE

Agenda
 Benefits
 Business Owner Profile
 Case Study
 Formation
 Taxation
 Application

Benefits
 Wealth accumulation
 Favorable tax treatment
 Minimize/reduce insurance costs
 Customize risk coverage
 Increased cash flow
 Wealth preservation
 Asset protection

Profile Client
 Successful business or profession
 Has uninsured risk
 Has insured risk willing to self insure
 Gross revenue - $10M or more
 Taxable income and free cash of at least $500k or
more

 Developers
 General Contractors
 Subcontractors
 Manufacturers
 Professional Services Firms
 Franchisees
 Restaurant / Hotel Chains
 Physician groups
 Hospitals
Profile Client

Case Study
 Manufacturing company (C Corp)
 $35M sales
 Operations in and out of the US
 300 employees
 Net profit - $4.5M annually
 Significant insurable risks
 Estimated premium to insure all risks totals $2M

Captive Formed
 Captive formed
 Insurance coverage selected and written by captive
 Captive makes 831(b) election
 Premium paid $1.2M

Income Tax Year 1
 Deduction to manufacturing company
 Saves approx. $400k in income tax
 Captive has no taxable income on premium received

Income Tax Year 2
 Deduction to manufacturing company
 Saves approx. $400k in income tax
 Captive has some taxable income
 Premium is non-taxable (if less than $1.2M)
 Investment income on reinvested underwriting profit is
taxable

Process - Qualification
 Financial qualification
 Risk assessment
 Cost - benefit analysis
 Decision to proceed or not

Process - Implementation
 Engage manager
 Underwriting review and report
 Actuarial analysis and pricing of risk
 Risk coverage selection
 Formation, capitalization and licensing
 Premium payment
 Policy issue

Process - Time
 Evaluation and decision making: 2-6 weeks
 Implementation: 6-8 weeks

Captive Insurance Companies
 Insurance company
 Formed to insure risk
 Liability
 Operating Risks
 Business Risks
 Exclusions
 Deductibles

Captive Jurisdictions
 Nevis
 Anguilla
 Bermuda
 Utah
 Nevada
 Vermont
 Kentucky
 Delaware
 District of Columbia

Types of Captives
 Pure Captive – Single Family House
 Risk reinsurance
 Cell / Series Captive – Apartment Building
 Less expensive
 (Revenue Ruling 2008-8) Uses the 12 or more subsidiary safe
harbor (Rev. Rul. 2002-90)

 Single Parent Captive
 Group Captive
 Homogeneous – same industry
 Heterogeneous – multiple industries
Types of Captives

 Foreign corporations taxed as US taxpayer
 Foreign corporation not taxed as US taxpayer
 CFC’s and 50% or more US shareholders
 US Shareholder means at least 10% ownership
 CFC’s and less than 50% US shareholders
 Domestic companies – US taxed
Types of Captives

Capital Required
 Statutory Requirements
 $125k Cayman
 $10k Anguilla
 $35k Nevis
 $250k Vermont and Delaware
 $200k Nevada
 Other Requirements
 Amount of coverages and premiums
 History of claims

Tax Issues
 Premium deductibility by US taxpayer
 Ordinary and necessary
 Real insurance – Helvering v. Le Gierse, 312 U.S. 531 (1941)
 Risk distribution
 Risk shifting

Real Insurance
 Risk sharing (spread risk over a number of insured)
 Harper Group v Commissioner (1991) 96 TC 45 – 30% OK
 Rev. Rul. 2002-89 - less than 50% OK
 Pooling – Reinsurance
 Actual exposure to risk of loss
 Risk shifting – move the risk off of the balance sheet

Reinsurance Pool
Reinsurance
Pool
Company
1
Company
2
Company
3
Company
4
Company
5
Company
6
Company
7
Company
8
Company
9

Tax Issues
 Income to the captive
 If captive is a:
 Foreign corporation and not a CFC – no US tax
 But 4% excise tax if writing domestic business
 CFC or 953(d) company – US tax (unless 831(b) election)
 Domestic company – US tax (unless 831(b) election)

953(d) Election
 Election by non-US company to be taxed as a US
company
 No excise tax on insurance premiums
 Can own US real estate
 Company files US 1120-PC as if domestic company
 Reduced filing requirements
 Company must post LOC equal to 10% of gross income or have
assets in the US equal to that amount

953(d) Election
 Election to be treated as US company
 Waive all treaty benefits
 File US tax returns
 Disclose all shareholders
 Name POA in US to receive notices
 Maintain an office in US
 Have assets in US equal to 10% of captive income

831(b) election
 For small insurance companies including captives
 Companies making the election can exclude up to
$1.2M in net premium
 In lieu of reserve calculation requirement
 Must pay tax on investment income

Distributions from Captives
 Distributions are taxable when paid out from the
captive (pure or cell)
 Taxable as dividends
 May be a favorable rate
 If company is sold in stock or stock redemption, then sale
proceeds are taxed at capital gains rates

Planning Ideas
 Captives may be often owned by their parent
 Captives may have one or more owners
 Captives do not have to be owned by a parent
company

Planning Ideas
Captive
Client

Planning Ideas

Planning Ideas
Captive
Trust for
children/grand
children
Underwriting profit passes gift
tax and GST tax free to trust
and its beneficiaries

Planning Ideas
Captive
Client Trust

Key Employees
 Have stock owned by key employees
 Can have vesting
 Buy out/redemption provisions
 Underwriting profits benefit loyal and productive key
employees

Asset Protection
 Transfer for adequate consideration
 Fraudulent conveyance laws
 Ownership by trust

Costs
 Pure Captive
 $80,000-$190,000 in year of formation
 $72,000-$115,000 in subsequent years
 Fee is also related to premium (pool costs)

InKnowVision September 2013 Captive Insurance Powerpoint

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InKnowVision September 2013 Captive Insurance Powerpoint