Risk Management and Wealth Transfer - Revisiting Captive Insurance Companies

Captive Insurance companies have been around for a long time. Many folks believe that they are only used in “mega- size” organizations or certain industries. The reality is that properly structured captives can reduce your overall insurance costs without affecting your operations, accelerate tax deductions and transfer wealth without gift tax. The current benchmark to evaluate captive opportunities is $300,000-$500,000 in total annual insurance premiums.

For manufacturers, captives are a good way to manage warranty liabilities, workers’ compensation and even auto liabilities. But captives can also be used to manage health care costs, create insurance for difficult- to- insure risks or catastrophic events, and control exorbitant premium increases. Coupled with the right managers, captives can be used to incentivize managers to control claims and losses, increasing the bottom line.

There are special accounting and tax rules that must be followed, and there is ability to, through certain elections, exempt up to $1.2 million in annual premiums from income tax. The operating company can deduct these premiums when paid. The insurance company DOES NOT pay tax on these amounts. Over time, as the insurance company accumulates profit, the cash can be distributed to the ownership group, which can be different than the operating company. Although distributions from the captive would be taxable, timing of income inclusion can be controlled. This allows for wealth transfer to another generation, managers, or other owners in a tax- effective manner.

See the summary of Captive Insurance Company- Tax Considerations   for more information.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.