This post is for the techno geeks among us who use complicated planning structures with our Clients.
A captive insurance company is a company that is owned and insures a parent company for particular risks they may have. An 831(b) captive is designed for those smaller companies who want to move from self-insured, but not deductible risks to self-insurance and deductible risks.
Most of the consultants working in the 831(b) marketplace are those who specialize in property and casualty insurance. As a result, most of the captive work that I see is based on controlling property and casualty costs. This is a good place to start, but there are two other important reasons to consider a captive if you qualify.
The first is the income tax savings that can be gained by having your won captive insurance company. In most self-insured situations there is no tax deduction for you taking on your own risk, that is of course unless you have a loss and then incur a deductible expense.
In a captive insurance company, the money that goes into the captive is tax deductible to the parent company and if the premium is less than $1,200,000 per year, there will be no taxes paid on underwriting taxes within the captive. Because of this income tax advantage it often makes sense for a captive owner to think about insuring items they’ve never formally insured before.
Having a captive allows a private business to develop a sinking fund that can be used for a variety of purposes and this fund is developed on a tax deductible basis. One of the purposes of that sinking fund might be to move assets in a family business from one generation to another with little or no tax consequences.
This is where the third use of a captive or 831(b) captive to be more specific comes in. There is a great deal of opportunity for estate planning as part of a 831(b) captive strategy. Ownership of the captive can be established inexpensively for younger generations and underwriting profits from the captive insurance company can accrue to those younger generations.
Captive insurance companies are complicated beasts. Before installing a captive you should think about the triple advantage of having a structure. I strongly suggest that you spend time talking with a captive expert who understands the three advantages of a captive and who they can be integrated in your own particular situation.
I've you thought about doing an 831(b) captive I'm interested in hearing what your experience has been, or what your thought process around captive formation is.
Josh Patrick
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