• Save
How Using Captive Structures Can Help You Manage Risk, Reduce Insurance Costs & Achieve Your Estate Or Succession Planning Goals

How Using Captive Structures Can Help You Manage Risk, Reduce Insurance Costs & Achieve Your Estate Or Succession Planning Goals



Captive insurance companies are insurance companies established with the specific objective of financing risks emanating from their parent group or groups. Using a captive insurer is a risk management ...

Captive insurance companies are insurance companies established with the specific objective of financing risks emanating from their parent group or groups. Using a captive insurer is a risk management technique where a business forms its own insurance company subsidiary to finance its retained losses in a formal structure. While larger companies have long been in the captive space, higher insurance rates, expansions in commercially uninsurable risks and the development of low-cost captive structures have made captives more attractive for certain middle market and closely-held businesses.

In this presentation, you’ll learn how using captive structures can help you manage risk, reduce insurance costs and even achieve your estate or succession planning goals.
For more information visit http://www.cbiz.com



Total Views
Slideshare-icon Views on SlideShare
Embed Views



2 Embeds 53

https://twitter.com 52
https://www.linkedin.com 1


Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
Post Comment
Edit your comment

    How Using Captive Structures Can Help You Manage Risk, Reduce Insurance Costs & Achieve Your Estate Or Succession Planning Goals How Using Captive Structures Can Help You Manage Risk, Reduce Insurance Costs & Achieve Your Estate Or Succession Planning Goals Presentation Transcript

    • Don’t Be Held Captive: Go Captive to Manage Your Risk and Expenses Presented by Stuart Anolik, Esq. Managing Director, CBIZ MHM, LLC.
    • Strategic Edge Series• Seven Core Principles to Maximize the Value of Your Business During Its Life and Upon its Sale – May 18th• Creative Compensation Strategies to Maintain Morale and Retain Talent – June 22nd• Don‟t Be Held Captive: Go Captive to Manage Your Risk and Expenses – July 20th• Federal Incentives That Can Show You the Money – August 17th• Protecting Your Legacy with Succession Planning – September 21st• State Tax Nexus: No Physical Presence Required – October 26thAll these webinars are from 2:00 – 3:00 ET. Here is the link for registration for any of these webinars - www.cbiz.com/strategicedge 2
    • Agenda1. Introduction to Captive Insurance2. Why CBIZ3. Tax Issues Related to Captive Insurance4. Opportunities
    • Definition of a Captive“An insurance company owned and controlled by its policy holders.”
    • Captive Illustration Owner PremiumsOperating Business Captive Insurance (“Insured”) Company (“Captive”) Insurance Policies
    • CBIZ MHM Captive Insurance ServicesCBIZ MHM is uniquely qualified to provide “turn-key” consulting servicesin regard to captive insurance as a result of its expertise in (i) accountingand tax for captive insurance companies through its Financial Servicesgroup and (ii) property and casualty insurance services through itsEmployee Services group, which includes our property and casualtyprofessionals.CBIZ MHM can therefore develop and implement captive insurancesolutions for traditional insurance coverages as well as for supplementalor non traditional coverages such as business interruption
    • Captive Benefits•Reduced Insurance Costs: •Retention of underwriting profits •Claims Settlement •Casualty premiums are deductible •Self-insurance is funded with after-tax dollars.•Risk Management: •Customized coverages. •Not available in commercial markets •Overly expensive •Claims Management•Wealth Preservation: •Asset protection •Owner control of stand-alone captive •Flexible ownership structure
    • How Does Captive Insurance work?Independent actuary determinespremiums Independent actuary underwrites coverages Generally, casualty premiums are tax deductible Owner directs investments Insured submits claims to captive Captive controls claims management and settlement Owner retains underwriting profit and investment income Dividends can be paid to owner
    • Examples of Non Traditional RisksAccounts Receivable Loss of key customerAdministrative actions Loss of key employeeBusiness interruption Loss of key supplierDeductibles/Exclusions MoldEarthquake Product recalls/warrantyIntellectual Property Subcontractor defaultLitigation expenses Terrorism
    • Tax Implications• Insurance companies, including Stand Alone Captives – Anticipated loss reserves (subject to certain discounts) allowed as a deduction against underwriting income and investment income• Small P&C Companies – Have up to $1,200,000 Premiums. Are taxed on investment income and NOT underwriting profits - Tax rate is 36%. • See IRC Section 831(b). – Beneficial for most medium sized companies.
    • Key Issue: Premium Deductibility Treas. Reg. Section 1.162-1(a): Business expenses deductible from gross income included the ordinary and necessary expenditures directly connected with the taxpayer‟s trade or business. Among the items included in business expenses are advertising and other selling expenses, together with insurance premiums. No definition in the Internal Revenue Code or regulations of “insurance”. Rely on judicial interpretation-Helvering v. LeGierse, 312 U.S. 531 (1941), must be risk shifting and risk distribution of insurance risk. Self Insurance is not deductible, unless loss sustained.
    • Risk Shifting and Distribution • Risk Shifting- the transfer of the risk to separate party • Risk Distribution- enough independent risks are being pooled to invoke the “actuarial law of large numbers” (e.g., spread risk among a large group)
    • Risk Shifting• Risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the financial consequences of the potential loss to the insurer, such that a loss by the insured does not affect the insured because the loss is offset by the insurance payment• IRS will look to facts and circumstances – Parental Guarantees
    • Risk DistributionPooling of Premiums – Risk distribution entails a pooling of premiums, so that a potential insured is not in significant part paying for its own risks – When a company “insures” unrelated risks, the arrangement constitutes insurance if a significant percentage of unrelated risks exists • See, Ocean Drilling & Exploration Co, 988 F2d 1135, 1152-53 (Fed Cir 1993); Sears, Roebuck & Co, 96 T.C. 61, 100-02; Harper Group v Comr, 96 T.C. 45, 58 (1991) – Brother-sister subsidiary corporations (i.e., subsidiary corporations of the same parent) may establish an arrangement and qualify as insurance for federal income tax purposes even if there are no insured policy-holders outside the affiliated group so long as risk shifting and risk distribution are present • Rev. Rul. 2008-8 citing Humana, Inc, 881 F.2d 247 (6th Cir 1989); Kidde Industries v US, 40 Fed Cl (1997); Rev. Rul. 2002-89 – A parent corporation with a direct arrangement with its own insurance subsidiary will still require sufficient risk pooling • See Humana, Inc, at 257 (6th Cir 1989)
    • IRS’s Historical Position -The Economic Family Doctrine• Rev. Rul. 77-316, IRS position that risk shifting and distribution do not exist in the context of a single economic family (i.e., parent-subsidiary) • Exception: In Rev. Rul. 78-338, the IRS conceded that sufficient risk shifting and distribution are present where 31 unrelated parties pool risks• In Rev. Rul. 2001-31, the IRS abandoned its position that risk shifting and distribution do not exist in the context of a single economic family• It now appears arm‟s length premium and loss reserve deductions attributable to brother-sister risk (i.e., other affiliates of the parent) will be accepted by the IRS• But premium and loss reserve deductions attributable to parent risk will not be allowed without presence of significant unrelated party risk measured by premiums • (30%?)(50%?)
    • Revenue Ruling 2002-89 Unrelated Risk Ruling• Single parent captive otherwise properly formed and operated (adequate capital, no parent guarantees, loan backs, etc.)• Not “insurance” if 90% of risks/premiums come from the parent• “Insurance” if less than 50% come from the parent and the remainder are from unrelated parties – If your captive can have 50% 3rd party risk, may apply for a favorable tax ruling from IRS
    • Revenue Ruling 2002-90IRS Sibling Ruling• Single parent captive otherwise properly formed and operated (adequate capital, no parent guarantees, loan backs, etc.)• Insures 12 domestic subs - parent a holding company; no sub accounts for less than 5% or over 15% of total risk/premium• “Insurance” under brother/sister doctrine
    • Revenue Ruling 2002-91 – Group Captive RulingFacts:• Industry group liability captive; exact number of participants not specified• No member owns over 15%; has over 15% of vote; or accounts for over 15% of risk/premium; implies 7 equal owners OK• No assessments or refundsIRS Holding: Captive constitutes an “insurance company” and premiumspaid by participants are deductible • Valid non-tax business purpose was a key factor • IRS reinforces prior rulings on group captive insurance arrangements
    • Revenue Ruling 2005-40 • In Ruling 2005-40, the IRS gave four situations showing specific examples of what did or did not represent insurance – In situation 1, the IRS said there was no insurance if there is only one insured – The same is true if there are two insureds - - one of which has at least 90% of the insurance » This was true for Situations 1 and 2 even if the parties were completely unrelated and all formalities were otherwise met – The IRS ruled that single member LLCs that are “disregarded” for all other tax purposes are not counted as insureds – Showed that single member LLCs that elect to be treated as corporations are counted as insureds
    • CaveatsThe captive must still establish:• Presence of risk distribution• That the captive should be respected as a separate and distinct taxable entity, i.e., it is not a sham
    • Non-Sham Status• Insurance status continues to require respect for the captive as an entity separate and distinct from its economic family: – Valid non-tax business purpose – Adequate capitalization – No parental support agreements – Limited loan backs of captive assets to parent or affiliates (“circularity of cash flow”) – Formation of captive in other than a weakly or non-regulated offshore domicile
    • Notice 2005-49 • In Notice 2005–49, the IRS asked for public comment on: “the circumstances under which qualification of an arrangement between related parties as insurance may be affected by a loan back of the amounts paid as „premiums‟.”
    • Notice 2005-49 • The comments state that if each of these four factors are present in a loan back, there is insurance (if insurance otherwise exists): – Bona fide indebtedness (enforceable; reasonable terms and rates; appropriate security) – Permitted or approved by the regulators – Sufficient liquidity of the insurance company – Sufficient liquidity of the borrower
    • Notice 2005-49• If less than all four factors are present, the comments state that the facts and circumstances must be reviewed to determine if the investment function undermines the essence of insurance
    • Cell Company Structure POOLED LAYER - CORE CAPITAL Cell A Cell B Cell C Cell D
    • Cell Captives-Revenue Ruling 2008-8IRS guidance of when a cell of a protected cell company can enterinto a transaction which is treated as insurance for federal incometax purposes, and when amounts paid to these cells is deductible as“insurance premiums” under Section 162.  Example 1: X, a corporation that owns Cell X, enters into a contract hereby Cell X insures professional liability risks of X. Cell X does not enter into any arrangements with entities other than X.  IRS finds the arrangement between X and Cell X is akin to a parent and its wholly owned subsidiary, and in the absence of unrelated risk, lacks the requisite risk shifting and risk distribution to constitute insurance.
    • Cell Captives-Revenue Ruling 2008-8 Example 2: Y, a corporation, owns all stock of Cell Y, as well as all the stock of 12 subsidiaries. (Mirrors facts of Rev. Rul. 2002-90). The 12 subs have a significant volume of independent, homogenous risks, insured into Cell Y. No sub has coverage for less than 5% nor more than 15% of the total risk insured by Cell Y. • IRS finds the subsidiaries have shifted the liability risks to Cell Y. The premiums are pooled such that a loss by one sub is not in substantial part paid from its own premiums. Had the subs of Y entered into identical arrangements with a sibling corporation that was regulated as an insurance company, the arrangements would constitute insurance and the premiums would be deductible under Section 162.
    • Captive Insurance Companies – IRS Notice 2008-19 Notice 2008-19 requests comments on further guidance to address issues that arise if those arrangements do constitute insurance The Notice provides guidance that would address (a) when a cell of a Protected Cell Company is treated as an insurance company for federal income tax purposes, and (b) some of the consequences of the treatment of a cell as an insurance company. The proposed guidance would include a rule that a cell of a would be treated as an insurance company separate from any other entity if:  the assets and liabilities of the cell are segregated from the assets and liabilities of any other cells and from the assets and liabilities of the Protected Cell Company  based on all the facts and circumstances, the activities of the cell, if conducted by a corporation, would result in its being classified as an insurance company within the meaning of §§ 816(a) or 831(c).
    • IRS Notice 2008-19Effect of insurance company treatment at the cell level under the proposed rule:• Any tax elections that are available by reason of a cell‟s status as an insurance company would be made by the cell;• The cell would be required to receive an employer identification number (EIN) if it is subject to U.S. tax jurisdiction;• The activities of the cell would be disregarded for purposes of determining the status of the Protected Cell Company as an insurance company for federal income tax purposes;• The cell would be required to file all applicable federal income tax returns and pay all required taxes with respect to its income; and• A Protected Cell Company would not take into account any items of income, deduction, reserve or credit with respect to any cell that is treated as an insurance company under the proposed rule making.
    • Internal Revenue Bulletin: 2010-45 - November 8, 2010 - Series LLC IRS issued proposed regulations regarding the classification for Federaltax purposes of a series of a domestic series limited liability company(LLC), a cell of a domestic cell company, or a foreign series or cell thatconducts an insurance business.The proposed regulations provide that, whether or not a series of adomestic series LLC, a cell of a domestic cell company, or a foreign seriesor cell that conducts an insurance business is a juridical person for locallaw purposes, for Federal tax purposes it is treated as an entity formedunder local law.Classification of a series or cell that is treated as a separate entity forFederal tax purposes generally is determined under the same rules thatgovern the classification of other types of separate entities.The proposed regulations provide examples illustrating the application ofthe rule.
    • Foreign Captives• A Foreign Captive pays US Income Taxes. – Sec. 953(c)(3)(C) and(d) election• If the Captive is an offshore domiciled insurance company a Sec. 953(d) election to be taxed as a US Insurance Company may be made. It has these advantages: – Captive is NOT a Controlled Foreign Corporation – US tax rates for Insurance Companies are as low as 15% – No Federal excise Tax, Pass-through of income or Branch Profits Taxes – Captive becomes a U.S. domestic corporation for all purposes of the U.S. tax code – Captive files U.S. tax return and pays income tax (Form 5471 no longer required for shareholders) – Eliminates U.S. trade or business concerns
    • Estate Planning Opportunities• Initial Presumptions: – The fundamental presumption in captive insurance planning is that the client has substantial non-tax insurance needs that can be satisfied by a captive without regard to any potential tax benefits. – Thus, captives must serve a valid business purpose and should provide significant cost savings. – The following discussion only outlines the potential ancillary estate planning benefits of a captive formed for substantial non-tax casualty, loss and liability purposes. – The discussion assumes that the captive is formed properly and operated and is respected as an insurance company for federal tax purposes and that premiums paid to the captive are arm‟s length and determined in accordance with proper underwriting standards.
    • Estate Planning Opportunities Family Creates and funds Dynasty trust Trust Client Independent Trustee Build up in value benefits trust. UnusedTrustee uses trust funds reserves can beto create and capitalize distributed to trust as captive as sole owner dividends. Captive Client Company Pays premiums to captive (deductible; not subject to gift tax)
    • Estate Planning Opportunities• Potential Transfer Tax Benefits: – Reasonable premiums paid by the insured to the captive should not create gift, estate or GST tax exposure to the insured‟s owner. • The premiums, however, must constitute full and adequate consideration for insurance coverage (e.g., arm‟s length and determined in accordance with underwriting standards). – When the insured‟s actual claims are less than actuarially predicted, the captive‟s reserves will grow. • If family members directly or indirectly own shares in the captive (e.g., through the dynasty trust structure), they benefit from this increase in value without any transfer tax liability. • In addition, the captive can distribute unused reserves to the captive shareholders (e.g., the dynasty trust) as a dividend (currently taxed at capital gains rates) or as a capital gain distribution upon complete liquidation of the captive. • The trust can distribute the income, if needed, for the trust beneficiaries.
    • Why CBIZ• CBIZ MHM has both the insurance expertise through its Employee Services (which includes our Property and Casualty professionals as well as the tax and accounting expertise to provide clients with fully integrated and seamless captive insurance services that are truly “turn-key”• Courtney W. Claflin joined CBIZ in January 2011. He has a 28 year career in Commercial Insurance Sales and has successfully designed hundreds of Alternative Risk Arrangements • Courtney brings with him a team of specialists to further CBIZ‟s expertise in the captive insurance area.
    • Summary/Key Takeaways• Captive insurance solutions provides mid sized companies the benefits of maintaining underwriting profit in its group, control over risk management matters, control over claims management, thus creating potential significant savings in its costs of insurance• Captive insurance provides mid-sized companies with flexibility in ownership thus allowing potential estate and wealth preservation opportunities• CBIZ can provide a seamless, turnkey captive insurance solutions due to its expertise in (i) insurance tax and accounting and (ii) property and casualty and alternative risk
    • CBIZ MHM, LLC Contacts Stuart Anolik Managing Director  301.951.3636  sanolik@cbiz.com
    • Thank You