Over the last several years InKnowVision has worked with several of their high income earning clients to incorporate captive insurance planning inside of their overall estate and wealth plans. Captives can be used to create income tax deductions, create wealth accumulation for a transitioning business owner and even act as a wealth transfer tool. We will be looking at some of the details you need to know to successfully market, design and implement this technical and powerful concept to a qualified client. Learn more at www.inknowvision.com

1. InKnowVision’s Monthly
HNW Webinar Series
Technical Webinar
©2012. InKnowVision LLC. All rights reserved. www.inknowvision.com

2. Captive Insurance Companies
SCOTT HAMILTON, CEO
INKNOWVISION, LLC
www.inknowvision.com
630-596-5090 x80
© 2012 InKnowVision, LLC

3. Captive Insurance Companies
 Insurance company
 Formed to insure risk
 Liability
 Operating Risks
 Business Risks
 Exclusions
 Deductibles
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4. Benefits
 Wealth Accumulation
 Favorable Tax Treatment
 Control Risk
 Customized risk coverage
 Increased cash flow/profit center
 Competitive advantage
 Minimize Insurance Costs
 Wealth Preservation / Asset Protection
© 2012 InKnowVision, LLC

5. Jurisdictions for Captives
Nevis Bermuda Anguilla
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6. Jurisdictions for Captives
Vermont
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7. Nevada
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8. US Jurisdictions
 Over 20 states
 Some others
 Utah, Nevada, Arizona, Colorado, Vermont, Kentucky, South
Carolina, Delaware, District of Columbia, and Hawaii.
© 2012 InKnowVision, LLC

9. Profile Client
 Successful business or profession
 Has uninsured risk
 Has insured risk willing to self insure
 Premium not much more than 12.5% of gross
revenue
 Premium of at least $500k or more
 Or Premium of $200k or less
© 2012 InKnowVision, LLC

10. Profile Client
 Developers
 General Contractors
 Subcontractors
 Manufacturers
 Professional Services Firms
 Franchisees
 Restaurant / Hotel Chains
 Physician groups (40 docs or more)
 Hospitals
© 2012 InKnowVision, LLC

11. Types of Captives
 Pure Captive – Single Family House
 Cell Captive – Apartment Building
 Less expensive
 (Revenue Ruling 2008-8)
 Uses the 11 or more subsidiary safe harbor (Rev. Rul. 2002-90)
 Requires pooling of risk
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12. Types of Captives
 Single Parent Captive
 Group Captive
 Homogeneous – same industry
 Heterogeneous – multiple industries
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13. Types of Captives
 Foreign corporations taxed as US taxpayer
 Foreign corporation not taxed as US taxpayer
 Domestic companies – US Taxed
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14. © 2012 InKnowVision, LLC

15. Capital Required
 Jurisdiction Requirements
 $125k (Cayman)
 $100k (Anguilla)
 $27k Nevis
 $250k+ (Vermont and Nevada)
 Reasonableness requirements
 Depends on premiums
 History of claims paid
© 2012 InKnowVision, LLC

16. Tax Issues
 Premium Deductibility by US taxpayer
 Ordinary and necessary
 Real insurance
 Risk sharing (spread risk over a number of insured)
 Harper – 30% OK
 Rev. Rul. 2002-89 - 50% OK
 Pooling – form of reinsurance
 Still must meet the safe harbor
 Risk shifting – move the risk off of the balance sheet of the insured
© 2012 InKnowVision, LLC

17. 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)
© 2012 InKnowVision, LLC

18. 953(d) Election
 Election to be taxed as a US company
 No excise tax on insurance premiums
 Can own US real estate
 Company files US tax return 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
© 2012 InKnowVision, LLC

19. 831(b) election
 For small insurance companies
 Includes captives
 Companies making the election can exclude up to
$1.2M in net premium (premium less underwriting
costs and expenses less losses)
 Must pay tax on investment income
© 2012 InKnowVision, LLC

20. Where are We?
 Manufacturing company (C Corp)
 $35M sales
 Plants around the world
 300 employees
 Net profit - $4.5M annually
 Insurable risks abound
 Estimated premium to insure all risks totals $2M
© 2012 InKnowVision, LLC

21. Captive Formed
 Captive formed
 Insurance coverage selected and written by captive
 Premium paid $1.2M
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22. Income Tax Year 1
 Deduction to manufacturing company
 Saves approx. $400k in income tax
 Captive makes 831(b) election
 Captive has no taxable income
© 2012 InKnowVision, LLC

23. 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.
© 2012 InKnowVision, LLC

24. Wealth Transfer
 Consider establishing children or grandchildren’s
trusts as owners
 Underwriting profit passes gift tax and GST tax free
to trust and its beneficiaries.
© 2012 InKnowVision, LLC

25. 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 then sale proceeds are taxed at capital gains
rates
© 2012 InKnowVision, LLC

26. Planning Idea
 Captives do not have to have one owner
 Part owner by client
 Part owned by trust for kids
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27. Costs
 Pure Captive or Cell Captive
 $62,000-100,000 in year of formation
 $37,000-75,000 in subsequent years
 Plus cost of reinsurance pool.
 Small Captive (per $100k of premium)
 $10-17k year 1
 $10K in years beyond year 1
© 2012 InKnowVision, LLC

28. Questions
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