Research and Development Expense Overrun Reimbursement
Example of an 831(b)
Sam (a real estate investor and business owner) sets up a CIC.
Sam raises the deductible on his current insurance policies and insures the new higher deductible with his CIC. His traditional premiums are lowered by $50,000.
With the CIC in place, Sam’s companies buy new insurance coverages including business interruption, terrorism, employment practices and fire damage to his tracts of timber.
Sam’s new premium to the CIC is $450,000 (which his businesses can write off).
The CIC does not pay income tax on the premium.
If Sam is in the 40% tax bracket, he just saved $180,000 in income taxes , and
Sam will build significant tax-favorable wealth by paying $450,000 every year for X years into his CIC.
When in retirement, he can close down his CIC and receive the money by paying capital gains taxes.
CICs can be one of the best estate planning tools if you have a profitable business and an estate tax problem.
Most successful business owners with estate tax problems gripe when they take money home and pay tax on it and then have to figure out a way to get it out of their estate for estate tax purposes.
With a CIC you can move money out of an estate literally overnight without income, gift, or estate tax worries.
If an irrevocable trust (IT) for the benefit of his of Sam’s daughter owned the CIC , Sam would have shifted significant wealth to the daughter income and estate tax free .
In this example, the total potential tax savings for paying $450,000 into a captive insurance company could be as much as $400,500. The breakdown is as follows:
Income tax savings $180,000.00 Estate tax savings 220,500.00 Total $400,500.00
For estate planning
Sam gifts “Seed” money to the IT.
IT forms CIC.
CIC Sells insurance to Sam’s company.
Company makes tax-deductible premium payments.
CIC is owned by IT therefore the tax-deductible premiums are now out of Sam’s estate and the business now has additional insurance coverage.
Irrevocable Trust (IT) CIC Sam Gifts Seed Money Company Tax-Deductible Premiums
Purchasing Life Insurance (LI)
People with estate tax problems have a significant need for life insurance to pay estate taxes .
Gifting to an ILIT is typically.
LI on Sam’s life can be a nice secure wealth building tool for a CIC.
And since the CIC can be owned by an IT, when Sam dies, the death benefit would pass through the IT income and estate tax free .
This structure allows you to pay for your needed life insurance with tax deductible dollars and without gift tax headaches .
The CIC manager has a duty to invest the money in a prudent manner.
A High Cash Value policy is a terrific idea because it 1) mitigates investment risk (downside protection), 2) would provide a financial windfall that would really fund the CIC upon a death, 3) allows money to grow in an 831(b) captive tax free.
Irrevocable Trust CIC Client Gifts Seed Money Company Tax-Deductible Premiums Life insurance policy CIC buys high cash value life insurance policy
Benefits of a CIC
Income tax reduction
CICs are not for everyone.
However, if you are a medium to small business owner, a CIC can be one of the most powerful wealth building and estate planning tools at your disposal.
The key is to work with a team of advisors who knows how to set them up in a compliant and client first manner.