Captive Insurance Companies (CICs) By:   Roccy DeFrancesco, JD, CWPP, CAPP, MMB Founder:  The Wealth Preservation Institut...
Introduction <ul><li>Captive Insurance Companies have been around for many years. </li></ul><ul><li>There are approximatel...
What is a Captive? <ul><li>It is just what you would think it is…. </li></ul><ul><ul><li>“ An insurance company owned and ...
Type of Captives <ul><li>Single parent* </li></ul><ul><li>Group/association/RRG </li></ul><ul><li>Rental captives, Segrega...
Typical Ownership Structure Business 1 Captive Insurance Company Business 2 Business Owner
Why are Captives Formed? <ul><li>1) Retain risk  </li></ul><ul><ul><li>This allows the owners to keep profits when insuran...
Structuring a Captive <ul><li>To make a CIC financially viable, you need to commit to sufficiently large premiums $250,000...
Costs to setup and run <ul><li>Single parent captives setup fees range from $50,000 to $250,000.  </li></ul><ul><li>On an ...
Domicile Selection <ul><li>You can choose between 24+ States permitting captive formation; or offshore, outside the United...
Income tax reduction <ul><li>Small Insurance Companies  - Insurance companies with annual premium income of  less than  $1...
“ Real” Purpose of a Captive <ul><li>Most small CICs are formed to insure  remote risks  that are not likely to have claim...
Establishing Premiums <ul><li>You will hire an actuary to help you determine what kind of coverages and how much of each y...
Typical non-traditional coverges <ul><li>Loss of License insurance </li></ul><ul><li>Business overhead expense (primary or...
Example of an  831(b)   <ul><li>Sam (a real estate investor and business owner) sets up a CIC. </li></ul><ul><li>Sam raise...
Continued <ul><li>Sam’s new premium to the CIC is $450,000 (which his businesses can write off). </li></ul><ul><li>The CIC...
Estate planning <ul><li>CICs can be one of the best estate planning tools if you have a profitable business and an estate ...
Estate Planning <ul><li>If an irrevocable trust (IT) for the benefit of his of Sam’s  daughter owned the CIC , Sam would h...
For estate planning  <ul><li>Sam gifts “Seed” money to the IT. </li></ul><ul><li>IT forms CIC. </li></ul><ul><li>CIC Sells...
Purchasing Life Insurance (LI) <ul><li>People with estate tax problems have a significant need for life insurance to pay  ...
Life insurance  <ul><li>The CIC manager has a duty to invest the money in a prudent manner. </li></ul><ul><li>A High Cash ...
Benefits of a CIC <ul><li>Income tax reduction </li></ul><ul><li>Wealth building </li></ul><ul><li>Retirement planning </l...
Summary <ul><li>CICs are not for everyone.  </li></ul><ul><li>However, if you are a medium to small business owner, a CIC ...
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  • Cic.client

    1. 1. Captive Insurance Companies (CICs) By: Roccy DeFrancesco, JD, CWPP, CAPP, MMB Founder: The Wealth Preservation Institute Co-Founder: The Asset Protection Society
    2. 2. Introduction <ul><li>Captive Insurance Companies have been around for many years. </li></ul><ul><li>There are approximately 5,000 captives in the world. </li></ul><ul><li>Over 50% of the &quot;Fortune 500&quot; companies have captives. </li></ul><ul><li>CIC are not exotic or complicated; they are just not well known to most people. </li></ul>
    3. 3. What is a Captive? <ul><li>It is just what you would think it is…. </li></ul><ul><ul><li>“ An insurance company owned and </li></ul></ul><ul><ul><li>controlled by its policyholders ” </li></ul></ul><ul><li>With a CIC, the policy holder is typically a single company, person, family or trust. </li></ul>
    4. 4. Type of Captives <ul><li>Single parent* </li></ul><ul><li>Group/association/RRG </li></ul><ul><li>Rental captives, Segregated protected cell </li></ul><ul><li>Common Characteristics. </li></ul><ul><ul><li>A participation of a risk sharing partner, or traditional insurer. </li></ul></ul><ul><li>*The most prevalent structure. </li></ul>
    5. 5. Typical Ownership Structure Business 1 Captive Insurance Company Business 2 Business Owner
    6. 6. Why are Captives Formed? <ul><li>1) Retain risk </li></ul><ul><ul><li>This allows the owners to keep profits when insurance claims are low. </li></ul></ul><ul><li>2) Reduce income taxes </li></ul><ul><li>3) Build wealth </li></ul><ul><li>4) Reduce estate taxes </li></ul>
    7. 7. Structuring a Captive <ul><li>To make a CIC financially viable, you need to commit to sufficiently large premiums $250,000+ annually for an 831(b). </li></ul><ul><li>The CIC must be funded properly to be able to pay claims. </li></ul><ul><li>You must recognize that a captive is a business separate and apart from your other business. </li></ul><ul><ul><li>Which means you must pay attention to running the captive or like any business it will not perform well. </li></ul></ul>
    8. 8. Costs to setup and run <ul><li>Single parent captives setup fees range from $50,000 to $250,000. </li></ul><ul><li>On an annual basis, the costs to keep a captive “compliant” are between $15,000-$35,000 a year. </li></ul><ul><li>While this seems expensive, for the “right” business owner, these fees are insignificant compared to the value. </li></ul>
    9. 9. Domicile Selection <ul><li>You can choose between 24+ States permitting captive formation; or offshore, outside the United States (i.e. Bermuda, Cayman Islands, British Virgin Islands leading the way). </li></ul><ul><li>A principal difference between onshore and offshore is potential ease of regulation and capitalization . </li></ul><ul><li>U.S. domiciled companies should NOT use an offshore captive to write insurance in the U.S. and think they will avoid U.S. income taxes . </li></ul>
    10. 10. Income tax reduction <ul><li>Small Insurance Companies - Insurance companies with annual premium income of less than $1.2 million can elect to be taxed only on investment income. </li></ul><ul><li>Premium income is tax free . However, investment income earned on the funds held inside the insurance company is taxable at ordinary C corporation rates*. (Internal Revenue Code section 831(b)) </li></ul><ul><li>*This can be mitigated with different type of wealth building tools. </li></ul>
    11. 11. “ Real” Purpose of a Captive <ul><li>Most small CICs are formed to insure remote risks that are not likely to have claims. </li></ul><ul><li>Why? </li></ul><ul><li>To build wealth in a tax favorable manner in a CIC. </li></ul><ul><ul><li>The business takes a 100% deduction for the premium </li></ul></ul><ul><ul><li>The CIC receives it tax-free </li></ul></ul><ul><ul><li>If structured properly much of the money can grow tax-free </li></ul></ul><ul><ul><li>Upon terminating the CIC, the money goes to the owners after paying capital gains taxes (not ordinary income taxes). </li></ul></ul>
    12. 12. Establishing Premiums <ul><li>You will hire an actuary to help you determine what kind of coverages and how much of each your businesses will be able to purchase. </li></ul><ul><li>In the real world, you will tell the actuary how much in new insurance premiums your business can afford to deduct. </li></ul><ul><li>Then the actuary will find the types of coverages in your industry to meet this need (if possible). </li></ul>
    13. 13. Typical non-traditional coverges <ul><li>Loss of License insurance </li></ul><ul><li>Business overhead expense (primary or excess) </li></ul><ul><li>Excess Professional Liability Legal / Claim Expense </li></ul><ul><li>Excess Professional Liability Loss Reimbursement </li></ul><ul><li>Disability Expense Reimbursement Protection </li></ul><ul><li>Key Supplier Loss Expense Reimbursement </li></ul><ul><li>Key Customer Loss Expense Reimbursement </li></ul><ul><li>Product Recall Loss Expense Reimbursement </li></ul><ul><li>Market/COGS Fluctuation Loss Expense Reimbursement </li></ul><ul><li>Health Insurance Difference in Conditions Expense Reimbursement </li></ul><ul><li>International Travel Accident </li></ul><ul><li>International Kidnap/Ransom Investigation Expense </li></ul><ul><li>Tax Audit Defense Legal Expense Reimbursement </li></ul><ul><li>Criminal Defense Legal Expense Reimbursement </li></ul><ul><li>Regulatory Investigation Defense Legal Expense Reimbursement </li></ul><ul><li>Injunctive Relief Defense Legal Expense Reimbursement </li></ul><ul><li>Bankruptcy Legal Expense Reimbursement </li></ul><ul><li>Currency Risk Loss Expense Reimbursement </li></ul><ul><li>Research and Development Expense Overrun Reimbursement </li></ul>
    14. 14. Example of an 831(b) <ul><li>Sam (a real estate investor and business owner) sets up a CIC. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>
    15. 15. Continued <ul><li>Sam’s new premium to the CIC is $450,000 (which his businesses can write off). </li></ul><ul><li>The CIC does not pay income tax on the premium. </li></ul><ul><li>If Sam is in the 40% tax bracket, he just saved $180,000 in income taxes , and </li></ul><ul><li>Sam will build significant tax-favorable wealth by paying $450,000 every year for X years into his CIC. </li></ul><ul><li>When in retirement, he can close down his CIC and receive the money by paying capital gains taxes. </li></ul>
    16. 16. Estate planning <ul><li>CICs can be one of the best estate planning tools if you have a profitable business and an estate tax problem. </li></ul><ul><li>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. </li></ul><ul><li>With a CIC you can move money out of an estate literally overnight without income, gift, or estate tax worries. </li></ul>
    17. 17. Estate Planning <ul><li>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 . </li></ul><ul><li>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: </li></ul>Income tax savings $180,000.00 Estate tax savings 220,500.00 Total $400,500.00
    18. 18. For estate planning <ul><li>Sam gifts “Seed” money to the IT. </li></ul><ul><li>IT forms CIC. </li></ul><ul><li>CIC Sells insurance to Sam’s company. </li></ul><ul><li>Company makes tax-deductible premium payments. </li></ul><ul><li>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. </li></ul>Irrevocable Trust (IT) CIC Sam Gifts Seed Money Company Tax-Deductible Premiums
    19. 19. Purchasing Life Insurance (LI) <ul><li>People with estate tax problems have a significant need for life insurance to pay estate taxes . </li></ul><ul><li>Gifting to an ILIT is typically. </li></ul><ul><li>LI on Sam’s life can be a nice secure wealth building tool for a CIC. </li></ul><ul><li>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 . </li></ul><ul><li>This structure allows you to pay for your needed life insurance with tax deductible dollars and without gift tax headaches . </li></ul>
    20. 20. Life insurance <ul><li>The CIC manager has a duty to invest the money in a prudent manner. </li></ul><ul><li>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. </li></ul>Irrevocable Trust CIC Client Gifts Seed Money Company Tax-Deductible Premiums Life insurance policy CIC buys high cash value life insurance policy
    21. 21. Benefits of a CIC <ul><li>Income tax reduction </li></ul><ul><li>Wealth building </li></ul><ul><li>Retirement planning </li></ul><ul><li>Estate planning </li></ul>
    22. 22. Summary <ul><li>CICs are not for everyone. </li></ul><ul><li>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. </li></ul><ul><li>The key is to work with a team of advisors who knows how to set them up in a compliant and client first manner. </li></ul>

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