InKnowVision September 2013 Captive Insurance Powerpoint

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After completing this course, you will be able to:
- Identify the benefits of Captive Insurance companies
- Differentiate which clients would be ideal for a Captive
- List the necessary steps to form a Captive
- Define and address Captive tax issues
- Apply all of the processes to form a successful Captive Insurance company

Published in: Economy & Finance, Business
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InKnowVision September 2013 Captive Insurance Powerpoint

  1. 1. ©2013. InKnowVision LLC. All rights reserved. www.inknowvision.com P: 630-596-5090
  2. 2. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Today’s webinar qualifies for 1 Continuing Education credit for CPAs and CFPs. We will send an email to all attendees following the webinar with details regarding CE credits. Polling questions are asked at various points in the presentation. People must respond to polling questions to indicate that they are actively participating in the presentation. People who are logged into the call, but do not respond to any polling questions will not receive a Certificate of Attendance. An evaluation form must be completed and returned via fax or email in order to receive CPE credits. CPA CE
  3. 3. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Agenda  Benefits  Business Owner Profile  Case Study  Formation  Taxation  Application
  4. 4. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Benefits  Wealth accumulation  Favorable tax treatment  Minimize/reduce insurance costs  Customize risk coverage  Increased cash flow  Wealth preservation  Asset protection
  5. 5. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Profile Client  Successful business or profession  Has uninsured risk  Has insured risk willing to self insure  Gross revenue - $10M or more  Taxable income and free cash of at least $500k or more
  6. 6. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC  Developers  General Contractors  Subcontractors  Manufacturers  Professional Services Firms  Franchisees  Restaurant / Hotel Chains  Physician groups  Hospitals Profile Client
  7. 7. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Case Study  Manufacturing company (C Corp)  $35M sales  Operations in and out of the US  300 employees  Net profit - $4.5M annually  Significant insurable risks  Estimated premium to insure all risks totals $2M
  8. 8. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Captive Formed  Captive formed  Insurance coverage selected and written by captive  Captive makes 831(b) election  Premium paid $1.2M
  9. 9. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Income Tax Year 1  Deduction to manufacturing company  Saves approx. $400k in income tax  Captive has no taxable income on premium received
  10. 10. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC 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
  11. 11. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Process - Qualification  Financial qualification  Risk assessment  Cost - benefit analysis  Decision to proceed or not
  12. 12. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Process - Implementation  Engage manager  Underwriting review and report  Actuarial analysis and pricing of risk  Risk coverage selection  Formation, capitalization and licensing  Premium payment  Policy issue
  13. 13. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Process - Time  Evaluation and decision making: 2-6 weeks  Implementation: 6-8 weeks
  14. 14. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Captive Insurance Companies  Insurance company  Formed to insure risk  Liability  Operating Risks  Business Risks  Exclusions  Deductibles
  15. 15. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Captive Jurisdictions  Nevis  Anguilla  Bermuda  Utah  Nevada  Vermont  Kentucky  Delaware  District of Columbia
  16. 16. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Types of Captives  Pure Captive – Single Family House  Risk reinsurance  Cell / Series Captive – Apartment Building  Less expensive  (Revenue Ruling 2008-8) Uses the 12 or more subsidiary safe harbor (Rev. Rul. 2002-90)
  17. 17. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC  Single Parent Captive  Group Captive  Homogeneous – same industry  Heterogeneous – multiple industries Types of Captives
  18. 18. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC  Foreign corporations taxed as US taxpayer  Foreign corporation not taxed as US taxpayer  CFC’s and 50% or more US shareholders  US Shareholder means at least 10% ownership  CFC’s and less than 50% US shareholders  Domestic companies – US taxed Types of Captives
  19. 19. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Capital Required  Statutory Requirements  $125k Cayman  $10k Anguilla  $35k Nevis  $250k Vermont and Delaware  $200k Nevada  Other Requirements  Amount of coverages and premiums  History of claims
  20. 20. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Tax Issues  Premium deductibility by US taxpayer  Ordinary and necessary  Real insurance – Helvering v. Le Gierse, 312 U.S. 531 (1941)  Risk distribution  Risk shifting
  21. 21. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Real Insurance  Risk sharing (spread risk over a number of insured)  Harper Group v Commissioner (1991) 96 TC 45 – 30% OK  Rev. Rul. 2002-89 - less than 50% OK  Pooling – Reinsurance  Actual exposure to risk of loss  Risk shifting – move the risk off of the balance sheet
  22. 22. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Reinsurance Pool Reinsurance Pool Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Company 7 Company 8 Company 9
  23. 23. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC 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)
  24. 24. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC 953(d) Election  Election by non-US company to be taxed as a US company  No excise tax on insurance premiums  Can own US real estate  Company files US 1120-PC 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
  25. 25. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC 953(d) Election  Election to be treated as US company  Waive all treaty benefits  File US tax returns  Disclose all shareholders  Name POA in US to receive notices  Maintain an office in US  Have assets in US equal to 10% of captive income
  26. 26. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC 831(b) election  For small insurance companies including captives  Companies making the election can exclude up to $1.2M in net premium  In lieu of reserve calculation requirement  Must pay tax on investment income
  27. 27. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC 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 in stock or stock redemption, then sale proceeds are taxed at capital gains rates
  28. 28. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Planning Ideas  Captives may be often owned by their parent  Captives may have one or more owners  Captives do not have to be owned by a parent company
  29. 29. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Planning Ideas Captive Client
  30. 30. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Planning Ideas
  31. 31. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Planning Ideas Captive Trust for children/grand children Underwriting profit passes gift tax and GST tax free to trust and its beneficiaries
  32. 32. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Planning Ideas
  33. 33. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Planning Ideas Captive Client Trust
  34. 34. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Key Employees  Have stock owned by key employees  Can have vesting  Buy out/redemption provisions  Underwriting profits benefit loyal and productive key employees
  35. 35. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Asset Protection  Transfer for adequate consideration  Fraudulent conveyance laws  Ownership by trust
  36. 36. www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Costs  Pure Captive  $80,000-$190,000 in year of formation  $72,000-$115,000 in subsequent years  Fee is also related to premium (pool costs)
  37. 37. (630) 596-5090 www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC Scott Hamilton, CEO InKnowVision, LLC www.inknowvision.com 630-596-5090 x80 Questions or Comments?

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