BUSINESS & TAX PLANNING
      WITH CAPTIVE INSURANCE
            COMPANIES
                                AUGUST 10, 2009...
WHAT IS A CAPTIVE INSURANCE
                COMPANY (“CIC”)?

• A Captive Insurance Company is an insurance company owned ...
WHO CAN BENEFIT FROM A CIC?

   • Profitable businesses.

   • Business with typically uninsured risks.

   • Businesses w...
HOW IS A CIC FORMED?

  • A new corporation is formed in a favorable jurisdiction.
  • The CIC is usually an “affiliate” o...
ILLUSTRATION OF CIC STRUCTURE
                 Owners                                     Owners




                     ...
HOW DOES A CIC OPERATE?

  • The CIC writes policies for the Business insuring appropriate risks.

  • The Business pays p...
HOW IS A CIC REGULATED?
  • The Department of Insurance of the state in which the CIC is formed
    will periodically audi...
WHAT ARE THE TAX BENEFITS OF A
                     CIC?
   • The premiums paid to the CIC by the Business are deductible....
TAX BENEFITS VS. COSTS
                                      Tax Benefits
            Assuming 45% combined state & federa...
WHAT ARE THE OTHER BENEFITS OF
                   A CIC?
   • Cost savings on insurance premiums for the Business.
   • Th...
EXIT STRATEGIES: HOW DOES AN
              OWNER GET OUT OF A CIC?
                There are a variety of favorable exit s...
DISCLAIMERS
       •   The information contained in this presentation is for illustration purposes
           only and not...
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Chamberlain Captive Insurance Companies Slides

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Chamberlain Captive Insurance Companies Slides

  1. 1. BUSINESS & TAX PLANNING WITH CAPTIVE INSURANCE COMPANIES AUGUST 10, 2009 J. SCOT KIRKPATRICK, ESQ. THOMAS E. JONES, JR., ESQ. (404) 658-5421 (404) 658-5432 scot.kirkpatrick@chamberlainlaw.com t.jones@chamberlainlaw.com PRIVILEGED AND CONFIDENTIAL © 2009 Chamberlain Hrdlicka
  2. 2. WHAT IS A CAPTIVE INSURANCE COMPANY (“CIC”)? • A Captive Insurance Company is an insurance company owned and controlled by you, your business, or a group of business with which you are affiliated. • A CIC provides self-insurance in a way that is approved by the IRS. • A CIC can provide coverage against numerous types of liabilities, including liabilities that you currently insure against as well as those that you do not insure against. • A CIC can provide substantial cost savings, tax and other benefits. PRIVILEGED AND CONFIDENTIAL -2-
  3. 3. WHO CAN BENEFIT FROM A CIC? • Profitable businesses. • Business with typically uninsured risks. • Businesses willing to undertake the cost and responsibilities of forming and administering a CIC. • Businesses with a history of low insured losses. • Businesses willing to take the risk that losses may exceed expectations in exchange for cost savings and tax benefits. PRIVILEGED AND CONFIDENTIAL -3-
  4. 4. HOW IS A CIC FORMED? • A new corporation is formed in a favorable jurisdiction. • The CIC is usually an “affiliate” of the business. – Alternatively, multiple businesses may set up a “Group” CIC. • The CIC obtains a captive license in its state of formation. • The amount of capital required is driven by insurance regulations. PRIVILEGED AND CONFIDENTIAL -4-
  5. 5. ILLUSTRATION OF CIC STRUCTURE Owners Owners Premiums Captive Insurance Business Company Investments The owners of each company are often the same, but for business, estate and asset protection purposes may be different. Trusts set up by the Business owners are often the owners of the CIC. PRIVILEGED AND CONFIDENTIAL -5-
  6. 6. HOW DOES A CIC OPERATE? • The CIC writes policies for the Business insuring appropriate risks. • The Business pays premiums to the CIC. • The CIC uses the premiums it receives to pay for operating expenses and to purchase investments. • The CIC pays claims to the Business. • A management company is generally used to conduct the daily operations of the CIC. PRIVILEGED AND CONFIDENTIAL -6-
  7. 7. HOW IS A CIC REGULATED? • The Department of Insurance of the state in which the CIC is formed will periodically audit the CIC’s books and records. • An auditing firm approved by the state must audit the CIC’s books and records annually. • An actuarial firm approved by the state must certify the CIC’s losses on an annual basis. • The CIC’s Board of Directors must have annual meetings. PRIVILEGED AND CONFIDENTIAL -7-
  8. 8. WHAT ARE THE TAX BENEFITS OF A CIC? • The premiums paid to the CIC by the Business are deductible. • Up to $1.2 million of the premiums received by the CIC per year are not taxed to the CIC. • Cash in the CIC may be paid to the owners of the CIC as dividends or as a return of capital at capital gains rates. PRIVILEGED AND CONFIDENTIAL -8-
  9. 9. TAX BENEFITS VS. COSTS Tax Benefits Assuming 45% combined state & federal corporate income tax rate: $1.2 million x 45% = $540,000 maximum annual savings Costs Set up and annual administrative costs will vary depending on complexity and other facts. Set up costs usually run from $60,000 to $120,000 and annual administration usually runs from $20,000 to $50,000. Year Tax Savings Estimated Costs Net Tax Savings 1 $540,000 $125,000 $415,000 2 $540,000 $30,000 $510,000 3 $540,000 $30,000 $510,000 4 $540,000 $30,000 $510,000 5 $540,000 $30,000 $510,000 PRIVILEGED AND CONFIDENTIAL -9-
  10. 10. WHAT ARE THE OTHER BENEFITS OF A CIC? • Cost savings on insurance premiums for the Business. • The CIC can potentially earn investment income that would otherwise be paid to an insurance company. • Greater flexibility for structuring insurance policy terms. • The CIC provides a layer of protection against creditors. PRIVILEGED AND CONFIDENTIAL -9-
  11. 11. EXIT STRATEGIES: HOW DOES AN OWNER GET OUT OF A CIC? There are a variety of favorable exit strategies: • Give it Away (during life or at death) • Sell • Merge • Liquidate • Other PRIVILEGED AND CONFIDENTIAL -10-
  12. 12. DISCLAIMERS • The information contained in this presentation is for illustration purposes only and not intended to be formal tax or legal advice. • The rules imposed by IRS Circular 230 require us to state that, unless it is expressly stated, any opinions expressed with respect to a significant tax issue are not intended or written by the practitioner to be used, and cannot be used by the recipient, for the purpose of avoiding penalties that may be imposed on the recipient or any other person who may examine this correspondence in connection with a Federal tax matter. PRIVILEGED AND CONFIDENTIAL -11-

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