InKnowVision September 2013 Captive Insurance Powerpoint

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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
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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

Agenda
 Benefits
 Business Owner Profile
 Case Study
 Formation
 Taxation
 Application

Benefits
 Wealth accumulation
 Favorable tax treatment
 Minimize/reduce insurance costs
 Customize risk coverage
 Increased cash flow
 Wealth preservation
 Asset protection

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

 Developers
 General Contractors
 Subcontractors
 Manufacturers
 Professional Services Firms
 Franchisees
 Restaurant / Hotel Chains
 Physician groups
 Hospitals
Profile Client

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

Captive Formed
 Captive formed
 Insurance coverage selected and written by captive
 Captive makes 831(b) election
 Premium paid $1.2M

Income Tax Year 1
 Deduction to manufacturing company
 Saves approx. $400k in income tax
 Captive has no taxable income on premium received

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

Process - Qualification
 Financial qualification
 Risk assessment
 Cost - benefit analysis
 Decision to proceed or not

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

Process - Time
 Evaluation and decision making: 2-6 weeks
 Implementation: 6-8 weeks

Captive Insurance Companies
 Insurance company
 Formed to insure risk
 Liability
 Operating Risks
 Business Risks
 Exclusions
 Deductibles

Captive Jurisdictions
 Nevis
 Anguilla
 Bermuda
 Utah
 Nevada
 Vermont
 Kentucky
 Delaware
 District of Columbia

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)

 Single Parent Captive
 Group Captive
 Homogeneous – same industry
 Heterogeneous – multiple industries
Types of Captives

 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

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

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

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

Reinsurance Pool
Reinsurance
Pool
Company
1
Company
2
Company
3
Company
4
Company
5
Company
6
Company
7
Company
8
Company
9

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)

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

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

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

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

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

Planning Ideas
Captive
Client

Planning Ideas

Planning Ideas
Captive
Trust for
children/grand
children
Underwriting profit passes gift
tax and GST tax free to trust
and its beneficiaries

Planning Ideas
Captive
Client Trust

Key Employees
 Have stock owned by key employees
 Can have vesting
 Buy out/redemption provisions
 Underwriting profits benefit loyal and productive key
employees

Asset Protection
 Transfer for adequate consideration
 Fraudulent conveyance laws
 Ownership by trust

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)

InKnowVision September 2013 Captive Insurance Powerpoint

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InKnowVision September 2013 Captive Insurance Powerpoint