831(b) Captives: Financial Benefits Through Comprehensive ... · 831(a) large captives with premiums in excess of $1 2 millionof $1.2 million • Focus on reduced insurance expense

831(b) Captives: Financial Benefits

Through Comprehensive

Risk Planning

831(b) Captives: Financial Benefits Th h C h i Ri k Pl iThrough Comprehensive Risk Planning

June 5th, 2015

VIP + Capstone AssociatedVIP + Capstone Associated + Your “Right Fit” Clientg

What is a Captive?

“A limited purpose insurance company licensed inA limited purpose insurance company, licensed in a U.S. state, or foreign jurisdiction, whose focus is insuring the risks of the captive’s owners.”

Here a P&C company, not a life insurer.

Captives are formed in the U.S., Bermuda, the Caribbean and other locations We do all of theCaribbean, and other locations. We do all of the above.

3

Single Parent Captive vsGroup CaptiveGroup Captive

A group captive is an insurer owned by multiple unaffiliated companies often within a specific industry for the purpose ofcompanies, often within a specific industry, for the purpose of insuring the group.

Group captives are generally used to provide a market for difficult lines of coverage. Oil Insurance Limited (OIL) is such an example.

Group captives may provide help for a specific situation, but they lack the strategic planning benefits of a single owner captive. They are comparable to mutual insurance companies and reciprocalsare comparable to mutual insurance companies and reciprocals.

4

Why Should You Include a Captive Discussion?

Open doors to new prospects by showing them how to

Captive Discussion?

integrate risk management more fully into their overall strategic plan.

More fully integrate agency financial products such as life and health insurance, wealth management consulting, and banking relationships.banking relationships.

Bring new ideas to existing clients, thus protecting your important clients from competition and solidifying yourimportant clients from competition, and solidifying your position as their primary financial advisor.

5

Broker Comment - Marsh

Midsize companies like the small captive concept. As the p p peducation process continues and an increasing number of firms investigate the creation of a captive, the captive industry has once again adapted to the marketplace. With a sharpened focus on the small captive market and resources dedicated to supporting small captives, Marsh is ready to assist our clients and prospects in determining whether a small captive is the right h i f th i i k t dchoice for their risk management needs.

• Innovative Uses of Captives: The Small Captive Concept, SPublished: December 14, 2013 – Marsh USA

6

How is Capstone Different?

Capstone is not owned by nor affiliated p ywith any insurers or brokers. For over 17 years we have been theFor over 17 years we have been the leading provider of turnkey alternative risk planning services to middle marketplanning services to middle market companies. We are independent of every conventional insurer.conventional insurer.

7

Comparison of IRC 831(a) and 831(b)

831(a) large captives with premiums in excessof $1 2 millionof $1.2 million

• Focus on reduced insurance expense & enterprise risk management

• Loss reserves are tax deductible• Increased income tax efficiencies – deferral of revenue

831(b) intermediate captives with premiums less831(b) intermediate captives with premiums lessthan $1.2 million• Focus on enterprise risk management w/ income tax &

ownership benefits• Underwriting profits are not taxed per statute• Increased income tax efficiencies – permanent difference

8

Ideal 831(b) Captive Clients

Closely held profitable businessClosely-held, profitable business

Pre-tax profits of $2,000,000+ per year

Significant retained risks

9

Reasons to Form an 831(b) Captive( ) p

Insurance needs – without this, no need for a captive

Business considerations – reduced total cost of risk

Concern over coverage exclusions and retained risks

Ancillary considerations

• Tax planningTax planning• Asset protection• Estate planning

10

831(b) Captive Ownership

Individuals/Spouses Families

Trusts LLCs

Partnerships Corporations

11

Tax Considerations

0% Federal Income Tax on underwriting profits0% Federal Income Tax on underwriting profits

I t t i t d t l C C tInvestment income taxed at regular C Corp rates

State tax Implications

Dodd Frank considerations

12

Onshore vs. Offshore?

Regulatory domicile only – 831(b) captive is aRegulatory domicile only 831(b) captive is a US corporation

Variations include capital requirements, investment limitations, regulatory restrictions and expedited formations

Client has total control over the assets. Captive investment & bank accounts are US based. Held at bank, brokerage, money manager, etc.

13

14

Sample Retained Risks Written By Captives

Loss of C

Loss of Key Professional Customer Employee Liability

Directors & Officers

Environmental Liability

Product Liability

Large Deductibles or Medical Stop Regulatory Deductibles or

Retentionsp

Lossg y

Changes

15

Big Picture

Common Ownership Group

Captive

100% owned

CoveragesCaptive

(Always a U.S. Company)Insurance Premiums

Operating Business(es)

A Captive’s predominant function is to insure the risks of its affiliates

Premiums deductible to Operating CompanyPremiums deductible to Operating Company

Premiums not taxable to the Captive – IRC §831(b)

16

Insurance Loss

Common Ownership GroupCommon Ownership Group

100% owned 100% d

Claim Payment

100% owned 100% owned

Operating Business(es) CaptiveInsurance Claim

Claim Payment

17

Secured Loan/Asset Protection


100% owned

$$ Secured Loan $$

Operating Business Captive(Always a U.S. Company)

Insurance Premiums

18

Return of Qualified Dividends

Common Ownership Group DividendsCommon Ownership Group Dividends


Coverages


Operating Business(es) Captive(Always a U.S. Company)

Insurance Premiums

g

19

Estate Planning Overlay

Ownership Group Heirs

Senior Generation Lower Generations

100% d

Coverages


Operating Business Captive (Always a U.S. Company)

Coverages

Insurance Premiums

20

Multiple CaptivesMultiple OwnersMultiple Owners

Existing Captive OwnersExisting OwnersOwnership Group Existing OwnersFLP – Trust – Executives

Coverages

Operating Business #1 Captive A Joint (50%/50%)

Underwriting

g

Captive B

Agreement

Insurance PremiumsOperating Business #2

21

Our Background and Expertise

Capstone Associated Services, Ltd.T k i id di t i k l l d i il Turnkey services provider, coordinates risk manager, local domicile counsel, actuary, independent auditor, third-party re-insurer, professionals engaged in policy design and pricing, and others. 175 + ti f d 17 S b t ti l i f t t B t 175 + captives formed over 17 years. Substantial infrastructure. Best practices.

Affiliated law firm. 10+ business (tax, corporate, regulatory, litigation) l t i ilawyers strong in experience. Optimize captive ownership Does not disclaim tax & legal

22

Our Background and Expertise

The Feldman Law Firm LLPThe Feldman Law Firm LLP• 10 Attorneys: Tax, corporate and business planning; M&A

and financings.• Combined 50+/- Team Members -- Staffed Offices in

Houston, Delaware, & the British Territory of Anguilla• Captives since 1998• Captives since 1998• Does not disclaim tax & legal

23

Questions?Questions?

24

Life Insurance Overlay

Business owneras grantor of trustOwner TraditionalgOwner

ILIT

100% owned

100% owned Loan

by captive

C ti

owned owned

Operating Business Captive(holds tax exempt $$)Premiums

ILIT established by Business OwnerOption: Move Captive’s ownership outside of estate

25

Asset Protection Overlay


100% owned100% owned

$$ Secured Loan $$

Operating Business Captive(Always a U.S. Company)

Insurance Premiums

26

State Tax Issues

(State) Independently procured premium (IPP) tax

Historically similar to “use” tax. The tax was imposed on insurance “used” in the state of Texas but acquired from non-admitted insurers, with no Texas tax assessed on outnon admitted insurers, with no Texas tax assessed on out of state activities.

• Tax in Texas is 4.85% of premiums. Generally lower in th t tother states.

• Tax was inconsistently applied. Confusing. • Dodd–Frank implications

Still h t i fl• Still somewhat in flux

27

Pool Structure

1 2 3 4 5 6 400 401 402

Insureds Your Operations

1 2 3 4 5 6 400 401 402

P l R 50% 50%

. . . . . . . . . . .

Pool Re(blends risks)

50%

direct written premiums to captive

50%

to pool

1 2 3 . . . 4 5 6 80 81

50%

from pool

. . . . . . . . .

CaptivesYour Captive

28

YourInsureds

ClaimYour Captive

Claim

Dozens of Captives- - - - - - - - - - - - - - - - - Capped at 160% of

Split 80/20

- - - - - - -Your Captive

Pool ReCapped at 160% of total premiums

Captive

Deductible 29

IRS Definition of Insurance

The IRS and the courts have historically required:The IRS and the courts have historically required:

Risk Shifting: the transfer of risk to a separate party

Risk Distribution: enough independent risks are being pooled to invoke the “actuarial law of large numbers”numbers

Recent rulings suggest that an insurer should h lti l i d d lti l li ihave multiple insureds and multiple policies.

30

Documents

831(b) Captives: Financial Benefits Through Comprehensive ... · 831(a) large captives with premiums in excess of $1 2 millionof $1.2 million • Focus on reduced insurance expense