captive insurance: business, estate planning, and asset...
TRANSCRIPT
Captive Insurance: Business, Estate Planning,
and Asset Protection ConsiderationsBest Practices for the Creation and Utilization of an 831(b) Alternative Structure
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TUESDAY, AUGUST 6, 2019
Presenting a live 90-minute webinar with interactive Q&A
Rodney H. Piercey, Partner, Piercey & Associates, Barrington, Ill.
Mark Sims, President of Global Business Development, Captive Alternatives, Atlanta
Robert K. Wold, AFIS, CLCS, Senior Risk Management Consultant, Carl E. Mellen & Co., Waukegan, IL
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PRIVATE INSURANCE
Managing Risk. Creating Opportunity.
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History of Micro Captives IRC 831 (b) Election
1986 tax reform act-crop insurance/ag play
Growth curve
Modest growth of captives over the past two decades with just over 6,600 worldwide
Much needed and viable outlet for risk transfer
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Typical IRC 831 (b) Election Architecture
831(b) Captive
Operating Business
Owner
Pays Premium
Issues PoliciesReceives Deduction
Pays No Tax on Premiums
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Current state of micro captive market
• Lawsuits, “Dirty Dozen”, audits, etc.
• Abuses set up purely for financial gain
• Our personal views going forward
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Why Use Private Insurance?
Reduce Cost of Risk Management
Ease Dependence on Commercial Insurance
Stabilize Insurance Pricing
Identify and Finance “Hidden” Risk
Obtain Coverage Unavailable in Commercial Market
Gain Access to Reinsurance Markets
Cash Flow Benefits
Ability To Customize Insurance Programs
Retain Underwriting Profits
Increased Claims Control
Creation of a New Profit Center
Ability to Direct Investment Options
Possible Tax Advantages (Consult with a tax professional)
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What Issues Does the IRS Have with Captives?
831(b) tax election
no risk sharing or risk distribution
aggressively priced premiums
no insurance policies
cycle flow of funds
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vWhat is Private Insurance?
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A negative social media post damages your brand or reputation.
An administrative or regulatory action impedes your ability to run your business.
A key employee, account, or supplier is lost unexpectedly.
A data breach exposes protected information.
A disgruntled former employee files a lawsuit.
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Types of Business Risk
Commercial Insurance• High frequency / Low Value
• Typically buy insurance
• Many Small Claims - WC, GL, Employee Benefits
Private Insurance • Low Frequency / High Value
• Typically ignore and hope for best
• Few Large Claims - Cyber, Brand, Regulatory…
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Hidden Risk in Your Business
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Most Commonly Selected Coverages
Loss of Key Person / Key Talent
Loss of Key Customers /Key Contacts
Brand / Goodwill Rehabilitation
Cyber Liability Administrative or Regulatory Actions
Medical Stop Loss
Labor Stoppage / Shortage
Representations and Warranties
Loss of Key Suppliers
Defense Cost and Legal Expense
vHow does it work?
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Premium Flow
01 Insured Business
Pays Premium to Licensed Insurer
Issues Policies to Insured02 Insurance
Company (Madison International)
Provides Risk Distribution and Cell structure
03 Reinsurance Company (MadRE)
Assumes Insured Risk04 Segregated
Asset Plan
Business Owner
(Convertible Promissory Note
Holder)
100%
100%
60%
40%
50%
50%
Claims Sharing
03 =
=
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SAP 999
SAP 001
SAP 002
SAP 005
SAP 004
SAP 003
MadRE
Puerto Rico
Segregated Asset Plan
Tax Benefits
Risk Sharing
Madison International
Structure
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831(b) Captives vs Private Insurance831(b) Captive Private Insurance
Most issue direct policies, use ”back end" pools, no licensed insurer
Operates like traditional insurance, policies issued through licensed insurer, 50% risk distribution as funds held
$2.3 Million No limit (beyond actuarial justification)
IRS Form 8886: Reportable Transaction Disclosure Statement
No U.S. disclosure filing requirements
Ownership restrictions No restrictions
2 – 6 months 2 – 4 weeks
Tax on investment income at regular income rates
Tax only on annual net income above $1.2 million at 4%
Foreign domiciles must elect 953(d) to avoid controlled foreign corporation entanglement
Not applicable: Puerto Rico I.I. is established as a non-controlled foreign corporation
Foreign domiciles regulated by local financial authorities
National Association of Insurance Commissioners / Puerto Rico DOI
Mixed at best and increased scrutiny following recent IRS Tax Court wins
15-year contract with Puerto Rico Tax Authority, extendable for two additional 15-year periods
STRUCTURE
PREMIUM LIMIT
OWNERSHIP
FORMATION TIME
TAX STRUCTURE
DOMICILE ISSUES
REGULATION
PROGNOSIS
REPORTING
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Formation Process
FeasibilityData
ImplementSelect
Captive Alternatives, Captive Alternatives LLC, or any of its affiliates or referral sources, do not give legal, tax, accounting or investment advice. You will need to obtain independent legal, tax or investment advice for this proposed Captive. Your business will obtain this advice from its licensed CPAs, tax or legal professionals. All Pro Formas are Examples Only. Individual Results Will Vary. Also note: tax rate indicated is only for present estimated federal tax rates; state tax rates or possible direct procurement taxes are not addressed due to differences between the States.
MARK SIMSVP OF BUSINESS DEVELOPMENT
Captive Alternatives
[email protected]: 404-823-6200
c: 812-327-3341
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RODNEY H. PIERCEYPARTNER
Piercey & Associates
ROBERT K. WOLD, AFIS, CLCSSENIOR RISK MANAGEMENT CONSULTANT
Carl E. Mellen & Co.
Thank You