Asset protection and tax deferral is critical for business owners. Small business owners need to find ways to reduce taxes, and a newly structured Captive Insurance Company (CIC) could be the answer. The following article compares a typical and affordable Captive Insurance Company and shows how these can provide many tax benefits to small business owners.
Any business owner earning significant profits usually worries about taxes and asset protection. Owners are always looking for ways to find ways to legally protect assets from the IRS and other creditors. There are some phenomenal options available that will help in accomplishing these feats, but near the top of the list is the Captive Insurance Company (CIC) strategy. It is a risk management tool that has no Employee Earnings (EE) inclusion, substantial deductions and long term capital gains taxes that are owed when absolved.
A Captive Insurance Company is a specific type of insurance company within the 28 U.S.C. sec. 831(b) code that insures risks of the business implementing the strategy. This insurance company will construct insurance policies, compute risks, collect insurance premiums, and create reserves that will cover potential insurance claims.
There are many benefits for the creation of a CIC, such as:
- Providing insurance for liabilities that are not encompassed by conventional insurance
- Mitigating potential risks by creating insurance plans in accordance with the proprietor’s goals
- Providing better oversight over insurance requisitions (claims)
- Lowering (decreasing) the aggregate expense of insurance
- Benefits of lowering taxes on business income
- Creating (generating, accumulating) net value within the Captive Insurance Company tax-free
- Proprietors benefit with a basis of good estate planning allowing the transfer of assets to their beneficiaries
- Protecting assets from frivolous lawsuits and creditors OR Form of protecting the business assets from creditors
In regards to taxes and investment growth, how are premiums affected?
Any insurance premium that is expended to a Captive Insurance Company is deemed as a full tax deduction. Within the code section 162, the premiums are considered to be a regular business write-off. All premiums paid will be tax free to the Captive Insurance Company, but the maturation of the investment that occurs is considered at the C-Corporation tax percentage.
How can taxes be minimized as assets mature inside the Captive Insurance Company?
The Captive Insurance Company proprietor can have assets within the insurance company designated to certain tax-free bonds, Equity Indexed Universal Life Insurance (EIUL), or tax-minimizing brokerage accounts.
What happens when the Captive Insurance Company proprietor determines to dissolve it?
If this happens and the Captive Insurance Company is dissolved because it is no longer needed, the proprietor can choose to leave it or redeem his share. If this is the case, he would pay long-term capital gain taxes on any appreciation within the Captive Insurance Company.
Will a Captive Insurance Company accept 100% of the risk for the insured exposure?
No, the Captive Insurance Company will distribute 50% of the risk, or more, with other Captive Insurance Companies that are formed in the same way. This is done so that the risks are distributed among other Captive Insurance Companies. A CIC will be large enough spread the risk with a big pool.
Who oversees the funds inside a Captive Insurance Company?
The Captive Insurance proprietors (you) will have complete power and can make decisions in regards to how claims will be managed and how the assets will be invested.
Making Captive Insurance Companies Cost Effective For Small Businesses
Most Captive Insurance Companies previously required between $50,000 and $75,000 to implement. There was also an annual cost of between $35,000 and $50,000 to run the CIC. These costs make this strategy not cost effective for most small business owners.
However, there is now more cost effective Captive Insurance Company that only costs $5,750 on every $100,000 in premiums to establish. This drastically reduces the set up cost, allowing more business owners to use CICs. There will be a yearly cost of 11% on new premiums. This is a great chance for small business owners to be eligible for a Captive Insurance Company when they otherwise would not have been.
Business owners have several options, but would you prefer to pay income taxes on every dollar at 40%+ OR diminish uninsured corporate risks, create legal tax deductions and grow the funds tax free with a guarantee on your principle? Most owners will opt for the latter option, giving them a wealth building tool.
Mitigate Taxes with Cash Value Life
The taxes that are incurred on the gains in a Captive Insurance Company can be reduced by implementing cash value life insurance. When owners are using the affordable structure, they can appropriate between 50% and 75% of the available assets to fund a cash value policy. The benefit of doing so will be that owners will have additional principle protection of their CIC assets from slumps of the stock exchanges.
For more information on how to setup a Captive Insurance Company or using Cash Value Life Insurance with your newly formed CIC contact Estate Street Partners toll-free at (888) 938-5872 to maximize your business tax deductions.
Rocco Beatrice, CPA, MST, MBA, Managing Director, Estate Street Partners, LLC.
Mr. Beatrice is an asset protection award winning trust and estate planning expert.