Asset Protection and Tax Deferment can be jointly achieved through a Closely Held Insurance Company which, in general, is not well known, but they can be powerful tools that can be used to create wealth. They make a great deferment tool for any business owner that has surplus income and do not want to pay taxes on the income when they are moving the money from one generation to the next.
Asset Protection and Tax Deferment: CICs (Closely Held Insurance Companies) Offer some of the best methods for Asset Protection and Tax Deferment
Closely Held Insurance Companies (CICs ) can be powerful wealth building tools for small and medium sized business owners (SMBO). Many owners find it difficult to transfer wealth from their estate to benefit their heirs. This can be done without having to worry about incurring additional taxes, such as income, estate and gift taxes. Closely Held Insurance Companies can make it possible for business owners to prepare for the years ahead and protect their current assets for their heirs. Many owners and individuals will have a variety of questions about using Closely Held Insurance Companies and these are addressed below.
How can business owners with an estate tax problem protect their estate for their heirs?
Moving money from an estate is typically achieved by gifting an amount of money and then paying the gift taxes that apply. Find out more information on gift taxes here: //www.irs.gov/pub/irs-pdf/i709.pdf
How can typical business owners earn income from their business while reducing their estate and gift taxes?
If the owner is planning on gifting money from the estate, they would first have to remove their income and consider it take-home pay. The owner would then pay State and Federal income taxes on their income. The business owner would thus have to pay 3 taxes or more, if minimum alternative tax, etc. were an issue as well, before getting their after-tax income. What if they could reduce them all with a legitimate expense?
How does a business owner usually reserve money for their life insurance policies inside their ILIT (irrevocable life insurance trust) used by some as a hedge to pay estate taxes that will be due at the time of death?
Again, the business owner would have to report the income and pay the appropriate taxes. Then, the owner would determine the best way to transfer their income into an irrevocable life insurance trust. One thing to be aware of is that since the income taxes would have been paid on the amount of take-home pay, the owner may also have to again deal with gift taxes later on.
Is there a more effective way to provide asset protection and defer taxes?
Additional methods can be used to transfer estate assets to reduce gift and estate taxes. Some possibilities include using Charitable Planning, using a depreciated Family Limited Partnership (FLP) and Sales to a Defective Trust. Each of these methods will help the owner reduce their estate and gift taxes. However, none of these mentioned methods will actually eliminate the income taxes that the business incurs.
CIC (Closely Held Insurance Company) Definition
A Closely Held Insurance Company (CIC) is a great tool for wealth building and it is actually an insurance company. The business owner can own the insurance company and the company will sell insurance to various people. In most cases, the business owner will sell insurance to himself via the CIC, creating legitimate income tax deductions for the business as well as gift and estate tax deferrals for his personal estate.
Can Closely Held Insurance Companies be used to transfer wealth and assets to heirs? How will these transfers be estate and gift tax free?
To answer this question, we will use an example of an individual business owner. Mr. Henry is 100% owner of his company which has successfully created an annual income of $200,000 of which he does not need to live on. He is married with four children. In total, including his company, he is worth $700,000 at the age of 57.
It is possible for Mr. Henry to employ a Closely Held Insurance Company to be owned by his children or the CIC could be owned by an Ultra Trust® irrevocable trust – an even better option. To do this, his company would buy between $10,000 and $600,000 in insurance from the CIC. Various types of coverage can be purchased. The premiums for the insurance would be paid by the company and would be considered a fully tax-deductible expense. The creation of a CIC would provide the following:
- Gift and Income Tax Deferral: The taxes would be deferred because he transferred the amount into a CIC that is an offshore account owned by the children or the Ultra Trust® irrevocable trust.
- Income Tax Deferral: He did not have to pay any income taxes because the money was not taken home.
- Asset Protection: Asset protection would be less of a concern because the money was transferred into the CIC and this means the money and assets are no longer in Mr. Henry’s name, but in the names of his children or the Ultra Trust® irrevocable trust.
In the event of an insurance claim, the money would be readily available because it is sitting in the CIC. Even though this is one of the main uses for the money, it is generally used as inheritance for heirs.
In many cases, a Closely Held Insurance Company is implemented to make any of the investment benefits that are amassed on the premiums as subject to taxes. There are a lot of clients who do not wish to pay the taxes due on the growth of the money in the CIC. Insurance is the way to avoid this. By having life insurance as a primary investment, capital gains taxes on growth can be avoided. Since the assets in the CIC are in offshore accounts, the funds will be asset protected.
Closely Held Insurance Companies can also act as a tool for transferring wealth. Again, the preferred tool to accomplish this is life insurance. This will come in handy when a business owner wants to transfer wealth to heirs.
What happens if the client needs to access money in the Closely Held Insurance Company?
Gaining access to the funds in a CIC can be a process, but if an LLC structure is being used, clients will have access to the majority of the cash in the account. There will be no taxes incurred when the money is removed and the process is 100% above board and legal. The LLC will invest in life insurance and the owner would have access to the cash value of the insurance policy.