Captive/CIC Presentation
- 1. Captive Insurance strategy 2009 marketing the captive benefits to the middle market Presented By: Fahad Karamat fahad@FinHRC.com 1
- 2. Introduction What is Strategic Tax Minimization? What is a “black letter law” tax exemption? What is a “tax shelter”? What is a “listed transaction”? What is a “safe harbor” ruling? 2
- 3. Total Commercial Risk Protection Market (2009) $ Billions Alternative market mechanisms cover about 30 percent ($98 billion) of the total commercial Commercial risk protection Insurance, $229B, market ($326.9 70% billion) Alternatives, $98B, 30% Source: Conning; MarketStance analysis; Insurance Information Institute. 3
- 4. Number of captives increased over 100% from 1989 to 2009. Today, over 6,500 captives, representing over $50 billion in premium dollars. 4
- 5. Insured Risk Captive Strategy: Transfer Uninsured Risk to ● Hidden Risks Workers Comp ● Property Auto ● General Liability Captive Uninsured Risk • Deductibles • Exclusions • Operating Risks • A/R Concentration • Construction Defect • Credit Default • Disability • Administrative Actions • D&O/E&O • Litigation Defense • Mold and Pollution 55 • Product Warranty
- 6. Captive Basic Structure Key Estate Plan Shareholders Shareholders Family Employees Trust Operating Entities Deductible Premiums Insurance Policies Captive Sub Sub Sub Sub Sub Up to $1.2 million in Annual Insurance Premiums (IRC 831(b)) Premiums deductible to the Business Premiums not taxable to 6 the Captive
- 7. Captive Benefits Wealth Accumulation Favorable Tax Treatment Control Risk Minimize Insurance Costs Wealth Preservation 7
- 8. IRC § 831(b) – Middle Market Solution Small property and casualty insurance company provision • If the company writes less than $1.2 Million in premium income, it will only pay taxes on its investment income. Shareholders $1.2 MM Premium – Tax Exempt Parent Captive Insurance Policies Company § 831(b) 8
- 9. Captive Pro-forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 10 Premium 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 Expenses (65,000) (42,000) (42,000) (42,000) (42,000) (42,000) Claims (120,000) (120,000) (120,000) (120,000) (120,000) (1,400,000) $ Available* 1,096,200 2,304,936 3,610,371 5,020,241 6,524,900 14,807,961 Net Benefit 522,200 1,147,736 1,869,971 2,696,641 3,636,100 10,265,161 *Available for claims, surplus, and distributions to shareholders; Assumes 40% personal / corporate tax rate, 8% investment return. For discussion purposes only. Actual results may vary significantly. 9
- 10. Who Qualifies? Business Owners: 1. With Requisite Insurance Risk 2. Makes Economic Sense 10
- 11. Sample Clients Developers General Contractors Subcontractors Manufacturers Professional Services Firms Franchisees Restaurant / Hotel Chains Hospitals / Physician Groups Transportation Other Middle Market Companies 11
- 12. How Do We Price the Premiums? ISO Rates (www.iso.com) Underwriters Actuaries Market quotes from independent carriers 12
- 13. The IRS and Captive Insurance What Constitutes Insurance? 1. Presence of Insurance Risk 2. Risk Shifting and Risk Distribution 3. Commonly Accepted Notions of Insurance 13
- 14. IRS “Safe Harbors” for Captives Three IRS Safe Harbor Rulings: Single Parent Captive Multiple Subsidiaries Group Captive As part of a captive feasibility study, the Captive Manager will analyze which IRS Safe Harbor is best for your business. 14
- 15. Estate Planning With a Captive Mom / Dad Child Trust Mom / Dad 1% 99% LLC Business Captive 15
- 16. Estate Planning With a Captive (Including Life Insurance) Mom / Dad Child Trust Mom / Dad 1% 99% LLC Business Captive Life Insurance 16
- 17. Protecting Assets Cr ed ti on ito r ti ga s Li Captive At to ts s eb s rn D ine e us ys B Wealthy businesses and owners are litigation targets Creditors have no legal claim on Captive’s assets Only Captive owner can make an insurance claim Captive structure creates independent wealth and investment diversification Foreign Captives may have extra layer of protection 17
- 18. Investment Structuring Parent Captive Loans LLC LLC LLC #1 #2 #3 Asset Asset Asset 18
- 19. Exit Strategies Salaries/Management Fees Dividends Liquidation C-Corp Upstream Merger Estate Planning 19
- 20. Turn-Key Captive Programs Structuring Formation Management Compliance Underwriting 20
- 21. Where is the Captive Formed? A WORD OF CAUTION With the introduction of the “Stop Tax Haven Abuse Act” of 2009, several formerly “friendly” jurisdictions for captive insurance are now identified as “off-shore secrecy jurisdictions”, to be scrutinized by the IRS as probable locations for US Tax evasion. The list includes such historically popular jurisdictions as: • Anguilla • St. Kitts and Nevis • Antigua and Barbuda • Costa Rica • St. Lucia • Aruba • Bahamas • Dominica • Turks and Caicos • Bermuda • British Virgin Islands • Cayman Islands As a result, we will ONLY consider US Domestic jurisdictions or US Territories for domiciles
- 22. Who is an Ideal Client? Good candidates Almost any business generally meet at type, including: least one of the • Contractors, following criteria: Developers, • Pre-tax profits of $1 Franchising million to $50 million • Healthcare, • Substantial self- Transportation, insured / uninsured Professional Services business risk • Manufacturing, • 50+ employees Distribution, Retail • Substantial traditional third-party insurance 22 expense
- 23. Captive Formation Captive Manager Will Handle All Aspects of Forming the Captive: • Initial Analysis and Feasibility Study • Domicile Selection and Applications, including business plan and pro forma financial preparation • Design and implementation of Captive ownership structure • Coordinate initial capitalization, including brokerage accounts • Maintenance of proper corporate records • Underwrite and draft insurance policies • Prepare and obtain approval for regulatory filings • Payment of regulatory fees • Corporate formation; payment of formation fees 23
- 24. Compliant Captive Management Captive Manager Will Provide Turn-Key Management of the Captive • Captive Manager assigned as contact point for all issues • Annually underwrite and draft insurance policies • Prepare regulatory filings for your review and approval • Ongoing work with domicile’s Supervisor of Insurance, the IRS, and other regulatory authorities • Accounting: Prepare quarterly financial statements, bank reconciliation, document and monitor account activity • Solvency margin analysis and loss reserve analysis • Prepare tax return for Captive • Arrange for unrelated insurance • Arrange reinsurance as necessary • Monitor ongoing regulatory changes • Consult with Captive owners regarding proper investment structuring • Maintenance of corporate records • Arrange and coordinate an independent audit if required by the domicile • Pay all regulatory and audit fees • Loss handling/claims processing 24 • Captive liquidation and winding up activities
- 25. What’s Next? 1. Client or Advisor to Complete Questionnaire 2. Captive Manager will Provide Feasibility Analysis 3. Client and Advisors to Discuss with Captive Managers. 4. Sign Engagement Letter to Form Captive 25
- 26. Domestic and U.S. Territory Captives “Turn Key” Captive Management For More Information Contact: Fahad Karamat fahad@FinHRC.com Legal Disclaimer: The information herein is for educational use and is not a substitute for competent legal, tax and business advice as it relates to the formation and ongoing operations of captive insurance companies. IRS Circular 230 Required Notice--IRS regulations require that we inform you as follows: Any U.S. federal tax advice contained in this communication is not intended to be used and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matters. 26