Scott Hamilton, CEO of InKnowVision, will discuss the use of captive insurance companies for estate planning, business tax planning, risk management and income tax benefits. All of these benefits can be substantial for the right company. As a CPA, attorney or financial advisor you will want to learn about captive insurance planning to help your clients reduce their tax liability, transfer more wealth out of their estate, manage risk, and much more. This program is ideal for those who wish to reach the HNW market and those who have business clients with gross revenues of $10M and higher.

1. InKnowVision’s Monthly
HNW Webinar Series
Technical Webinar
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2. ©2013. InKnowVision LLC. All rights reserved.
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3. InKnowVision.com
 Process Brochure
 Periodic Table
 Sample Plans
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4. Agenda
 Benefits
 Business Owner Profile
 Case Study
 Formation
 Taxation
 Application
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5. Benefits
 Wealth accumulation
 Favorable tax treatment
 Minimize/reduce insurance costs
 Customize risk coverage
 Increased cash flow
 Wealth preservation
 Asset protection
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6. Profile Client
 Successful business or profession
 Has uninsured risk
 Has insured risk willing to self insure
 Gross revenue - $10M or more
 Taxable income and free cash of at least $500k or
more
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7. Profile Client
 Developers
 General Contractors
 Subcontractors
 Manufacturers
 Professional Services Firms
 Franchisees
 Restaurant / Hotel Chains
 Physician groups
 Hospitals
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8. Case Study
 Manufacturing company (C Corp)
 $35M sales
 Operations in and out of the US
 300 employees
 Net profit - $4.5M annually
 Significant insurable risks
 Estimated premium to insure all risks totals $2M
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9. Captive Formed
 Captive formed
 Insurance coverage selected and written by captive
 Captive makes 831(b) election
 Premium paid $1.2M
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10. Income Tax Year 1
 Deduction to manufacturing company
 Saves approx. $400k in income tax
 Captive has no taxable income on premium received
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11. Income Tax Year 2
 Deduction to manufacturing company
 Saves approx. $400k in income tax
 Captive has some taxable income
 Premium is non-taxable (if less than $1.2M)
 Investment income on reinvested underwriting profit is
taxable
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12. Process - Qualification
 Financial qualification
 Risk assessment
 Cost - benefit analysis
 Decision to proceed or not
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13. Process - Implementation
 Engage manager
 Underwriting review and report
 Actuarial analysis and pricing of risk
 Risk coverage selection
 Formation, capitalization and licensing
 Premium payment
 Policy issue
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14. Process - Time
 Evaluation and decision making: 2-6 weeks
 Implementation: 6-8 weeks
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15. Captive Insurance Companies
 Insurance company
 Formed to insure risk
 Liability
 Operating Risks
 Business Risks
 Exclusions
 Deductibles
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16. Captive Jurisdictions
 Utah
 Nevis
 Nevada
 Anguilla
 Vermont
 Bermuda
 Kentucky
 Delaware
 District of Columbia
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17. Types of Captives
 Pure Captive – Single Family House
 Risk reinsurance
 Cell Captive – Apartment Building
 Less expensive
 (Revenue Ruling 2008-8) Uses the 12 or more subsidiary safe
harbor (Rev. Rul. 2002-90)
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18. Types of Captives
 Single Parent Captive
 Group Captive
 Homogeneous – same industry
 Heterogeneous – multiple industries
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19. Types of Captives
 Foreign corporations taxed as US taxpayer
 Foreign corporation not taxed as US taxpayer
 CFC’s and 50% or more US shareholders
 US Shareholder means at least 10% ownership
 CFC’s and less than 50% US shareholders
 Domestic companies – US taxed
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20. Capital Required
 Statutory Requirements
 $125k Cayman
 $10k Anguilla
 $35k Nevis
 $250k Vermont and Delaware
 $200k Nevada
 Other Requirements
 Amount of coverages and premiums
 History of claims
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21. Tax Issues
 Premium deductibility by US taxpayer
 Ordinary and necessary
 Real insurance – Helvering v. Le Gierse, 312 U.S. 531 (1941)
 Risk distribution
 Risk shifting
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22. Real Insurance
 Risk sharing (spread risk over a number of insured)
 Harper Group v Commissioner (1991) 96 TC 45 – 30% OK
 Rev. Rul. 2002-89 - less than 50% OK
 Pooling – Reinsurance
 Actual exposure to risk of loss
 Risk shifting – move the risk off of the balance sheet
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23. Reinsurance Pool
Company
1
Company Company
9 2
Company Company
8 3
Reinsurance
Pool
Company Company
7 4
Company Company
6 5
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24. Tax Issues
 Income to the captive
 If captive is a:
 Foreign corporation and not a CFC – no US tax
 But 4% excise tax if writing domestic business
 CFC or 953(d) company – US tax (unless 831(b) election)
 Domestic company – US tax (unless 831(b) election)
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25. 953(d) Election
 Election by non-US company to be taxed as a US
company
 No excise tax on insurance premiums
 Can own US real estate
 Company files US tax return as if domestic company
 Reduced filing requirements
 Company must post LOC equal to 10% of gross income or have
assets in the US equal to that amount
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26. 953(d) Election
 Election to be treated as US company
 Waive all treaty benefits
 File US tax returns
 Disclose all shareholders
 Name POA in US to receive notices
 Maintain an office in US
 Have assets in US equal to 10% of captive income
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27. 831(b) election
 For small insurance companies including captives
 Companies making the election can exclude up to
$1.2M in net premium
 In lieu of reserve calculation requirement
 Must pay tax on investment income
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28. Distributions from Captives
 Distributions are taxable when paid out from the
captive (pure or cell)
 Taxable as dividends
 May be a favorable rate
 If company is sold in stock or stock redemption, then sale
proceeds are taxed at capital gains rates
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29. Planning Ideas
 Captives may be often owned by their parent
 Captives may have one or more owners
 Captives do not have to be owned by a parent
company
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30. Planning Ideas
Captive
Client
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31. Planning Ideas
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32. Planning Ideas
Captive
Trust for Underwriting profit passes gift
children/grand tax and GST tax free to trust
children
and its beneficiaries
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33. Planning Ideas
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34. Planning Ideas
Captive
Client Trust
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35. Key Employees
 Have stock owned by key employees
 Can have vesting
 Buy out/redemption provisions
 Underwriting profits benefit loyal and productive key
employees
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36. Asset Protection
 Transfer for adequate consideration
 Fraudulent conveyance laws
 Ownership by trust
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37. Costs
 Pure Captive
 $80,000-$190,000 in year of formation
 $72,000-$115,000 in subsequent years
 Fee is also related to premium (pool costs)
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38. Questions or Comments?
Scott Hamilton, CEO
InKnowVision, LLC
www.inknowvision.com
630-596-5090 x80
(630) 596-5090 www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC