Captive Insurance and Other Tax Reduction Strategies –
The Good, Bad, and Ugly - By Lance Wallach May 14th
Every accountant knows that increased cash flow and cost savings are critical for
businesses. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices
designed to reduce the cost of providing employee benefits while increasing their own
retirement savings. The solutions ranged from traditional pension and profit sharing
plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as
vehicles to bring about benefits. Unfortunately, the high life insurance commissions
(often 90% of
the contribution, or more) fostered an environment that led to aggressive and
noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter
promotion. For unknowing clients, the tax consequences are enormous. For their
accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called
Captive Insurance. These so called “Captives” are typically small insurance companies
designed to insure the risks of an individual business under IRS code section 831(b).
When properly designed, a business can make tax-deductible premium payments to a
related-party insurance company. Depending on circumstances, underwriting profits, if
any, can be paid out to the owners as dividends, and profits from liquidation of the
company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and
manage. Also, captives are allowed to garner tax benefits because they operate as real
insurance companies. Advisors and business owners who misuse captives or market
them as estate planning tools, asset protection vehicles, tax deferral or other be
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