A captive insurance company provides risk-mitigation services for its parent company. Captives are also increasingly being used by the owners of closely held businesses, a variation referred to as ‘wealth captives.’ According to the New York Times and National Association of Insurance Commissioners, at least 30 states have legislation favorable to captive groups with Vermont being the state most favored for setting up a captive insurance company. With the Affordable Care Act now law, many small and middle sized companies are considering a captive insurance company for their health care needs.
One of the biggest benefits of a captive insurance company is the tax savings. The operating business can deduct, and the captive can receive tax free, up to $1.2 million a year. IRC Section 831(b). Also, when the amount of money the captive insurance company pays out in claims is less than its assets, the difference can be returned to the parent company in the form of dividends, which are taxed at a lower rate than income. In a wealth captive, the profits are returned to the owner of the captive which might be dynasty trust for the benefit of the heirs of the owners of the operating business.
Another benefit of a captive insurance company comes with estate planning. If a business owner creates the captive insurance company in the name of the owner’s heirs, the captive could also be a vehicle to transfer money to the heirs free of gift and estate taxes. The IRS will look unfavorably on the captive if the money in the captive is used primarily to buy life insurance that benefits the heirs.
Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.