Tuesday, December 8, 2015

Fake Captives | Stacey Arenas | LinkedIn

fake captives | Stacey Arenas | LinkedIn

1 comment:

  1. Photo Courtesy of
    Much has been written about the financial and tax power of forming and operating a captive insurance company that qualifies for the tax benefits of section 831(b) of the Internal Revenue Code. But all too often, promoters of this concept forget that each captive must be first and foremost a risk management tool with legitimate risks and properly priced premiums.
    An “831(b)” captive is an insurance company whose premiums do not exceed $1.2 million a year and that elects to have those premiums exempted from taxation. If the captive has proper “risk distribution” (a topic for another article), then the insured company can deduct the premium being paid to the captive, while the captive pays no income taxes on that premium. After the payment of losses and expenses, any profits in that captive can be distributed at a favorable dividend rate or can be distributed in a full liquidation of the captive, and the shareholders will receive those accumulated profits at capital gains rates. And if the captive is owned by trusts or adult children, the entrepreneur can also enhance the benefits in his or her estate plan by sidestepping the estate tax.
    But these benefits are only possible if you first get the underwriting right. Over the years, we have conducted audits on existing 831(b) captives formed by some of our competitors. We have been amazed by what people are charging for risks, many of which can be insured in the traditional insurance market at much lower rates. We call it “underwriting by the blind.” The IRS is well aware of the pricing abuses in our industry. As we understand it, the majority of negative audits recently have not been because of faulty “risk distribution” mechanisms, but because of badly overpriced premiums being paid to the captive.

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