Captive Insurance Buyer Beware
By
Lance Wallach, CLU, CHFC
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Lance Wallach, CLU, CHFC
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Is a captive insurance cell the way to go? - Accounting
Today - Captive Insurance: Achieve large tax and cost reductions by renting a
“CAPTIVE”. Most accountants and small business owners are unfamiliar with a
great way to reduce taxes and expenses. By either creating or sharing “a
captive insurance company”, substantial tax and cost savings will benefit the
small business owner.
Today - Captive Insurance: Achieve large tax and cost reductions by renting a
“CAPTIVE”. Most accountants and small business owners are unfamiliar with a
great way to reduce taxes and expenses. By either creating or sharing “a
captive insurance company”, substantial tax and cost savings will benefit the
small business owner.
Over 80% of Fortune 500 companies take advantage of
some kind of captive insurance company arrangement. They set up their own
insurance companies to provide coverage when they think outside insurers are
charging too much, or coverage is simply unavailable. The parent company
creates a captive so that it has a self-financing option for buying insurance.
The captive then either retains the risk of providing insurance or pays
reinsurers (companies that reinsure insurers) to take the risk.
If you buy insurance from a standard insurance company, your money buys a
service, but the money is spent and gone forever. When you utilize or “rent a
captive”, your money buys a service but it is invested with a good possibility
of a return.
In the event of a claim, the company pays claims from its captive or from its
reinsurer. To keep costs down, captives are often based in places where there
is favorable tax treatment and less onerous regulation (i.e. Vermont, South
Carolina, and Bermuda).
Optimum utilization of a captive by a small business, medical practice, or
professional.
The best way for a small business, medical practice, etc., to take advantage of
captive benefits is to share or rent a large captive. You can significantly
decrease your costs of insurance and obtain tax deductions at the same time.
There are, as well, significant tax advantages to renting a large captive as
opposed to owning a captive.
The advantages of “renting a captive” become apparent when you consider that
the single parent captive may be forced to use less than adequate standards or
marginal service so they can meet the financial requirements associated with
the initial general licensing and administrative costs of establishment.
Additionally, when renting a large captive, the captive bears the burden of
initial capital commitment and protects reinsurers from runaway claims and
unnecessary losses through their underwriting protocols and claims management
practices, all at significant savings to the small business owner.
Other advantages include low policy fees and no capital responsibilities to
meet solvency requirements or annual management and maintenance costs. By
renting a large captive, you only pay a pro rata fee to cover all
administrative expenses for the captive insurance company. Another significant
advantage of renting a large captive is the ability to take a loan. It is
illegal for an individual captive to make loans to subscribers. When renting a
large captive, however, the individual subscriber has no ownership interest,
and this difference makes it legal for a rented captive to make loans to
individual subscribers. So you can make a tax deductible contribution, and then
take back money tax free. Operation of an individual stand alone captive
insurance company may not achieve the type of cost savings that a small
business could obtain by renting a large captive. To rent a large captive, your
company simply fills out some forms. Renting a captive requires no significant
financial commitment beyond the payment of premiums.
Buyer Beware
As with many strategies to enjoy tax savings and advantages, you must to do
this correctly. IRS and other problems have happened, in the past, to those
that have done this improperly or abusively. You probably want to work with a
large captive that already has over fifty million in assets and is being rented
by at least 200 different companies. Also, you’ll not want to own or control
any part of the captive. As an unrelated party, you can more likely
significantly decrease your cost of insurance, eliminate capital requirements,
and minimize maintenance costs.
You want to deal with a large captive that meets the risk shifting requirements
of IRS Revenue Ruling 2005-40. Be cautious about setting up your own small
captive. In addition to all the costs, a small captive may find that the
expense of defending itself from regulatory oversight is much greater than any
benefits received.
Lance Wallach, National Society of
Accountants Speaker of the Year and member of the AICPA faculty of teaching
professionals, is a frequent speaker on retirement plans, abusive tax shelters,
financial, international tax, and estate planning. He writes about
412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more
than ten conventions annually, writes for more than 50 publications, is quoted
regularly in the press and has been featured on television and radio financial
talk shows including NBC, National Public Radio’s “All Things Considered” and
others. Lance has written numerous books including “Protecting Clients from
Fraud, Incompetence and Scams,” published by John Wiley and Sons, Bisk
Education’s “CPA’s Guide to Life Insurance and Federal Estate and Gift
Taxation,” as well as the AICPA best-selling books, including “Avoiding
Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.” He
does expert witness testimony and has never lost a case. Contact him at
516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
some kind of captive insurance company arrangement. They set up their own
insurance companies to provide coverage when they think outside insurers are
charging too much, or coverage is simply unavailable. The parent company
creates a captive so that it has a self-financing option for buying insurance.
The captive then either retains the risk of providing insurance or pays
reinsurers (companies that reinsure insurers) to take the risk.
If you buy insurance from a standard insurance company, your money buys a
service, but the money is spent and gone forever. When you utilize or “rent a
captive”, your money buys a service but it is invested with a good possibility
of a return.
In the event of a claim, the company pays claims from its captive or from its
reinsurer. To keep costs down, captives are often based in places where there
is favorable tax treatment and less onerous regulation (i.e. Vermont, South
Carolina, and Bermuda).
Optimum utilization of a captive by a small business, medical practice, or
professional.
The best way for a small business, medical practice, etc., to take advantage of
captive benefits is to share or rent a large captive. You can significantly
decrease your costs of insurance and obtain tax deductions at the same time.
There are, as well, significant tax advantages to renting a large captive as
opposed to owning a captive.
The advantages of “renting a captive” become apparent when you consider that
the single parent captive may be forced to use less than adequate standards or
marginal service so they can meet the financial requirements associated with
the initial general licensing and administrative costs of establishment.
Additionally, when renting a large captive, the captive bears the burden of
initial capital commitment and protects reinsurers from runaway claims and
unnecessary losses through their underwriting protocols and claims management
practices, all at significant savings to the small business owner.
Other advantages include low policy fees and no capital responsibilities to
meet solvency requirements or annual management and maintenance costs. By
renting a large captive, you only pay a pro rata fee to cover all
administrative expenses for the captive insurance company. Another significant
advantage of renting a large captive is the ability to take a loan. It is
illegal for an individual captive to make loans to subscribers. When renting a
large captive, however, the individual subscriber has no ownership interest,
and this difference makes it legal for a rented captive to make loans to
individual subscribers. So you can make a tax deductible contribution, and then
take back money tax free. Operation of an individual stand alone captive
insurance company may not achieve the type of cost savings that a small
business could obtain by renting a large captive. To rent a large captive, your
company simply fills out some forms. Renting a captive requires no significant
financial commitment beyond the payment of premiums.
Buyer Beware
As with many strategies to enjoy tax savings and advantages, you must to do
this correctly. IRS and other problems have happened, in the past, to those
that have done this improperly or abusively. You probably want to work with a
large captive that already has over fifty million in assets and is being rented
by at least 200 different companies. Also, you’ll not want to own or control
any part of the captive. As an unrelated party, you can more likely
significantly decrease your cost of insurance, eliminate capital requirements,
and minimize maintenance costs.
You want to deal with a large captive that meets the risk shifting requirements
of IRS Revenue Ruling 2005-40. Be cautious about setting up your own small
captive. In addition to all the costs, a small captive may find that the
expense of defending itself from regulatory oversight is much greater than any
benefits received.
Lance Wallach, National Society of
Accountants Speaker of the Year and member of the AICPA faculty of teaching
professionals, is a frequent speaker on retirement plans, abusive tax shelters,
financial, international tax, and estate planning. He writes about
412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more
than ten conventions annually, writes for more than 50 publications, is quoted
regularly in the press and has been featured on television and radio financial
talk shows including NBC, National Public Radio’s “All Things Considered” and
others. Lance has written numerous books including “Protecting Clients from
Fraud, Incompetence and Scams,” published by John Wiley and Sons, Bisk
Education’s “CPA’s Guide to Life Insurance and Federal Estate and Gift
Taxation,” as well as the AICPA best-selling books, including “Avoiding
Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.” He
does expert witness testimony and has never lost a case. Contact him at
516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
The information provided herein is not intended as legal,
accounting, financial or any type of advice for any specific individual or
other entity. You should contact an appropriate professional for any such
advice.
accounting, financial or any type of advice for any specific individual or
other entity. You should contact an appropriate professional for any such
advice.
While every effort has been made to ensure the accuracy
of this publication, it is not intended to provide legal advice as individual
situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related
topics, please contact the author.
of this publication, it is not intended to provide legal advice as individual
situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related
topics, please contact the author.
Plan,Bisys,Creative Services Group,Sterling Benefit Plan,Compass 419,Niche 419,CRESP,Sea Nine Veba, American Benefits Trust, National Benefit Plan and Trust, ABT, Professional Benefits TrustBenistar 419 Plan, Millennium 419 Plan,Bisys 419,Creative Services Group 419 Plan,Sterling Benefit 419 Plan,CRESP 419,Sea Nine Veba 419, National Benefit Plan and Trust 419, American Benefits Trust 419,ABT 419,Old Mutual"Grist Mill Trust" "Penn Mont" "Real Veba" "United Financial Group" "Kenny Hartstein" "Millennium Plan" Kenny Hartstein" "Millennium Plan" "John Koresko" "captive insurance" cresp "Ridge Plan" "Professional benefits Trust" "PBT " "Professional Planning Associates" "National Pension Associate" "NPA"Dennis Cunning, Steve Toth, Michael Sonnenberg, Larry Bell, Scott Ridge, Randall Smith, Greg Roper, Tracy Sunderlage, Heritage Plan, Warren Trust,Joseph Donnelly, "Insurance fraud""pension and benefit plan fraud""insurance company fraud""ECI Pension Services""Norm shelter fraud" "tax shelter scam" "expert witness irs" veba "expert w
ReplyDeletePlan,Bisys,Creative Services Group,Sterling Benefit Plan,CompassMutual419, Guardian 419, Amerus 419, Wells Fargo 41 benefit plans" "lance wallach" "6707A" "captive insurance" "tax shelter fraud" "section 79""tax letter" "irs letter" "irs letters" "irs determination letter" "419 plan help" 412i 6707a "form 8886" "listed transactions" "abusive tax shelter assistance" "insurance scam" "retirement plan fraud" "life insurance fraud" "life insurance scam" "health insurance scam" health insurance fraud" "tax shelter fraud" "tax shelter scam" "expert witness irs" veba "expert witness services" "Grist Mill Trust" Benistar "SADI Trust" "Beta 419" "Millennium Plan" Bisys "Creative Services Group" "Sterling Benefit Plan" "Compass 419" "Niche 419" CRESP "Sea Nine Veba" "419 plan" 412i 419e "expert witness insurance fraud" "welfare benefit plans" "419 plan help" "expert witness irs" "Lance Wallach" "419 plan help" "412i plan help" "tax resolution services" "irs problem solvers" "form 8886" 6707a "irs letter" "abusive tax shelters" "abusive tax shelter" "listed transactions" "listed transaction" "8886 help" "expert witness" "life insurance expert" "tax expert" "irs audit defense" "abusive tax shelter help" "tax letter" "irs letter" "irs letters" "irs determination letter" 419e 412i 6707A "form 8886" "listed transactions" veba "expert witness services" "abusive tax shelter help" "Grist Mill Trust" "Penn Mont" "Real Veba" "United Financial Group" "Kenny Hartstein" "
ReplyDeletehow a plan sponsor for a 419 plan distributed life insurance policies that were found to be taxable.
ReplyDeleteTOPIC: Court Rules That Section 419A(f)(6) Plan Sponsor Made Taxable Distribution of Life Insurance Policies
CITES: Gluckman v. Comm'r, No. 13-761, 2013 WL 6124391 (2nd Cir. Nov. 22, 2013); Gluckman v. Comm'r, T.C.M. 2012-329, 2012 WL 5951351 (T.C. Nov. 28, 2012); I.R.C. § 419A(f)(6) (2012); I.R.C. § 6662(b)(2) (2012); Schwab v. Comm'r, 111 AFTR-2d 2013-667 (9th Cir. 2013).
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SUMMARY: The Second Circuit upheld a Tax Court decision that the insured taxpayers, a husband and wife, received a taxable distribution of life insurance policies from a Section 419A multi-employer welfare benefit plan. The court found in favor of the IRS even though the policies were transferred directly to a second welfare benefit pl