February 10, 2022

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Unsure how to set up your captive insurance company structure? Luckily, there is a typical structure to follow.
As a reminder, a captive insurance company is a business that sets up its own insurance to cover its own risks, and the majority of captive insurance companies are structured in a certain way. The primary captive insurance structure is a C-corp, or an LLC that is taxed as a C-corp. A c-corp (C corporation) is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity
So the main point is that the business must be a separate entity from the captive insurance company. Broken down further, a typical capture insurance structure looks like this:
The business, which is on top, pays a premium to the captive insurance company. The captive insurance company is in the middle. When dividing dividends, it goes to the shareholders. Shareholders are the ones who own the captive insurance company, and in the vast majority of cases, the shareholders of the captive insurance company are the same shareholders as the original business.
Regardless of the structure chosen, there are some basics common to all captive insurance structures. One of these is the participation of a risk-sharing partner or traditional insurer. Risk-sharing partners offer such necessary and desirable services as certification of coverage and limits, reinsurance, loss control, and mitigation, claims reserving, adjustment, and oversight, risk management, and underwriting and regulatory response and assistance. This often-overlooked service has become one of the most valuable services offered by insurers to captive insurance companies today.
When a business needs to establish a captive insurance company, it must carefully choose a risk-sharing partner, as providing certificates to outside parties is usually a material service.
The rules around captive insurance company structure have changed within the last few years. The Protecting Americans from Tax Hikes (PATH) Act was legislation issued in 2017. The law changed how captive insurance companies could be structured. Before the PATH Act, the business owners and the captive insurance company owners could have been separate people. Sometimes, you have captive insurance management partners and a patriarch or matriarch controlling the top-level business. This was commonly seen in families. This allowed parents to get money past the estate and gift tax line to their children.
The IRS did not accept this as a legitimate means of intergenerational wealth transfer. The PATH Act was created to protect taxpayers and their families against fraud and permanently extend many expiring tax laws. Under the law, the children, spouses, or other descendants of the business owners can own up to 2% of the captive insurance company. Capital insurance arrangements are typically deductible, so there is still a tax benefit.
New captive structures are being created every day, and a diverse approach will benefit the whole industry. However, any structure must ultimately reflect the information above.
Click the link to start the assessment:
https://www.riskmgmtadvisors.com/captive-insurance-fit-assessment
The contents of this article are for general informational purposes only and Risk Strategies Company makes no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information contained herein. Any recommendations contained herein are intended to provide insight based on currently available information for consideration and should be vetted against applicable legal and business needs before application to a specific client.
Wesley Sierk is a recognized authority in the realm of captive insurance company design and management. As Managing Director and Lead Strategist for Risk Management Advisors, Inc., he possesses an unmatched track record that spans nearly 30 years, with a focus on empowering profitable, closely held businesses. Wesley's expertise isn't just limited to consultation; he's profoundly adept at strategic implementation. He has partnered with leading homebuilders, real estate developers, manufacturing enterprises, and professionals in sports and entertainment, providing them with unparalleled insights and solutions. A hallmark of Wesley's career has been his unwavering commitment to his education. He holds esteemed designations like the Chartered Financial Consultant (ChFC) and Chartered Life Underwriter, both awarded by the American College since 1996. Further amplifying his credentials is the CRIS (Construction Risk and Insurance Specialist) recognition, secured in 2006. Notably, he's among the rare individuals globally to have earned the Associate in Captive Insurance (ACI) designation, a testament to his profound understanding of the subject. Beyond his direct work with clients, Wesley takes immense pride in working hand-in-hand with other professionals, including CPAs, Attorneys, and Financial Advisors. This collaborative approach ensures thorough due diligence and optimal plan design implementation. An accomplished author, Wesley has penned critical works like Taken Captive: The Secret to Capturing Your Piece of America's Multi-Billion Dollar Insurance Industry and You Can Make It, But Can You Keep It?. The latter serves as a guiding light for the affluent, teaching them strategies to preserve their hard-earned assets. In the realm of speaking engagements, Wesley is a coveted name. Whether it's insurance industry gatherings or legal and accounting symposiums, he's regularly called upon to demystify the intricate dance between traditional insurance markets and the potential of captive insurance entities. Under Wesley's leadership, Risk Management Advisors remains a beacon of innovation, committed to elevating clients' financial well-being and mitigating risks in an ever-evolving landscape. He is married to Leslie and has two 'not so young' children. Their son is attending the University of Tennessee studying entrepreneurship and risk management. While their daughter finishes up her high school years. They love to travel, golf, cook and hike with their two huge dogs.