2020 Year-End Tax Guide

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WHEN IS A CAPTIVE APPROPRIATE? A captive can be a viable solution for insurance cost savings when the following requirements are met:

SUMMARY In establishing a captive, to avoid these issues, owners should engage a consultant with expertise in insurance and actuarial operations. In many cases, a company interested in starting a captive can achieve significant cost savings by instead joining an industry or association captive that is already formed. If a captive is set up and managed correctly, it is possible for a company to lower its insurance premiums. Eventually, upon the dissolution of the business, the owners can reclaim any funds remaining after paying claims. The related captive has a difficult, but not impossible task, meeting the above requirements. However, with the right counsel and planning, the related captive can provide insurance to its related company and end the year with a non-taxable profit.

The captive has a real risk of loss from claims.

X

There is a shift of risk from the company to the related captive.

X

X The risk is distributed among all members of a group, association or industry captive. The captive behaves like an insurance company. A properly formed and managed captive insurance company can provide a client company with significant cost savings and benefits. Risks of a defective captive occur when premiums are significantly larger than they would be if the coverage were purchased from an unrelated commercial insurance company; the premiums are not paid consistently; or when there is no actuarial analysis in setting premiums. The management of the captive can come into question should the captive not conform with the laws of the jurisdiction in which it is incorporated, or if there is not sufficient capital to assume the risk of claims. The captive’s assets should not include any type of illiquid assets not normally held by an insurance company. Also, there should be no “transactions of interest” with the owners of the captive. Typical transactions of interest include financing by or loans to an owner, as the captive can’t be treated as the company or owner’s “piggy bank.” X