Over the past 20 years, many small businesses have begun to provide their own risk with a product called "captive insurance." Small captivity (also known as single-parent captives) are insurance companies established by entrepreneurs family wants to ensure that the risks are too expensive or difficult to obtain in the traditional insurance market. Brad Barros, expert in the field of captive insurance, explains that "all prisoners shall be treated as a corporation and must be treated in a manner that is in accordance with the rules on both the IRS and the appropriate regulator of insurance."
According to Barros, exile some parents are often owned by the trust, company or other structure shall be determined by the payer of the premium or his family. When properly designed and operated, the company can make a tax-deductible premium payments related to your insurance company. Depending on the circumstances, the benefits of a subscription, if necessary, can be given to the owners of dividends and liquidation of the company profits can be taxed on capital gains.
associates and their captives can reap tax benefits when the prisoner acts as a real insurance company. Alternatively, consultants and entrepreneurs who use the prisoners as a tool for planning, asset protection vehicles, deferral of tax or other benefits that are not related to the true purpose of the subject of the insurance company can deal with serious regulatory and tax consequences.
Many often captive insurance companies by US companies are formed in jurisdictions outside the United States. The reason for this is that foreign jurisdictions offer lower costs and greater flexibility than their American counterparts. In general, US companies may use insurance companies headquartered abroad, provided that the jurisdiction in accordance with the law governing insurance appropriate Internal Revenue Service (IRS).
There are some significant foreign jurisdictions whose insurance regulations are recognized as safe and effective. This includes Bermuda and St. Lucia. Bermuda, while more expensive than other countries, there are several major insurance companies in the world. St. Lucia, place more reasonably priced for small captives, the outstanding laws that are progressive and consistent time. Saint Lucia is also recognized recent approval of the law "Incorporated cell", modeled on similar laws in Washington, DC.
Joint custody abuses insurance; While prisoners are still very useful for many businesses, professionals have started to hurt badly and the use of these facilities in the market for purposes other than those provided for by Congress purposes. Abuses include the following:
1. Travel undue risk and risk sharing, also known as "zero-risk groups"
2. High refuse arrangements grouped into slavery; Re ensure captors life insurance provides variable accommodation
3rd Improper Marketing
4. Integration of inadequate life insurance
Compliance with the high standards imposed by the IRS and regulatory bodies can be complex and expensive proposition and should be done with the help of a competent and experienced lawyer. The consequences of withdrawal insurance can be devastating and can include the following sanctions:
1. The loss of all deductions on premiums received by the insurance company
2. Loss of all deductions to pay a premium
3rd Forced distribution or liquidation of all assets of an insurance company to an additional tax on capital gains or dividends
Fourth potential adverse tax treatment as a controlled foreign company
5th unfavorable tax treatment of potential foreign holders of personal business (TOU)
6th potential regulatory sanctions jurisdiction insurers
7. potential penalties and interest imposed by the IRS.
However, the tax consequences can be greater than 100% of the premium paid prisoners. In addition, lawyers, consultants CPA heritage and its clients can be treated as a tax shelter promoters by the IRS, causing fines are large as $ 100,000 or more per transaction.
Obviously, the creation of captive insurance company is not something to take lightly. It is essential that companies seeking to establish a captive operation with competent lawyers and accountants who have the knowledge and experience necessary to avoid problems associated with violent structures or poorly designed security. The general rule is that the captive insurance product must have a legal opinion on the essential elements of the program. It is known that the opinion must be provided by an independent firm of lawyers, regional or national.
Dunas potential for abuse and risk sharing; The two key elements of insurance insured risk for other (risk of crowding out) movement, and then spread the risk among the pool (risk diversification) of the insured. After years of litigation, in 2005, the IRS issued a tax resolution (2005-40), which describes the essential elements required to meet the changing needs and risk sharing.
For those who are self-insured, the use of structures Rev. captive approved Resolution 2005-40 has two advantages. First, the parent does not have to share the risks with any other party. In 2005-40 the decision, the IRS announced that the risks can be shared in the same economic family providing independent affiliates (minimum 7) resulting from non-tax business reasons, and that the separation of these subsidiaries and business reason. In addition, the "risk distribution" is always given when the insured subsidiary has provided more than 15% or less than 5% of the premium in captivity. Second, the specific provisions of the Insurance Act which detainees to obtain immediate deduction for estimated future losses, and in some cases, shelter investment income reserves, reduced the rate needed to fund the cash requirements of the future about 25% to about 50%. In other words, a well-designed as slaves, which meets the requirements of 2005-40 could result in savings of 25% or more.
Although some companies can meet the requirements within their own group of related persons 2005-40, private equity firms, on the other hand can not. Thus, it is common for prisoners to buy "risk third" other insurance companies, often from 4% to 8% per year in the amount of coverage that you need in order to meet the requirements of the IRS.
One of the essential elements of risk of buying is that there is a reasonable probability of loss. Due to this exposure, some developers have tried to circumvent the intent of arrival Resolution 2005-40, directing their customers at risk of false. "In this common scenario of something, lawyer or any other promoter will have 10 or more prisoners of their customers to enter a collective agreement a joint venture. Included in the contract is written or unwritten agreement not to make statements about the pool. Customers like this arrangement because get all the tax benefits of having a captive insurance company without the risks associated with insurance. Unfortunately, for these companies, the IRS considers these contracts as private insurance.
since they are considered agreements ensuring that risks are unfounded and should be avoided at all costs. They amounting to nothing more than the famous pre-tax savings account. If you can prove that the group risk is fine protection captivates tax status be denied, and apply serious tax implications described above.
It is known that the IRS considers the agreement between the owner captured with great suspicion. The gold standard in the industry buys the risk of a third party insurance company. All, but it opens the door to possible catastrophic consequences.
High deductibles; derogatory Some developers sell slaves and their captives then participate in a pool of risks with a high deductible. Most of the fall in tax deductible losses and get paid for it, not the pool in captivity risk.
These promoters can advise their clients, because the franchise is so high that there is a real risk of claims by third parties. The problem with this arrangement is that the franchise is so high that the prisoner does not meet the standards of the IRS. In captivity more like a sophisticated system of pre-tax savings account: not the insurance company.
A particular problem is that customers can be informed that they can deduct all premiums paid to pool risk. In the event that the risk pool has little or no protest (against the captives accumulated by participants who use large losses), assigned risk pool premiums are simply too high. If complaints, then the premium to be reduced is not present. In this scenario, if challenged, the IRS denied the deduction by the pool unnecessarily affected gross risk captive's. The IRS also be treated as slaves as more than just insurance companies, because they do not meet the standards in 2005-40 and previous related resolutions.
Reinsurance intends variable life private accommodation; Over the years, developers have tried to create a mounting solution designed to duty-free benefits of abusive tax or "exit strategies" from the captives. One of the most popular diets is when a company or work with a captive insurance company, and is related to reinsurance premiums proportional to the risk of re-assurances.
In general, the reinsurer is a property of life foreign insurance company. The legal owner of the station is a reinsurance company owned by a foreign insurance against accidents is not paid income tax in the United States .. practically owned reinsurance company can be attributed to the cash value of life insurance policy with an insurance company issued alien life principal owner of the company or related parties, and that this principle guarantees the owner or similar entertainment.
1st IRS can apply a doctrine of false operations.
2nd IRS can lead to the application of reinsurance contracts that it is unable to redirect revenue from taxable persons to non-taxable entity and attempt to reallocate income.
3rd Life Insurance approved the Company can not be considered life insurance for US federal tax purposes because it violates restrictions inverter.
investors control; The IRS is repeated in its published decisions of income, private letter rulings and other administrative declarations, the owner of life insurance is considered to be the owner of the asset marital property by police to a life insurance policy if the owner 'property incidents "in these funds. Generally, life insurance is considered to be a property owner in a separate account, controls on individual investment decisions should not be the owner of the policy.
The IRS prohibits the owner of the policy or support related policies, to have any rights, either directly or indirectly, require the insurance company, or separate accounts to gain an advantage of the funds in a separate account. Indeed, the owner of the directive can not be said for life insurance in particular is actively investing in. And, the IRS has announced that it can not be pre-determined plan or listening, for which certain assets may be invested in a separate account (usually referred to as "indirect control of investors"). And in a continuous series of private letters making, transparency IRS approach regarding investments under a special life insurance find indirect accounts investor controls applied consistently. Recently, the IRS issued guidance on when the restriction issued by the inverter control is violated. This guide covers all reasonable and unreasonable levels of participation in the policy owner, as security zones and permitted levels established control of the inverter.
The final decision was made simple. The Court was asked if there was an understanding or communicated orally or tacitly understood that the accounts of separate life insurance policy is to invest their funds in reinsurance issued by the ownership of the reinsurance policy and accident insured risks of doing business in which the owner of a life insurance policy and insured under the life insurance policy are linked, or are the same person as the owner of companies to deduct payment of property and casualty insurance premiums?
If you can answer yes, then the IRS should be able to successfully convince the Tax Court that the control converter limit is violated. As a result, revenue from life insurance is taxable owner of life insurance as earned.
Control Inverter limit is violated in the structure described above, as these plans generally reinsurance, will be held under a special account of life insurance by providing professional owners Lifetime persons related business door. If you draw a circle, all the money paid premium for a company may not be available to unrelated third parties as well. Thus, any court looking at this structure could easily conclude that each construction step was inclined and controls converter limit is violated.
Suffice it to say that the IRS announced in the Notice 2002-70, 2002-2 CB 765, both the doctrine of fraudulent transactions, and will apply §§ 482 or 845 of redistribution of income from non-taxable entity for the taxable entity situations, including arrangements for reinsurance and goods similar structures described accident reinsurance.
Although life insurance premiums are reasonable and comply with the requirements for risk sharing and risk sharing, so that the payment of these premiums are fully deductible for tax purposes in the United States, the company's ability to deduct premium payments now on their income tax is very different from the question whether a life insurance policy is considered life insurance for tax purposes in the United States.
inadequate marketing; One way in which the prisoners were sold through aggressive marketing designed to highlight the benefits are not real business purpose. The prisoners were firm. As such, they can provide valuable opportunities for planning for shareholders. However, the potential benefits, including asset protection, estate planning, tax advantaged investments, etc., should be subordinated to the real business objective of the insurance company.
Recently, a large regional bank began offering "work and planning captive" customers of its reliable service. Again, the golden rule of the prisoners is that they have to act as the company's actual security. insurance companies selling property insurance does not use the "estate planning". The IRS can use the promotional material wrongly sold promotor refuse compliance and the following deductions. relating to a prisoner given the significant risks of insufficient promotion, it's a safe bet that only works with captive sales promoters materials to captive insurance company property, without properties, asset protection planning and investment advantages. Or better yet, it would be a promoter has a great opinion and an independent national or regional law firm compliance material and confirmation that materials meet standards set by the IRS.
The IRS can look back a few years of abuse, then I guess the developer sells an abusive tax shelter, out of the potentially devastating study insured and sellers.
abusive life insurance; A recent concern is the integration of small captives with life insurance. Small prisoners treated in accordance with Article 831 (b) do not have the legal authority to deduct life premiums. Also, if you use a small captive life insurance as an investment, life insurance policy's cash value may be taxable in captivity, and then they can be taxed again when distributed to the final recipients. The consequence of this double taxation is devastated effectiveness of life insurance and the expansion of the serious levels of responsibility for all accounting recommended plan or sign up on the tax return of the company paying the premium the same fate.
The IRS is aware that several large insurance companies promoting their life insurance policies as investments with small captives. The result looks suspiciously like thousands of planes 419 and 412 (I) is currently verified.
In all captive insurance arrangements can be very beneficial. Unlike in the past, now there are clear rules and history that define what constitutes a well-designed insurance company, marketed and managed. Unfortunately, some developers are abused, bend and twist the rules to sell more prisoners. Often, the owner of the company that buys in captivity is not aware of the enormous risks that forward, because the developer has acted incorrectly. Unfortunately, it is insured, and the beneficial owner of the captives who face painful consequences if the insurance company considered unfair or improper. Captivity industry has qualified specialists who provide support services. It is best to use experts with the support of a law firm that sells promoter spot something that seems too good to be true.
