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Succession Planning after ATRA 2012 – Investment Opportunities

By September 16, 2013October 24th, 2018Business Blog, Fred Whitaker

Fred Whitaker

The Captive Insurance Company – specifically, Internal Revenue Code Section 831(b) small insurance company captives, is a unique tool to reduce current taxation.  You can self-insure company risks and pay premiums to your own wholly owned insurance captive.  Instead of paying tax on profits, you receive a deduction for premiums.  Your Section 831(b) small insurance company is allowed to earn up to $1.2mm per year in premiums without paying any federal income tax on them.  It only pays tax on the investment income.

So, what can you do or not do with the tax efficient funds (formerly your taxable profit) sitting in the captive insurance company?   While you are not allowed to invest in or loan back to your operating business, there are a variety of investment strategies for the captive that should be customized to the business owner’s needs and goals.

Investment opportunities include:
•    Income producing real estate or loans. 
•    Income producing loans to customers and ancillary companies of the operating business. 
•    Stock market, mutual funds, and other traditional investments.
•    Life Insurance

Of these strategies—life insurance— is one that can work particularly well.   Unlike other investments, the cash build up or cash value crediting rate inside a life insurance policy is tax free.  The proceeds can be borrowed from without being taxed, and, of course, the death benefit is tax free.  Life insurance can be a double tax-free benefit for the owners of the captive.  In my next blog, we will provide a life insurance example showing significant tax savings. In addition, we will discuss ownership options that are estate tax efficient and tax preferred exit strategies for the captive.


IRS Circular 230 Disclosure:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.