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Succession Planning after ATRA 2012 – Life Insurance

By September 16, 2013October 25th, 2018Business Blog, Fred Whitaker

Fred Whitaker

In the previous blog, we examined the use of a Captive Insurance Company – specifically, Internal Revenue Code Section 831(b) small insurance company captive to save current taxation.  In summary, 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.

Last blog, we ended with the thought that life insurance can be a tax efficient investment vehicle for the Captive.  Since the premiums paid to the Captive are not taxed, but the investment income is taxed, tax free growth inside a life insurance policy can be very attractive.  It also, can be a tremendous estate tax planning tool.

First, you should have the second generation own the Captive.  The only use of the gift tax exemption might be the initial capitalization needed for licensing.  The Captive will then receive income tax free premium income, moving $1.2mm of wealth each year to the second generation without a taxable gift.  Second, if you buy a life insurance policy(ies) on one or more members of the second generation, the amount of premium allocated to the provision of a death benefit is much lower than if the first and older generation was insured.  This saves most of the $1.2mm to build up in the cash value investment portion of the policy tax free.  Usually, within two years the cash value at the crediting rate exceeds the premiums being put in.  The cash value continues to grow as invested and can be borrowed out as needed for the second generation’s schooling, housing, other needs and investments.  It can even be used to pay the estate tax when the first generation passes away.  There is instant tax free liquidity for the family’s use.  If you compare this to the standard use of an Irrevocable Life Insurance Trust to have estate tax free liquidity, it saves $480,000 a year in gift tax, based on $1.2mm in premiums.  Nothing beats the double tax efficiency of the captive.

In the next blog post, we’ll wrap up our discussion of captives with the scenarios for exit and succession planning.


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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.