Captive insurance companies have been in existence for more than 100 years, and constitute an insurance subsidiary that is set up by a parent company and controlled by its policyholders. Within this structure, the insured party is the principal beneficiary of underwriting profits and corresponding investment income. A properly structured and managed captive insurance company can provide attractive tax and non-tax benefits.
The roster of Holland & Knight clients includes both Fortune 500 companies – the majority of which use captive subsidiaries – in addition to smaller businesses, doctors and other high-income professional service providers. Our clients include both captive companies and managers, including the nation's largest microcaptive manager.
In guiding the proper structure and management of a captive insurer, our attorneys provide a valuable platform for clients to save money on insurance, sharpen their focus on risk management and segue into an entirely new business opportunity.
When clients come to us for advice on whether to put their capital at risk by creating their own insurance company and working outside of the commercial insurance marketplace, our attorneys are prepared to help them achieve their risk financing objectives. Holland & Knight's captive insurance lawyers draw from the knowledge of the firm's insurance, transactional, tax and compliance services attorneys, providing our clients with diverse resources with which to address complex issues.
Whether a client is motivated to shape a captive insurance company because of excessive pricing, limited capacity or coverage that is unavailable in the traditional insurance market, our attorneys can help achieve stability in pricing, increased control and broader coverage through a captive arrangement. We educate clients on an array of concepts, such as risk shifting and risk distribution, giving them information that is critical in meeting IRS requirements and in determining the best course for their business.
Insurance is an ever-changing industry riddled with economic uncertainties for both insurers and policyholders. The planning, formation and management of a captive are complex undertakings, and our attorneys help to ensure compliance with the heavy regulations of running an insurance company. In addition, the broad experience of our team can support clients with structuring captive management arrangements, reinsurance agreements and protected cell company structures.
Establishing a captive insurance company is not realistic for all businesses, but where appropriate, it can provide substantial tax benefits to shareholders and their families. In addition, non-tax benefits for captive insurers can relate to estate planning, asset protection planning, business succession and deferred compensation. The collaborative approach of Holland & Knight allows us to guide clients through a wide-ranging area of business.
Congress added new restrictions to microcaptives in its 2015 appropriations bill to discourage formation of captives that are designed primarily as tax shelters, rather than alternative insurance that serves a legitimate risk management purpose. The law places a limit on the proportion of a captive's premiums that can come from a company controlled by one person or family, and severely restricts heir ownership of a captive that insures a company owned by a family member. Essentially, the law restricts captives used primarily to shift wealth between generations in a family. However, the law does raise the limit on the amount of premiums that can be shielded from income taxes, and the IRS will continue to allow favorable tax treatment for captives that follow its guidelines. Our attorneys can provide guidance on adapting to these new rules. In some cases, we can show clients how to utilize offshore alternatives that provide benefits similar to so-called "831(b) captives."
The IRS has placed "abusive tax shelters," including captives, on its "Dirty Dozen" list of tax scams that includes such obvious fraud as phishing, phone scams and fake charities. Used properly for insurance needs that address risk management in an operating business, with the ancillary benefit of tax benefits and intergenerational wealth planning, captives should continue to pass scrutiny with the IRS. Our attorneys are skilled in setting up captives that satisfy the requirements of the IRS, and we also advise clients on how to respond to audits and enforcement actions.
A current case before the U.S. Tax Court, Avrahami v. Commissioner, tests to what extent a captive must adhere to accepted actuarial and risk management standards in assigning premiums and risks. Avrahami involves a small business operating as a jewelry store that pays insurance premiums to a captive insurer owned by the same taxpayer who owns the jewelry business. The captive insurance company provides numerous insurance coverages to the jewelry store, including so-called "terrorism" insurance. The IRS contends in this case that the defendant's captive and the insurance policies it issued do not meet the traditional definition of insurance, but is instead primarily a vehicle for tax evasion. The outcome of the case likely will signal future IRS enforcement strategy. Holland & Knight is following the case closely.
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