Posted: 12.30.2011
Save taxes, reduce premiums, preserve wealth – and more.
Having worked for more than 40 years building Cooper Industrial Bolts & Fasteners, a strong, thriving family manufacturing company, the Coopersmith’s wanted to ensure their wealth could be preserved from estate taxes as much as possible, leaving a legacy for their children. Their commercial lines agent told them about something called a “micro captive.” After some careful research, they set-up this private insurance company, with their children maintaining 99% ownership. In taking this step, the Coopersmiths have excluded this portion from their estate, saving an estimated $680,000 in estate taxes, preserving wealth for their family.
Although the Coopersmith’s are fictional, their story is not. For many small and mid-sized family businesses, setting
up a micro captive does indeed save estate taxes. But it also does much more.
What is a “micro captive?”
A micro captive is a privately-held insurance company that is custom-created for and by small and mid-size firms. Although a bona fide insurance company, one way it distinctly differs from most other insurance companies is that it is owned by the creating company solely for that company’s benefit and is not tied to a typical insurance company like The Hartford or Chubb. It is also known as a “831(b) captive”, referring to the section of the Internal Revenue Code applying to small property and casualty insurance companies writing annual premiums less than $1.2 million.
How does it work?
The creating company pays its micro captive an insurance premium that can be deducted as a business expense. These monies are invested and generate income. This capital can then be used to meet many different needs, such as insuring a risk not covered by conventional policies, paying the deductibles of other policies, or covering litigation costs. If no claims are paid by the micro captive, then the wealth can be distributed to business owners, key executives or family members.
Who can benefit from a “micro captive?”
Good candidates generally are businesses with substantial risk that are underinsured or are self-insured. Key industries falling under this category include real estate developers or builders, manufacturers, professional services firms, franchisees, restaurant or hotel chains, physicians or physician groups. If you fall into any one of these groups, you may be a prime candidate for a micro captive.
To qualify, you must meet two or more of the following criteria:
* Preferably a closely-held privately owned business
* Profitable operations, with taxable income exceeding $1.5 million
* $200,000 self-insured/uninsured business risk and/or
* 100 or more employees
The reason for these qualifications is the parent company must be large enough to generate a level of risk premiums to make creation of the captive feasible and beneficial.
Can your company benefit?
To find out if your company can benefit from a micro captive, call your local Brown & Brown office to set-up a consultation.
Timothy J McNelly, CPCU, ARM, AFSB, AMIM
Brown & Brown of New York
