When you think of a succession plan, what comes to mind? Risk Management and Insurance probably aren’t the first thing, but there is an Enterprise Risk Management process utilizing the 831(b) “Micro Captive.” Used as a funding mechanism for current exposures to your business, the Micro Captive functions as both a succession planning tool and as an alternate method of drawing revenue—now and after you’ve left the company. You’re already in the insurance business, you just don’t know it. Allow me to explain below.
In the tax code for decades, and strengthened by case law, a company can form an 831(b) for the sole purpose of insuring itself, with incredible tax and revenue benefits. Think about the lines of insurance that you currently choose not to buy—that you’re already “self-insuring” by not purchasing: Cyber Liability, Directors & Officers Liability, Crisis & PR Management Insurance, Deductible Buybacks and Stop-loss, Punitive Damages, Regulatory Liability Defense, etc. If there is a loss related to an exposure you currently do not insure, you’re on the hook for it. Why not purchase from a traditional insurance carrier? In most cases it is a cost benefit analysis that drives the decision not to purchase insurance for low frequency risks to your business. An 831(b) Micro Captive allows you the ability to insure these exposures through an insurance company that you own and benefit from. Here’s the process broken down:
• Waste Hauler “X” forms a Micro Captive, named “Waste Insure” (Waste Insure’s owners can be you, your children, a trust, etc.).
• Waste Hauler “X” pays Waste Insure premiums of anywhere from $500k up to $1.2 million for an insurance policy covering defined exposures for defined limits of insurance. As insurance premiums they are a deductible business expense which is received tax free by Waste Insure.
• At the end of every policy term, the premiums Waste Hauler “X” has paid convert to retained earnings of Waste Insure and you can distribute these earnings to the shareholders of Waste Insure at dividend rates or at the capital gains tax rate at liquidation of the Captive. This provides a tax savings of approximately 17%!
• This generally is a long term structure (10 years or more) that allows you to continue to purchase insurance for your exposures every year, building equity while funding for potential losses.
With a long standing, easily attainable method of setting aside that much revenue to be drawn at a lower tax rate, why wouldn’t you want to set one up? Even after you retire from the garbage business, you (or whoever else you named as owner of the micro captive) will still draw revenue through the underwriting profits paid by your garbage company. Talk to your accountant today to discuss the viability of your company forming your very own micro captive, and start saving more on your taxes every year! This does not displace your current lines of coverage; it is something you can set up alongside what you currently purchase.
This article was written by Tanner Fornesi. Tanner’s underwriting experience prior to becoming a broker lends expert insight when it comes to turning your insurance purchases from a line item into a revenue stream. Contact Tanner today to learn more about your succession planning options.
To learn more about Heffernan Insurance Brokers please visit www.heffins.com.