The Definitive Guide to Captive Insurance Companies: What Every Small Business Owner Needs to Know About Creating and Implementing a Captive

By Peter J. Strauss

The Definitive Guide to Captive Insurance Companies:
What Every Small Business Owner Needs To Know About
Creating and Implementing a Captive

America’s top corporate estate, tax and asset protection attorney provides readers with true insight on multiple key sophisticated planning techniques for small business owners implementing captive insurance companies.

The Definitive Guide to Captive Insurance Companies will provide readers with the ability to:

- Reduce income taxation,
- Increase cashflow,
- Self-insure,
- Protect personal and business assets, and
- Enhance estate planning.

• Language: English
• Publisher: AuthorHouse
• Release date: Oct 6, 2011
• ISBN: 9781467038645

Peter J. Strauss

Peter J. Strauss is the Managing Member of The Strauss Law Firm, LLC, located on Hilton Head Island, South Carolina. His firm is devoted to providing estate and tax planning, asset protection, international business, and captive insurance solutions to hundreds of individuals, families, and business owners located both in the United States and internationally. The Strauss Law Firm is deeply rooted in the Hilton Head Island Community. Mr. Strauss serves on the Board of Trustees for Sea Pines Montessori Academy, as a Board Member for the Children's Relief Fund, and regularly volunteers for various non-profit organizations in the community. Mr. Strauss has authored the book “Captive Insurance Companies for the Small Business Owner”, and he regularly speaks at public seminars, professional society meetings such as the American Institute of Certified Public Accountants (AICPA), Hawaii Tax Institute (HTI), National Advisors Trust Company, and Continuing Legal Education conferences. Mr. Strauss is a graduate of the New England School of Law, and he holds an LL.M. in Estate Planning from the University of Miami. In 2010, he was appointed to the Board of Advisors of the Southpac Offshore Planning Institute in recognition of his experience in the field of captive insurance planning. He lives on Hilton Head Island with his wife Mackenzie and their two sons, Colin and Quinn.

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© 2011 by Peter J. Strauss, J.D., LL.M. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or transmitted by any means without the written permission of the author.

First published by AuthorHouse 09/22/2011

ISBN: 978-1-4670-3866-9 (sc)

ISBN: 978-1-4670-3864-5 (ebk)

Library of Congress Control Number: 2011916964

Printed in the United States of America

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Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

Contents

MEET THE AUTHOR

ACKNOWLEDGEMENTS

PREFACE

CHAPTER ONE

FUNDAMENTAL PRINCIPLES: WHAT YOU NEED TO KNOW ABOUT CAPTIVE INSURANCE

CHAPTER TWO

HOW TO MINIMIZE YOUR ESTATE AND INCOME TAXES WITH CAPTIVE INSURANCE

CHAPTER THREE

PUTTING THE CAPTIVE INSURANCE COMPANY TO WORK FOR YOU: HOW TO SET UP A CAPTIVE AND START INSURING YOUR BUSINESS

CHAPTER FOUR

WHAT YOU NEED TO KNOW ABOUT MANAGING YOUR CAPTIVE INSURANCE COMPANY: TAX AND REGULATORY REQUIREMENTS

CHAPTER FIVE

PROTECTING YOUR ASSETS FROM LAWSUITS WITH A CAPTIVE INSURANCE COMPANY

APPENDIX

CAPTIVE INSURANCE CASES AND RULINGS

MEET THE AUTHOR

Image%201-%20Peter%20headshot.jpg

Peter J. Strauss is the Managing Member of The Strauss Law Firm, LLC, located on Hilton Head Island, South Carolina. His firm is devoted to providing estate and tax planning, asset protection, international business, and captive insurance solutions to hundreds of individuals, families, and business owners located both in the United States and internationally.

The Strauss Law Firm is deeply rooted in the Hilton Head Island Community. Mr. Strauss serves on the Board of Trustees for Sea Pines Montessori Academy, as a Board Member for the Children’s Relief Fund, and regularly volunteers for various non-profit organizations in the community.

Mr. Strauss has authored the book Captive Insurance Companies for the Small Business Owner, and he regularly speaks at public seminars, professional society meetings such as the American Institute of Certified Public Accountants (AICPA), Hawaii Tax Institute (HTI), National Advisors Trust Company, and Continuing Legal Education conferences. Mr. Strauss is a graduate of the New England School of Law, and he holds an LL.M. in Estate Planning from the University of Miami. In 2010 and 2011, he was appointed to the Board of Advisors of the Southpac Offshore Planning Institute in recognition of his experience in the field of captive insurance planning. He lives on Hilton Head Island with his wife Mackenzie and their two sons, Colin and Quinn.

ACKNOWLEDGEMENTS

I must begin by thanking my wife Mackenzie and my two sons, Colin and Quinn, who inspire me each and every day. I am deeply appreciative of the support I’ve also received from my friend, John Ivsan, whom has provided invaluable guidance and without whom, this book wouldn’t have been possible. I would also like to thank Lindsay Swanker for her patience and assistance in publishing this book.

– Peter Strauss, Attorney at Law

PREFACE

When I set out to write my first book on captive insurance, I did not yet realize just how popular the topic would be with business owners. Many years ago I stumbled across the topic of captive insurance quite by accident. The idea of owning your own insurance company to save on taxes and accumulate wealth intrigued me.

Almost immediately, my clients were asking me to help them implement captive insurance plans. I also began to see the tremendous sums of money my clients were saving through their businesses. Yet, I increasingly felt that someone needed to write a book on the subject directed at the business owner.

It is not every day that the United States Congress confers a huge tax benefit for business owners using captive insurance. However, very few business owners have any idea what captive insurance is or how it works. Most business owners are not lawyers or accountants, but most books on captive insurance are directed only at these professionals.

My first book sold out rather quickly, and I realized that I was on to something. Pretty soon, I had people coming up to me at national conferences and thanking me for having written a book directed at them, with straightforward explanations and no technical jargon.

With this second book, I hope to cover a few topics in greater detail while keeping things simple and straightforward. My goal is to show you that:

• Captive insurance enables you to achieve valuable tax savings.

• Captive insurance works well with your estate plan to protect your assets from catastrophic lawsuits.

• A good captive insurance plan is not that expensive.

• Captive insurance is not that complicated.

Every business owner wants to save on taxes and put more money in the bank. Captive insurance is one of those bright spots in the tax law where Congress actually gives you a benefit… but only if you use a captive. As with everything that Congress does, this valuable tax benefit requires that you follow some rules and procedures. However, I trust that you will learn in this book that captive insurance is not difficult, particularly if you team up with an experienced attorney and captive insurance provider.

If, after reading this book, you understand the basic principles of what captive insurance is and how it works, then I know that I will have done my job.

– Peter Strauss, Attorney at Law

CHAPTER ONE

FUNDAMENTAL PRINCIPLES: WHAT YOU NEED TO KNOW ABOUT CAPTIVE INSURANCE

Life is filled with risks. Every day, you take risks in your business. Some of these risks are calculated on your part; after all, you must take on these risks in order to make a profit in your business. Other risks may not be so well known to you, or they may not be at the forefront of your mind on a regular basis. As much as you may carry insurance on the truck used to make deliveries in your business, you may not carry similar insurance on the computer used to track your deliveries. There may even be some risks which you know about but which are simply too expensive for you to insure.

Unfortunately, unless you pay an insurance coverage a premium to insure your business against all of these risks, there is no tax benefit to self-insurance. According to the American Institute of Certified Public Accountants (AICPA), most businesses unknowingly self-insure a great part of their risks from daily business activities. This same AICPA report says:

Self-insurance, whether funded out of company reserves or personal after-tax savings is not tax-deductible. To compound the problem, smaller deductibles are expensive and not tax-beneficial.

The solution, according to this AICPA report, is a captive insurance company. Properly structured, self-insurance through a captive structure can create substantial tax deductions, resulting in tremendous tax savings.

Captive insurance produces material tax savings that help you to save real dollars in your business. Furthermore, captive insurance helps businesses to combat inadequate insurance and excessively high premiums. Yet, most business owners have no idea what captive insurance is, much less how to use it to their advantage.

Captive insurance is a strategy whereby your business purchases insurance coverage from an insurance company that you own and control, i.e., a captive insurance company. The premiums paid by your business are tax deductible. Meanwhile, the premiums that your captive collects are tax-free. You read that correctly: The premiums collected by your captive insurance company are tax-free.

Suppose your business pays $1 million in premiums to your captive insurance company every year. Assume further that your combined federal and state income tax rate is 50%. Your business would deduct $1 million from its taxable income, saving you $500,000 each year. Furthermore, that $1 million would be received free of income tax each year inside your captive insurance company. You would pay less in taxes and have more money in the bank.

In this first chapter, I will start you out with a brief history of captive insurance. I will share with you how captive insurance came to evolve into an insurance strategy with tremendous tax savings potential. I will then provide you with an overview of the fundamental legal and tax principles governing captive insurance planning. Finally, I will walk you through an overview of the captive insurance industry so that you have a better understanding of how captive insurance works and how captive insurance companies operate to save their owners money. By the end of this chapter, you should have a basic understanding of what captive insurance is and how it works. More importantly, you should gain some insight into the tremendous tax savings involved by utilizing captive insurance in your business.

A Brief History of Captive Insurance

To better understand how captive insurance works, I would first like to walk you through the origin of captive insurance. It all began with a company in Youngstown, Ohio, called Youngstown Sheet and Tube Company, and their insurance agent, a man by the name of Fred Reiss.

The City of Youngstown and the Steel Industry

Youngstown, Ohio is a rough-and-tumble Rust Belt city sitting on the Mahoning River, almost in a straight line halfway between Cleveland to the northwest and Pittsburgh to the southeast. The city first earned its reputation for holding large coal deposits. With the discovery of iron ore nearby, Youngstown also became a center for steel production.

At the turn of the 20th century, as large national steel companies were making their way into Youngstown, a group of local businessmen founded the Youngstown Sheet and Tube Company. At the same time, labor unions were beginning to make inroads into the Youngstown steel factories.

Youngstown Sheet and Tube gradually earned a reputation for not being easy to intimidate. In 1916, workers at the company went on strike, setting fire to a portion of the city. Afterward, East Youngstown was renamed the City of Campbell in honor of the company’s president, who had stood up against the strikers. In 1937, unions banded together and staged what became known as the Little Steel Strike. Youngstown Sheet and Tube joined a group of steel mills that resisted signing an agreement with the strikers.

The Steel Seizure Case

Later, in the early 1950s, labor unions again confronted Youngstown Sheet and Tube, pressing for wage increases amidst the Korean War. As steel mills were under government-imposed price controls, the management at Youngstown Sheet and Tube refused to give into the strikers’ demands. When the unions sought help from a labor-friendly White House, President Truman in 1952 issued an executive order seizing Youngstown Sheet and Tube’s steel mills. The company’s lawyers immediately went to court to fight the presidential decree as unlawful.

The resulting U.S. Supreme Court decision in Youngstown Sheet & Tube Co. v. Sawyer,¹ became known as the Steel Seizure Case and was a rebuke of the U.S. President’s authority. The Supreme Court ruled that the President could not seize private property without specific authorization in the Constitution or under an act of Congress.

Fred Reiss, the Inventor of Captive Insurance

Around the time that Youngstown Sheet & Tube was fighting President Truman over the right to control its own destiny, Frederic Mylett Reiss entered the picture. Reiss had served in the Navy and gone through college on the GI Bill. After college, he went to work for the Ohio Inspection Bureau, assessing insurance risks for large plants and steel mills.

Working next as an underwriter in Cleveland, Reiss became familiar with the techniques for calculating