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Captive Insurance 101

A "captive" is a property and casualty insurance company specifically established to insure the risks of an associated business. Owning your own captive insurance company comes with advantages that help you gain better control over your business’s risk management, earnings, and tax planning. Conventional insurance policies often limit or exclude coverage for certain inherent operational risks.

With captive insurance, these risks can be written right into the policy, free of vague or ambiguous language. Under IRC 831(b), middle market organizations can take advantage of both the primary benefits of captives, including tailor-made risk coverages and secondary benefits, such as improved tax planning. Capstone is the leading alternative risk planning company for the mid-market and we’re continuing our 17-year trend of growth and leadership in the industry. While other captive insurance managers disclaim tax and legal services, we offer a comprehensive alternative risk financing program in collaboration with The Feldman Law Firm LLP. We invite you to explore all the benefits of captive insurance and the turnkey services we provide.
Learn more about forming Captives >>.

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Important News You Should Know About

U.S. Sides with Tax-Avoiding Companies

U.S. Sides with Tax-Avoiding Companies

New Services from Capstone Associated, Houston TXJuly 23, 2015 (Houston, TX) - Bloomberg reports that the Obama administration handed a victory to U.S. companies that minimize taxes by establishing a foreign domicile, suggesting that virtually all of them are still eligible for U.S. government contracts.

The Department of Homeland Security last year endorsed a legal memorandum that argued in part that a 2002 law banning such companies from federal contracts was invalid. Although President Barack Obama later began publicly criticizing the tax maneuvers known as corporate inversions, there is no sign that he has reversed the department’s decision.

Capstone administers the design, implementation, and management of captive insurance arrangements, providing exceptional risk coverage for middle market organizations. Middle market businesses may obtain tailored risk coverages and fill in gaps in their existing commercial policies with a captive insurance arrangement. Insurance premiums paid to the captive insurer are made on a tax-deductible basis.

For more information on Capstone's 17-year work history in forming and operating captives, please contact a member of its executive team.

Tax Inversion Wave Keeps Rolling - Wall Street Journal

The Tax Inversion Rate Keeps Rolling

July 14, 2015 (Houston, TX) - The Wall Street Journal reports that despite Washington’s efforts last year to protect the U.S. corporate tax base, revenue keeps eroding. Since applicable Treasury rules went into effect last fall, 55 U.S. companies have been sold to or targeted by foreign buyers, many of those acquirers formed by inversions themselves, according to FactSet, a prominent financial analysis and data provider. Several companies have closed deals through tax-beneficial migrations known as inversions.

"Tax inversion" or "corporate inversion" refers to the relocation of a corporation's legal domicile to a country with lower corporate tax requirements while usually retaining its material operations in the higher-tax country of origin (e.g., the U.S.). Through these techniques, large, multi-national companies are able to manage their tax bill, taking advantage of tax rates, a fraction of the 35% charged in the U.S.

Capstone administers the design, implementation, and management of captive insurance arrangements, providing exceptional risk coverage for middle market organizations. Middle market businesses may obtain tailored risk coverages and fill in gaps in their existing commercial policies with a captive insurance arrangement. Insurance premiums paid to the captive insurer are made on a tax-deductible basis. Please call Lance McNeel, CPCU, ARM -- Vice President of Business Development at 800.705.4014 to learn more.

Captive Insurance Clarification Act

What the Clarification Act Means for Captives

July 10, 2015 (Houston, TX) - The issue of double taxation as it relates to captive insurance companies has been the crux of The Non-admitted and Reinsurance Reform Act (NRRA) since its enactment in July 2010. The Act, part of the Dodd-Frank Act, contained vague language vis-à-vis captive insurance arrangements that led to uncertainty as to whether captive insurers would be taxed in the home state where their insured businesses were headquartered as well as the state in which their captives were domiciled. The Act failed to explicitly exclude captives from the definition of “nonadmitted insurer.”

The Captive Insurers Clarification Act, introduced by Vermont Senator Patrick Leahy and South Carolina Senator Lindsey Graham is an attempt to clarify this loose language, define a true captive insurance company and provide clear language on the independent procurement of taxes on the insurance purchased from the captive. If passed, the bill would clearly state whether taxes would need to be paid to the home state as well as to the state where the captive is domiciled, leading to double taxation.

Currently, the bill is in its infancy, having just been introduced on June 11, 2015. The bill was assigned to a congressional committee, which will consider it before it goes before the U.S. House of Representatives or the U.S. Senate. Current captive owners should continue to adhere to the regulatory guidelines provided by their domicile. Captive managers, if qualified, should also be able to provide guidance on their state tax obligations.

If you have any additional questions regarding the NRRA or the Captive Insurers Clarification Act, please contact the Firm directly at 713.850.0700.

FForm a captive insurance company earlier in the year

Why Form a Captive Earlier in the Year?

June 25, 2015 (Houston, TX) - Time is short to design, form, and implement captive/alternative risk planning with tailored coverages for 2015. These regulated insurers usually take 2-4 months to properly implement. Closely-held middle market businesses that form captives operate in a wide variety of industries, including manufacturing, fabricators, transportation, distribution, construction, healthcare, and retail.

These businesses usually have risks that are either uninsurable commercially, too expensive in the conventional markets, or unreliably offered. First and foremost, a captive is an insurance company, underwriting property and casualty risks. A captive allows the pre-funding of future losses on a tax-advantageous basis. Additionally, a captive insurer provides other planning benefits, such as secured lending, are all in support of the underlying insurance function. Now is an ideal time to explore the benefits of forming a captive. For more information, please contact Lance McNeel, CPCU, ARM, and Vice President of Business Development at 800.705.4014.

captive insurance

Forming a Captive Early Has Powerful Benefits

June 12, 2015 (Houston, TX) - Alternative risk and tax planning done early in the year leaves more time to design and implement tailored insurance coverages, which can only begin once the policies are issued. In turn, policies are only issuable following the application to form an insurer which itself follows the insurer's capitalization and licensing. Thus, fourth quarter transactions are more difficult.

Clients interested in supplementing their commercial insurance coverages with a captive have the unique advantage of writing broad policies paid on a tax-deductible basis to their captive insurance company which in turn finances future losses. Factors such as claims history and anticipated losses, uninsured but insurable risks, investments including secured loans from the captive to the operating company for business-related purposes, and even prospective dividends at favorable tax rates are considered when assessing an alternative risk program.

Capstone is the premier captive insurance planning company in the United States, working with middle market businesses across various industries, including construction, transportation, energy, and manufacturing.


Captives in the IRS' Dirty Dozen List of Abusive Tax Schemes? Get the Facts
February 10, 2015 (HOUSTON, TX) - In the first quarter of each year, the IRS increases the volume of its press releases in a thoughtfully designed program to spur taxpayer compliance with our income tax system. This is a well-reasoned effort by the IRS.

Gallagher Captive Manager Artex discloses it's subject to IRS probe
Artex Risk Solutions Inc., the Bermuda-based captive management subsidiary of insurance broker Arthur J. Gallagher & Co., has confirmed that it is involved in an Internal Revenue Service probe into captive insurers formed under 831(b) of the Internal Revenue Code.

September 10, 2014 Federal Court Opinion Ordering Artex's Compliance with IRS Subpoena
The Internal Revenue Service (IRS) is conducting an investigation of Respondent Artex Risk Solutions, Inc. (Artex). The IRS is allegedly
examining Artex’s role in transactions involving captive insurance plans under 26 U.S.C. § 831, and investigating whether such transactions constitute abusive transactions.

Artex Docket Report
Petition to enforce IRS summons filed by United States of America (Shoemaker, Martin) (Entered: 06/03/2014)

The “Captive Manager” Fallacy Continues
The captive insurance community is aware of a series of IRS audits over the last decade years directed at small captives operating under Section 501(c)(15) of the Internal Revenue Code (IRC). The IRS undertook a series of audits to test compliance with the 2004 legislative changes.

What is a Captive Insurance Company?
A captive is a small property and casualty insurance company usually formed by a business owner to provide property and casualty insurance for the related businesses. The policies may either supplement or replace existing conventional coverages. Often the captive is best used for unique, industry specific coverages not readily available in the conventional markets. Learn what captive insurance companies are and how they can help you manage business risks.

How a Captive Insurance Company Works
Smaller companies are increasingly copying a method to control insurance costs that used to be the domain mainly of large businesses: setting up insurance firms to provide coverage when they think outside insurers are charging too much. After a string of catastrophes in recent years -– the terror attacks in the U.S. in 2001 and London in 2005, as well as Hurricane Katrina in 2005 –- a number of small and midsize public companies are putting more thought into how to get the most insurance protection at the best costs.

Why Businesses Should Form Captive Insurance Companies
Owners of middle market businesses are attracted to the cost saving, risk management, and profit potential provided by owning their own insurance company. In a recent interview, Stewart A. Feldman, chief executive of Capstone Associated Services, a Houston-based firm specializing in alternative risk planning for closely held businesses, explained: “Many middle-market businesses needlessly ‘self-insure’ a wide range of risks . By self-insurance, I mean ‘pay directly out-of-pocket as losses are incurred’. This is an inefficient and dangerous approach to risk planning.”