Captive Insurance Companies and the Role of Life Insurance
William Bell, JD and Advanced Design Director for Pacific Life, joined Stephen L. Friedman, Partner at McNeil, Levy & Friedman, as one of six expert panelists at the recent captive educational seminar, "Own Your Own Insurance Company," sponsored by theInstitute of Captive Insurance Planning and co-sponsored by the Delaware Department of Insurance.
One of the more engaging seminar topics was, "Acceptable Assets of a Captive Insurer."
A captive must comply with the investment requirements prescribed by the insurance commissioner of the insurer's domicile, that is, where the captive is licensed. A captive, like all insurers, is subject to restrictions on investments. The insurance commissioner proscribes appropriate investments, and mandates diversification of such, to protect the solvency and liquidity of the captive insurer.
One alternative, often found to be attractive in this low interest rate environment, is simply to let the monies sit within the captive and earn a return on, for example, U.S. Treasury investments. Investments in U.S. and state government and agency bonds and other high quality corporate bonds are always acceptable along with a percentage of investments in publicly traded stocks.
Among the "approved assets" in some domiciles are certain types of life insurance as one of a number of diversified assets of the captive.
Note, however, the captive should not be looked at as an extension of the owners' personal checkbook. Rather, the captive is an operating insurance company whose premium revenue significantly comes from companies that you own. As with all insurance companies, investments of premium revenue are an extension of their insurance operations, with all investments subject to regulatory review.
To learn more about the role life insurance plays in the overall asset portfolio of a captive insurer, please call or email our office directly. Our staff will be happy to address your specific questions in detail.
Stewart A. Feldman
CEO, Capstone Associated Services, Ltd.
Capstone Appointed Captive Manager by Delaware
Capstone Insurance Management, Ltd. CIMA, a subsidiary of Houston-based Capstone Associated Services, Ltd., has been licensed as an insurance manager by Delaware's Department of Insurance as of January 2010. Already CIMA has placed two captives in the state of Delaware.
Capstone now operates an office in Delaware to meet the continuing demands of our clients. Having formed over CAPTIVE_FORMATIONS captives in multiple domiciles over the last CAP_YEARS_NUMBER+ years, we understand the importance of choosing the right domicile, whether in the U.S. or abroad, for our clients.
For alternative risk planning to be practical, it must operate in a jurisdiction with an efficient and accessible regulatory environment. High on our criteria in recommending jurisdictions to our clients are licensing regimes that are responsive, efficient and focused on providing cost-effective services to its regulated entities.
Owners of a closely-held business prefer domiciles offering reasonable capitalization requirements, less restrictive on-site meeting and banking requirements, coupled with sensible regulations and insurance expertise in the captive arena. In these respects, Capstone is honored to now offer Delaware as a U.S. domicile option for owners of small and intermediate size captives.
Together with The Feldman Law Firm LLP and its well-recognized staff of attorneys, Capstone is the U.S.' leading provider of turnkey management services for small and intermediate size captive insurance companies (property & casualty premiums of less than CURRENT_PREMIUM_CAP million per year), which in turn insure their middle market affiliates.
Capstone Binds Hundreds of Policies
2013 Premiums Approach $60,000,000
As is longstanding policy dating back to the late 1990's, representatives of Capstone meet early each year with insurance regulators to discuss ongoing regulatory issues of concern to our clients and bind our captive clients' many policies. In recent years, the meetings have occurred in The Valley, Anguilla, British West Indies. This year is no different.
Hundreds of insurance policies were bound at Capstone-Anguilla's offices, which are located across the street from the Anguilla Financial Services Commission's (AFSC) new offices in the most modern office building in Anguilla.
Earlier this month, Capstone's CEO and General Counsel, Stewart Feldman, held meetings over three days with its Anguillan subsidiary, Capstone Insurance Management (CIMA). CIMA is a one of the two largest licensed insurance managers in the British Overseas Territory of the British West Indies, with Capstone-Anguilla well-recognized as the most comprehensive and sophisticated provider of turnkey captive services for the offshore middle market.
As well, Capstone's CIMA subsidiary is one of the largest sponsors of turnkey captive services in Delaware.
Also, on the agenda was Mr. Feldman's meetings with Fiona Curtis, Capstone-Anguilla's resident manager, and her assistant, Rita Ible, who operate and maintain our clients' statutory offices in Anguilla and facilitate ongoing government contacts.
Additionally, meetings took place with the new director of the AFSC, Keith Bell, along with senior insurance regulators Lavie L. Hobson and Glyne C. Buchanan. The discussions centered on individual issues of each of our clients' captives, along with regulatory and legislative issues generally.
Keith Bill, Director Anguilla Financial Services Commission
Mr. Bell, who was appointed Director of Anguilla's Financial Services Commission in July 2012, is a Certified Management Accountant (Ontario) and holds a Bachelor of Arts (Honors) from the University of Strathclyde, Glasgow, and a Masters of Business Administration from the University of Toronto.
Prior to joining the Anguilla FSC, Keith worked for 20 years with the Office of the Superintendent of Financial Institutions (Canada). In addition to his Canadian experience, Mr. Bell has worked extensively overseas, serving on 25 IMF/World Bank missions to assess countries' systems of banking supervision, including six dealings with international financial centers.
Additional meetings were with the Companies Registrar (Secretary of State) Lanston Connor who oversees more than 10,000 corporations, insurance companies, banks, trusts and foundations domiciled in Anguilla.
Capstone-Anguilla's Anguilla office is staffed full time, ensuring that offices of each of our captives are properly maintained, and that the benefits of alternative risk/captive planning are preserved.
Captive Insurer for World Trade Center
Following the September 11, 2001 attacks, New York City was unable to secure adequate amounts of insurance for the rescue, recovery and debris-removal work done at Ground Zero. As a result, the City of New York formed the World Trade Center Captive Insurance Co., Inc. to provide insurance coverage for persons working on the rescue effort (e.g., construction workers, firefighters, police officers and other workers and volunteers). WTC Captive Insurance also issued policies protecting the site owner and contractors against plaintiffs' cancer claims.
Last Thursday, WTC Captive Insurance announced settlements with more than 10,000 plaintiffs who claimed sickness or injuries arising from site remediation work. The settlements could total up to $657 million (an average of $65,000 per plaintiff). The settlement announcement was reported by all major media.
Captives such as WTC Captive Insurance are commonplace among large corporations and governmental bodies. Similarly, Capstone administered captive insurers are increasingly common among mid-market companies. Capstone enjoys a national reputation for reducing the cost and complexity of this sophisticated planning used by larger corporations, thus making it feasible for the closely-held, middle market company to similarly benefit.
Re: Fiscal Cliff Legislative Update for High Income Taxpayers
The Bad News.
On January 2, 2013, President Obama signed the Taxpayer Relief Act of 2012 (the "Act"). While the so-called "Relief" Act permanently extends certain tax cuts, temporarily averting the "fiscal cliff" much discussed throughout 2012, taxes increase on high-income taxpayers--some dramatically. Stealth taxes abound in the "Relief" Act. For planning purposes, high-income business owners living in Texas can now expect an effective personal income tax rate of approximately 45%. Unfortunately, this is the best situation a U.S. taxpayer now faces!
Additionally, for federal income tax purposes, individuals with adjusted gross income in excess of $250,000 ($300,000 for married couples) will be subject to a phase-out of personal exemptions and certain itemized deductions, which roughly equates to as much as 5% in income tax in certain circumstances. FICA/Medicare taxes (employer and employee combined) can add up to an additional 16.2% on the first $113,700 in wages.
With the addition of state income taxes, high-income business owners living in California can expect an effective minimum state and federal income tax rate of approximately 53% and those living in New York State can expect a rate of approximately 50%, even when the federal itemized deduction for state taxes is considered. The Texas margin tax of up to 1% of the so-called "gross margin" represents an additional level of burden. Local income taxes (e.g., Philadelphia, NYC, etc.) add yet another layer of taxation.
All of the above is based on, beginning this year, individuals earning (that is, with adjusted gross income ("AGI") in excess of) $400,000 ($450,000 for married couples) having a top nominal marginal income tax rate of 39.6%. Also note that, as part of the Obamacare legislation passed in 2010, there is an additional 0.9% Medicare tax on individuals with wages in excess of $200,000 ($250,000 for married couples), as well as a 3.8% Medicare tax on net investment income tax that will apply to dividends and capital gains, as well as certain other types of investment income. Dividends and long-term capital gain rates have also increased, as discussed below.
Your-Take-Away: Depending on the city/state in which you live, we now live in a 45% - 55+% tax world. Said another way, you begin working for yourself around July 1st of each year.
The Good News.
Included in the Act is the permanent extension of the unified $5 million lifetime gift and estate tax exemption, along with continuing portability provisions. However, the maximum gift and estate tax rate will increase from 35% to 40%. This $5 million exemption is indexed for inflation.
The Act increases the nominal top long-term capital gains and qualified dividend tax rates from 15% to 20% on high-income taxpayers (that is, individuals with AGI in excess of $400,000 or $450,000 for married couples), which when combined with the additional 3.8% Medicare tax on net investment income, brings the effective tax rate on qualified dividends and long-term capital gains to 23.8%. With respect to qualified dividends, the new tax rate is still well below the 43.4% effective rate that would have gone into effect on January 1, 2013, if Congress had allowed the Bush-era tax cuts to expire.
The Act also extended, on a non-permanent basis, many individual and business provisions, including the research and development tax credit, 50% bonus depreciation, and Section 179 deductions with a $500,000 maximum amount and $2 million phase-out.
The difference between ordinary income and capital gain tax rates continues to be about 20 percentage points. Due to the permanent nature of the tax rate changes, planning benefits should not be in further jeopardy of expiring as they have in prior years.
Minor Issues. The Act permanently patches the alternative minimum tax and now includes inflation indexing, saving many taxpayers from its application. Fortunately, the Act did not extend the payroll tax holiday that temporarily reduced the old age, survivors, and disability insurance tax on employees from 6.2% to 4.2%, which further depleted the social security system.
If you have any questions regarding the changes in the Act and how they may affect you and your business, please feel free to contact us at WEB_TEL.
Treasury Circular 230 Disclosure: To the extent this communication contains any statement of tax advice, such statement is not intended or written to be used, and cannot be used, by any person for the purpose of, or as the basis for, avoiding tax penalties that may be imposed on that person. This communication is not intended to be used, and cannot be used for the purpose of promoting, marketing, or recommending to another party any matter addressed in this communication.
“Gang of Six Deficit Reduction Plan”
On July 19, 2011, the "Gang of Six" released A Bipartisan Plan to Reduce Our Nation's Deficits. The President and a growing number of legislators have expressed support of the plan. The plan contemplates an initial bill that would make immediate spending cuts and a directive to develop a comprehensive reform bill. The plan includes a fundamental overhaul of the tax code. While the goal of the "Gang of Six" plan is admirable, respectfully, the plan itself is widely believed to be largely nonsensical. The plan is based on idealistic assumptions with regards to comprehensive reform. Once the conceptual is reduced to specific proposals, the ability to enact a deal is usually lost.
The tax reform contemplated by the plan includes a general directive to the Senate Finance Committee to develop "tax reform" that includes $1 trillion in additional revenue (a.k.a. tax increases), net tax relief of $1.5 trillion as scored by the Congressional Budget Office, reduced tax expenditures, stimulated economic growth that leads to increased revenue, increased simplicity, and maintaining or improving the 'progressivity' of the tax code. These general directives are presented alongside the following detailed goals:
- Establish three individual tax brackets with rates of 8-12%, 14-22%, and 23-29%
- Permanently repeal the Alternative Minimum Tax
- Reform, not eliminate, tax expenditures for health, charitable giving, home ownership, and retirement
- Retain the Earned Income Tax Credit and Child Tax Credit, or provide the same level of support for qualified individuals
- Establish a single corporate tax rate between 23% and 29% that at least maintains the current corporate tax revenue and moves to a competitive territorial tax system
The initial enthusiasm and support for the plan has quickly turned to skepticism, with many legislators questioning the wisdom of such a hastily executed approach to fundamental tax reform. As this is a rapidly changing issue, we will be closely monitoring any developments. However, at this time, the plan is an amorphous and fundamentally flawed conceptual proposal.
Should you have any questions regarding this matter, please feel free to contact us.
Stewart A. Feldman
Low Interest Rates Equals Opportunity
When it comes to preserving wealth for future generations, lower interest rates offer clients greater opportunity to reduce the burden of gift and estate tax.
Each month, the U.S. Treasury publishes a rate known as the applicable federal rate (AFR). With respect to estate planning, this rate establishes the minimum interest rate that can be charged between family members to avoid gift tax on loans or installment sales for fair market value. As rates continue to decline--note that the September mid-term AFR is a stunning 1.94%--clients are more motivated to sell assets with growth potential to trusts for younger generations.
The greater the growth in asset values over the term of the note, the greater the estate tax savings for the family. This creates exciting possibilities for wealth transfer by removing the estate tax consequences from future growth in asset valuation.
Particularly coupled with lower valuations on certain assets these days, the odds of significant savings are much greater than usual.
Middle Market Spurs Growth In Captive Insurance
Last month, captive insurance domiciles both in the U.S. and offshore reported their 2011 year-end results, with most posting some growth reflecting an uncertain and still stagnant global economy. Here in the U.S., many states that have captive legislation reported little growth in new captive formations. However, one bright spot in an otherwise flat 2011 performance has been the continued growth of the Section 831(b)captive, or "small" property & casualty captive, which has become the risk planning vehicle of choice for middle market companies.
Small Captives Fuel Big Growth
Many suggest that the small captive's growth is a natural function of the captive market evolving from the province of larger businesses to one in which smaller companies are now widespread participants. Captive insurers have been around for decades and are no longer considered a cutting edge planning tool. It is estimated that over 90% of Fortune 500 companies utilize captives, and a significant number of U.S. states now license captive insurers.
As more middle market companies incorporate alternative risk planning into their operations, the result has been an uptick in formations of small captives and the U.S. domiciles that regulate their operation.
For example Delaware, a top 10 U.S. domicile for captive formations, breached the 100 captive mark in 2011, with most new formations being Section 831(b) captives. As reported in Captive Review's 2011 survey of leading captive domiciles, "Many of the emerging domiciles are growing off the back of 831(b) captives."
Capstone is among the top sponsors of Section 831(b) captives in the nation and is among the top two captive sponsors in both Delaware and Anguilla. Capstone continues to realize continued growth among its middle market clientele.
"Growth in small captives for us is driven by the middle market which we serve," says Clete Thompson, VP of Business Development for Capstone. "In today's challenging economy, a captive insurance company offers middle market businesses multiple benefits in protecting against contingencies."
Capstone is recognized nationally as the high quality sponsor and manager of small captive insurers. This is due in large part to the seamless integration of our offices in both Delaware and the British West Indies with our affiliated 10-attorney tax and corporate law firm based in Houston.