Is a Captive Insurance Company Right for Your Business?

Blue Bell Ice Cream Captive InsuranceHow Blue Bell Could Have Avoided 2850 Layoffs with a Captive

May 20, 2015 (Houston, TX) - The Wall Street Journal reports that family owned Blue Bell Creameries LP has laid off 750 full-time and 700 part-time employees, and has put another 1,400 on a partially paid furlough. Blue Bell has also reduced salaries for its remaining staff. These actions come after a voluntary recall of its products following its ice cream being linked to a listeria outbreak that resulted in three deaths and additional illnesses spread across several states. Read the full story here.

Product recall insurance written under a captive insurance arrangement would have mitigated the costs by reducing out of pocket expenses for these unexpected losses. This is an ideal use of a captive insurance arrangement. An alternative risk management program which includes a captive is a proven strategy for mitigating these types of risks. In affiliation with The Feldman Law Firm LLP, Capstone has implemented tailored risk programs across many industries, including in the food manufacturing industry, over the last 17 years.


Capstone Meets With U.S. Captive Regulators

Delaware Insurance Commission Logo

On April 7, 2013, Capstone hosted insurance regulators from Delaware, Oklahoma, Tennessee, Montana and Kansas for a luncheon and round table discussion during the annual National Association of Insurance Commissioners (NAIC) conference.

The NAIC is the U.S. standard-setting and regulatory support organization of insurance regulators  throughout the fifty states and various U.S. territories.  Through the NAIC,  insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight.

Of key concern to Capstone is having various state regulators establish quality standards and best practices among captive managers.  Because U.S. domiciled captives are regulated at the State level, it is the responsibility of the insurance commissioner in each State or U.S. territory to approve the captive managers.

As more states enact captive legislation, there has been corresponding growth in the number of ill-qualified and ill-equipped "captive managers" in the industry.  Too often, state regulators are more focused on increasing revenues than on ensuring the long-term protections of their regulated insurers.

Captive insurance companies require oversight by professional captive managers that understand the legal, tax, insurance and compliance aspects of the planning.  As a result, more careful and conscientious vetting of captive managers by the various state regulators is critical.

BLOOMBERG: "Obama Victory Leads Wealthy to Make Quick Pre 2013 Moves"

Dear Captive Clients and Advisors:

Please see the breaking article linked below from  Bloomberg News on the accelerated need for year end 2012 planning.

Click here to see article

As you are aware, Capstone and The Feldman Law Firm LLP have been anticipating these issues over the last two years.  We have been in active negotiation with insurance regulators both in the U.S. and in the Caribbean, seeking dividend approvals to maximize your respective positions.    The need for the planning is now upon us.

The race is on to meet the December 31, 2012 deadline.

Bloomberg News: "Obama Victory Leads Wealthy to Make Quick Pre-2013 Moves,"  - November 7, 2012.

Capstone is the largest turnkey sponsor of mid-market captives in the nation.  To learn more about how captive insurance can protect your business, contact Lance McNeel WEB_TEL.

"Breakthrough Idea" for Business Owners

Breakthrough Idea for Business Owners

In this month's issue of Insurance News Net Magazine, readers are introduced to captive insurance companies as a "Breakthrough Idea for Business Owners."  See the linked article below, "The How And Why To Setting Up A Captive Insurance Company."  Capstone and The Feldman Law Firm are in the 13th year of alternative risk planning for closely-held businesses, notwithstanding this "breakthrough idea."

Click here for article

The emphasis that we would make in an article such as this is that alternative risk/captive planning is appropriate for owners of substantial, closely-held businesses.  These clients usually have marginal property & casualty coverages relative to the actual risks of the business.   The most important risks of the business are usually left uninsured or underinsured from a property & casualty standpoint.

In such instances, a captive insurer can play an important role in the client's overall financial planning.  In addition, the federal government encourages the formation of captive insurers through various tax incentives.  The captive insurer, which is generally a U.S. tax exempt entity, then invests its monies in typical investments of an insurance company, including stocks, bonds, mutual funds or other forms of managed accounts.

Convert Self-Insured Risks Into Tax-Deductible Premiums

Convert Self-Insured Risks Into Tax-Deductible Premiums

Most business owners unknowingly self-insure a large number of risks. These risks include the many hidden risks that are inherent in the operations of any business, as well as the many risks that are excluded by conventional insurance policies. For example, one of our steel service center clients insures against the political risk associated with trade sanctions affecting its supply chain.  Another in the oil service business insured against governmental actions which could adversely affect its business such as a drilling moratorium.

One benefit of owning your own captive insurance company is the opportunity to pre-fund on a tax deductible basis a comprehensive range of future losses. With a captive, otherwise currently non-deductible, self-insured risks can be covered by tax-deductible premiums paid to a captive. If insurance claims are lower than projected, the captive retains these underwriting profits that can be distributed to its owners on a tax advantageous basis, or used to pay other claims.

Operating businesses are only allowed to deduct losses as they occur. In contrast, insurance companies are unique in that they are able to currently deduct future, unspecified losses. With a captive insurance arrangement, those reserves are available to fund future losses, or in the event that the loss does not occur, the profits can be distributed to the captive's owners.  Meanwhile the captive has a wide range of investment opportunities.

Dividend tax rate to nearly triple under senate budget proposal

Budget resolution.

Last week the senate budget committee passed a fiscal 2011 budget resolution that includes an increase in the top tax rate on dividends to 39.6% from the current 15%-a 164% increase. As such, if enacted into law, the tax rates on dividends will no longer be tied to capital gains rates after 2010.

Since the jobs and growth tax relief reconciliation act of 2003 (pub. L. No. 108-27), the maximum dividend and capital gains tax rates have been linked together at 15%. Unless congress affirmatively acts in the coming months, the capital gains tax rate will return to its pre-2003 level of 20% in 2011, and dividends will again be taxed at ordinary income tax rates of up to 39.6%.

In addition, the recent health care and education reconciliation act of 2010 (pub. L. No. 111-152) includes a 3.8% tax surcharge on all investment income, including dividends, beginning in 2013. This would nearly triple the top dividend rate to 43.4% in just the early years of Mr. Obama's presidency. Dividends, which are payouts from business earnings, are already taxed once at the corporate rate of 35%±. The individual dividend tax is a second levy on that same income, and at a rate of 43.4% would take the total tax on each dollar paid in dividends to 63 cents±.

The punitive tax rate on dividends combined with the deductibility of interest on borrowings increases the tax code's bias toward debt over equity. Fewer businesses will offer or increase dividend payouts, which means less dividend revenue for the government than currently projected.

Last week's senate budget committee resolution increases the likelihood that the dividend tax rate of 39.6% will become law next year. The millions of Americans who receive dividend income--most of them not rich--need to begin adjusting their investment strategy accordingly.

Captive clients.

Since the dividend tax rate will most likely increase in 2011, clients with intermediate size-captive insurance companies (§831(b) captives) should consider paying significant dividends this year at the 15% favorable dividend tax rate. Steve Cohen of our firm is coordinating this effort. IRS circular 230 notice: to comply with certain U.S. Treasury requirements, we inform you that, unless expressly stated otherwise in writing, any U.S. Federal tax advice provided by this firm, whether in this email or its attachments or otherwise, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the internal revenue service.


Rising taxes

In the cover story in Barron's June 21, 2010 issue, readers are advised to prepare for rising taxes. See the linked article below, "watch our assets."

click here for article

There are a number of tax strategies that our firm is putting in place for clients this year to take advantage of the historically low 15% capital gains rate which expires in six months. These strategies require significant up-front work and will not be possible in the 4th quarter of this year.
Please contact us now if you'd like to explore planning opportunities.

In 2012, Many Tax Benefits Increase Due to Inflation Adjustments

The Feldman Law LLP logo






Clients and Friends:

For tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, the Internal Revenue Service recently announced.

By law, the dollar amounts for a variety of tax provisions, affecting virtually every Steve Cohen, Capstone Associated Services, Ltd.taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:

• The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.
• The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
• Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.
Credits, deductions, and related phase outs.
• For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
• The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.
• The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
• For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts; please see the table below.

Medical Savings Accounts (MSAs) Self-only coverage Family coverage
Minimum annual deductible $2,100 $4,200
Maximum annual deductible $3,150 $6,300
Maximum annual out-of-pocket expenses $4,200 $7,650

The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Estate and Gift

For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.

The annual exclusion for gifts remains at $13,000.

Other Items
• The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.
• Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household.

Details on these inflation adjustments can be found in Revenue Procedure 2011-52, which will be published in Internal Revenue Bulletin 2011-45 on November 7, 2011.

IRS_logoclick here for link

Steven D. Cohen

Signature - Steve Cohen, Capstone Associated Services, Ltd.




Is A Captive Insurance Company Right For Your Business?

Businesses carry various types of insurance in order to provide protection from liabilities and reduce risks. Coverage for certain types of risks is expensive or difficult to obtain in the conventional markets, and as a result, many business owners simply choose to forgo insurance.

For today's middle market businesses, there is a better option.

Middle market companies can insure business risk through a captive insurance company. Captives provide a platinum level of insurance coverage for the business while providing additional tax, estate and asset planning benefits for the business owners.

What is a 'captive'?
A captive insurer is a company established to insure the risks of affiliated businesses in a more cost efficient manner. Many clients use captives to cover their deductibles and for exclusions on conventional policies. While a captive is most often used to supplement conventional insurance coverages, it can also create policies to replace existing coverages if the economics make sense.

How does a captive work?
A captive is a separate corporation established for the exclusive purpose of writing property and casualty insurance. It is a fully licensed insurance company under the jurisdiction of the Insurance Commissioner within the state it is established. As such, the captive must adhere to certain requirements to be respected, such as proper risk sharing, risk distribution and underwriting guidelines for the determination of the annual premium amounts. A wide variety of risks can be covered including business interruption, liability, change in government regulation, loss of services, loss of a major client, etc.

Each year, the captive issues policies depending on the need of the operating business, in exchange for annual premiums. The operating business deducts the insurance premiums as a business expense and the captive records the premiums as income. However, the captive does not pay tax on the first $1.2 million of premiums received each year if a Section 831(b) election has been made. This election allows for some very unique planning opportunities not normally available.

What are the potential benefits for a captive owner?
Only business clients with a significant operating business or professional risks, and with a minimum of $1 million/year in taxable income should consider this planning. Given these prequalifications, there are various and substantive benefits.

First the operating business can improve its cash flow by pre-funding potential future risks with pre-tax dollars. This saves on income taxes and provides peace of mind that a greater range of the company's risks are being addressed.

Second, if the captive is properly managed and experiences a positive claims history, it could generate annual profits for its owners, providing a secondary income source.

Third, the ownership of the captive is very flexible. Since the captive is a C corporation, it can be owned by various types of entities, such as a trust or a partnership, or by relatives or business associates of the operating company. This flexibility adds some potential estate and asset protection planning possibilities to the mix.

What are some of the potential drawbacks?
Set-up costs and annual operating costs need to be evaluated. Factors that impact the cost structure are the country or state of jurisdiction in which the captive is incorporated, the complexity of insurance policies written, the types of coverages involved and the number and types of captive owners.

Captives exist under decades old provisions of the Internal Revenue Code. The IRS could change the rules down the road. These potential drawbacks may be mitigated by aligning yourself with qualified tax, legal and insurance professionals who are knowledgeable in this area and who can guide and support you through the complexities and potential rule changes.

Who should consider a captive?
Generally, any profitable closely held business with no less than $750,000 per year of discretionary income, current uninsured and/or under-insured business risk and a desire to improve its bottom line should consider a captive. In the right situation, a properly established and well-run captive can accomplish the goals of many business owners, including better risk management, increased cash flow, and the ability to take advantage of tax, estate and asset planning opportunities.

Please give us a call to learn more about owning your own captive insurance company.

Very truly yours,


Stewart A. Feldman, CEO
Capstone Associated Services, Ltd.

Not All Captive Managers Are Created Equal


Over the last few years there has been significant growth in captive insurance as alternative risk planning among middle market companies (i.e., privately held, +$2Million annual profits). To serve those interests, there has been a correspondent growth in captive insurance "managers".

Here in the US, "captive managers" are usually small, unlicensed administrative services providers with little professional experience and, unfortunately, can have a less than stellar background.

As a national subject matter expert on IRC 831(b) captives Capstone is frequently contacted directly by both trusted advisers and middle market companies. They have shared with us they sought out Capstone as we take ownership of the planning vs. the plethora of captive insurance "managers" who have correctly disclaimed ownership as they lack the professional current tax attorney credentials.

Capstone's offering is turnkey and is truly the low cost solution as we take overall ownership of the planning and keep the 831(b) captives in compliance with the IRS, regulators and all legal aspects.

Our middle market clients depend on Capstone and our affiliated law firm,The Feldman Law Firm LLP, to stay on top of current law, including Dodd-Frank and other state and federal tax legislation. Since 1998, we have been a nationally recognized authority on alternative risk planning. We have raised the bar on all captive managers by our affiliated law firm.

To learn more about how to differentiate between a captive administrator and a professional captive manager, click for an analysis from Captive Review, "The Captive Manager Fallacy" published in January, 2013.