Why Companies Opt for Captive Arrangement

FORBES: Why Companies are Opting For Captive Insurance Arrangements

The January 28, 2013 issue of the Forbes reports that more middle market companies are looking at captives to insure their own risks--a strategy which Fortune 500 companies have been utilizing for decades:

Forbes: By having their own captive insurance agencies, companies can save on costs and receive tax benefits, provided those premiums don't exceed $1.2 million per year. That's because an insurance company is able to deduct losses before payments have been made, according to Forbes contributor Lowell Yoder.

Middle-market companies looking for alternatives to traditional insurance offerings should consider the option of captive insurance, especially for the ability to control costs, achieve tax benefits and manage its risk. Capstone is the largest turnkey sponsor of mid-market captives in the nation. We focus on captives for closely-held, non-public companies with substantial operations (i.e., annual profits exceeding $2 Million). As a leading authority on middle market captives since 1998, we were honored to be quoted in Forbes regarding our expertise. Read Forbes, "Why Companies Are Opting for Captive Insurance Arrangements" January 23, 2013.

To learn more about how captive insurance can protect your business, contact us at WEB_TEL

Editor's Note: As of CURRENT_YEAR the cap on 831(b) captive insurance premiums is CURRENT_PREMIUM_CAP million.

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Businesses Use Captives for Increased Protection

Uninsured RisksCaptives Supplement Conventional Insurers

Most businesses have substantial risks that are not insured through conventional coverages. These uninsured risks tend to fall into two categories: (1) risks for which insurance, practically speaking, is unavailable or unaffordable in the conventional markets; and (2) risks that remain unconsidered or not properly identified.
The latter arises because most businesses do not hire a risk manager that examines the business' exposures. Rather, the property & casualty agent merely sells the conventional insurance products that are readily available.

Insurance policies contain many coverage exclusions, leaving a business exposed to many serious perils. For many business and professional organizations, key coverages are unavailable, unaffordable or mispriced. As an alternative to the conventional markets, a captive's policies can be custom designed to meet the particular needs of the insured.
Uninsured risks also include those that a business simply has not appropriately thought through and identified. Many businesses have these type of risks. Businesses that do not comprehensively identify and/or insure for future risks arising out of their current operations are simply overstating current profits.

The risks may include loss of key customer, loss of key vendor, loss of franchise, computer data risks, imparting of goodwill, product recall, equipment failure, etc. Many of these risks, once identified, can be assessed and insured, often though a captive arrangement.

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“Alive and Kicking”: Why Trust-Owned Life Insurance Is More Relevant Than Ever

Dear Clients and Friends,

As we charge forward into this CURRENT_YEAR election year, we remind you that the estate and gift tax provisions of the 2010 Tax Relief Act are scheduled to expire at the close of this year. Yes, the most generous wealth transfer provisions since the birth of U.S. estate tax legislation in 1916 are clinging to their final months of life.

The brief shelf life of the $5 million gift tax exemption has produced significant planning opportunities, and will continue to provide those opportunities until the end of CURRENT_YEAR. Unless a new law is passed during this critical campaign year, the lifetime gift tax exemption and estate tax exemption will both return to a mere $1 million in 11 1/2 months. Owners of closely-held business interests and valuable real estate would again face challenging planning obstacles with a return to lower gift and estate tax exemptions. Even those families with significant holdings in cash and marketable securities would be reminded of the wisdom of annual exclusions and larger during-life transfers.

In light of the prospect of lower exemptions, has the strategy of trust-owned life insurance returned? In our view, trust-owned life insurance never left the planning table and is more relevant and valuable than ever. The Feldman Law Firm is responsible for advising executors and surviving spouses on a regular basis as part of our trusts and estates practice. Our experience in handling estates has taught us that cash proceeds from life insurance--particularly that which is free from the burdens of taxation--are the "best friend" to executors and beneficiaries alike. While this may be particularly true with business-owners and landowners, it is true for each and every estate of value.

Trust-owned life insurance offers a trifecta of benefits at the single most critical time in the administration of an estate. First, life insurance provides an income-tax free death benefit to beneficiaries. Second, by securing trust ownership of the policy, the policy and all proceeds from the policy are removed from the estate of the insured for federal estate tax purposes. Finally, through the use of annual exclusion gifts or lifetime gift tax exemption, the grantor of the trust (most often the insured under the policy) can avoid gift tax on the transfer of gifted funds used to pay insurance premiums. But, beyond the tax benefits, an executor or surviving spouse or business partner enjoys practical advantages when an estate plan includes life insurance. In next month's issue, we will explore some examples of how trust-owned life insurance can offer greater flexibility for the executor and for those who will succeed the deceased owner of a business.

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Business Owners Use Captives To Cover Self-Insured Risks

Captives Self-Insured Risks - captive arrangement
Dear Clients and Friends,

As we charge forward into this CURRENT_YEAR election year, we remind you that the estate and gift tax provisions of the 2010 Tax Relief Act are scheduled to expire at the close of this year. Yes, the most generous wealth transfer provisions since the birth of U.S. estate tax legislation in 1916 are clinging to their final months of life.

The brief shelf life of the $5 million gift tax exemption has produced significant planning opportunities, and will continue to provide those opportunities until the end of CURRENT_YEAR. Unless a new law is passed during this critical campaign year, the lifetime gift tax exemption and estate tax exemption will both return to a mere $1 million in 11 1/2 months. Owners of closely-held business interests and valuable real estate would again face challenging planning obstacles with a return to lower gift and estate tax exemptions. Even those families with significant holdings in cash and marketable securities would be reminded of the wisdom of annual exclusions and larger during-life transfers.

In light of the prospect of lower exemptions, has the strategy of trust-owned life insurance returned? In our view, trust-owned life insurance never left the planning table and is more relevant and valuable than ever. The Feldman Law Firm is responsible for advising executors and surviving spouses on a regular basis as part of our trusts and estates practice. Our experience in handling estates has taught us that cash proceeds from life insurance--particularly that which is free from the burdens of taxation--are the "best friend" to executors and beneficiaries alike. While this may be particularly true with business-owners and landowners, it is true for each and every estate of value.

Trust-owned life insurance offers a trifecta of benefits at the single most critical time in the administration of an estate. First, life insurance provides an income-tax free death benefit to beneficiaries. Second, by securing trust ownership of the policy, the policy and all proceeds from the policy are removed from the estate of the insured for federal estate tax purposes. Finally, through the use of annual exclusion gifts or lifetime gift tax exemption, the grantor of the trust (most often the insured under the policy) can avoid gift tax on the transfer of gifted funds used to pay insurance premiums. But, beyond the tax benefits, an executor or surviving spouse or business partner enjoys practical advantages when an estate plan includes life insurance. In next month's issue, we will explore some examples of how trust-owned life insurance can offer greater flexibility for the executor and for those who will succeed the deceased owner of a business.

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National Estate Planning Awareness Week

Clients and Friends:

Congress has designated the third week of October of each year as NATIONAL ESTATE PLANNING AWARENESS WEEK. This year, National Estate Planning Awareness week begins on MONDAY, OCTOBER 17th. The purpose of proclaiming a week dedicated to estate planning is to raise public consciousness of the burdens that may arise following death or disability. These burdens are not only carried by immediate family members, but are often, by extension, endured by extended family, friends, business partners and employees.

In this year of the most extraordinary gift and estate tax exemptions in history, please take this opportunity to review your Will, Trust and Powers of Attorney. Contact us for assistance in reviewing your documents in light of current law. When reviewing your documents, consider changes in family circumstance and other factors such as:

•  Your IRAs and other retirement accounts should be properly coordinated with the terms of your Will
•  Your Wills should address the proper way protect your descendants against claims of creditors or divorce proceedings
•  Your Wills should properly account for "blended families" and multiple marriages to avoid strain for surviving spouse and heirs
•  Life Insurance policies should be reviewed in light of more attractive mortality rates and competitive pricing structure
•  Beneficiary designations and trust ownership of life insurance should be implemented or reviewed
•  The ownership succession of your business should be finalized because the transition may be most important in sustaining asset value for surviving spouse or descendants

Please join us in using next week as an opportunity to begin an important conversation with spouse, family members and advisors.

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Succession Planning in the NFL

Clients and Friends:

Congress has proclaimed the third week of October as National Estate Planning Awareness Week. Throughout this week, we will presenting you with special interest articles on the importance of estate planning to surviving spouses, children, business partners and employees. Please share these messages with friends, family, clients or colleagues.

Our topic today is on the unfolding saga of NFL franchise ownership transitions in light of an aging roster of owners. Some of you may recall the unfortunate financial consequences following the death of Miami Dolphins owner Joe Robbie in 1990. The Robbie family owed $47 million in estate taxes and were forced to sell their stake in the Dolphins and their interest in then-named Joe Robbie Stadium.

On the other hand, Lamar Hunt of the Kansas City Chiefs and Wellington Mara of the New York Giants made plans decades prior to their deaths to retain franchise ownership in family hands.

The succession planning opportunities for business owners have NEVER BEFORE been more attractive than today due to higher gift tax exemption amounts and lower interest rates. Please read more on family business succession and estate planning by clicking on the link below. This Forbes article discusses the recent death of Oakland Raiders owner Al Davis and the impact of estate planning on retaining control of family assets.

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From The Feldman Law Firm LLP

When Employers Lose More Than Employees

Whether it is a result of cut backs or policy violations or resignations, employer-employee relationships are routinely severed. Employees in the recent lagging economy often have fewer options available to them in their upcoming job search. As a result, anger and desperation may prompt workers to pack up more than just their personal items in those boxes. Others may simply see an opportunity to help themselves and their new employers gain an unfair competitive advantage by taking and using trade secrets and proprietary information belonging to their former employers.

Under Texas law, a trade secret may consist of any formula, pattern, device, or compilation of information that is used in one's business and which gives one an opportunity to obtain an advantage over competitors. Items such as customer lists, pricing information, client information, customer preferences, buyer contacts, market strategies, blueprints, and drawings have all been found to be trade secrets by Texas courts. When an effort is made to keep material important to a particular business from competitors, trade secret protection is warranted.

It is important for employers to keep up with the current state of law regarding trade secrets and proprietary information. In both the adjacent article and the article below, we review two recent court opinions dealing with this crucial workplace issue.

When Employers Lose More Than EmployeesEmployees Almost Get Away With Literally Packing Up and Taking Information

An oilfield services company suddenly had six key employees quit en masse. As it turns out, the employees left for signing bonuses totaling $6 million to join a newly formed competitor. The employees decided to take the company's proprietary information along with them. One of them was caught on security video loading boxes of material onto his truck the night before he quit. Another employee sent an email requesting a laptop on which to transfer information from his prior employer. Still another departing employee used company financial numbers in presentations to potential investors in the new competing enterprise.

Not surprisingly, the company immediately filed suit against the employees. Despite these facts and the evidence presented, the district court bought into the employees' argument that they had not used any trade secrets of the company and found that the company had failed to show any damages from loss of its trade secrets. The court dismissed the company's claims and granted summary judgment in favor of the employees. But there's more.

The court awarded the former employees attorneys' fees totaling $425,000 in defending against the company's suit! However, the United States Court of Appeals for the Fifth Circuit introduced reason into the case by promptly reversing the summary judgment, dismissing the award of attorneys' fees, and sending the matter back to the trial court for further proceedings.
Non-compete Agreements Protect Trade Secrets and Proprietary Information

A Texas appellate court recently examined whether a business has the right to enforce a covenant not to compete agreement devoid of any express promise to provide confidential information. This case involved an employee that decided to accept a position with a direct competitor. Not only did she leave, but on the same day, her entire service department also opted to go work for the same competitor.

The employer took the appropriate measure by seeking injunctive relief against the employee. Since the employee had signed a non-compete agreement, the employer believed it appropriate to protect not only the non-compete agreement but also information which it considered proprietary. The former employee claimed that the non-compete was unenforceable because it did not promise to provide any confidential information and the information to which she had access to would not otherwise be considered confidential. Much to the surprise of the employer, the trial court agreed with the employee and refused to provide the injunctive relief requested by the company.
On appeal, the Court of Appeals disagreed with the trial court and reversed the ruling. First, the Court held that because the agreement implied that confidential information would be disclosed and because all other requirements for an enforceable agreement were met, the non-compete should be enforced. Second, the appellate court held that when an effort is made to keep material important to a particular business from competitors, trade secret protection is warranted. Moreover, a covenant not to compete is enforceable not only to protect trade secrets but also to protect proprietary and confidential information. This purpose is met where the information or data is something that the employer has taken steps to protect.

These cases highlight the importance of implementing appropriate measures to protect and maintain company trade secrets and proprietary information. This area of the law is continually evolving so that employers must stay abreast to ensure that the safeguards in place for protecting their proprietary information are current and effective.

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NY Times Article on Captives

In the May 8th edition of The New York Times, readers are "introduced" to captive insurance companies as "subsidiaries set up by any large company to insure the company's own risks." See the linked article below, "Seeking Business, States Loosen Insurance Rules." Captive insurers of all sorts are commonly used by U.S.-based businesses for a variety of risk planning applications.

Click here for NY Times article

Capstone and The Feldman Law Firm are in their 13th year of designing, implementing and operating on a turnkey basis captive insurers and other alternative risk financing arrangements for closely-held businesses. Capstone has formed over CAPTIVE_FORMATIONS captives in both U.S. and non-U.S. jurisdictions since 1998.

Captives are tax-advantaged, for-profit insurers. The U.S. government encourages the formation of small insurers to help protect closely-held businesses as a way of promoting jobs and growth. Substantial, closely-held businesses are ideal candidates for alternative risk planning.

Today, over 90% of Fortune 1000 companies and many successful mid-market companies have captives. Already thousands of businesses representing industries such as manufacturing, fabrication, distribution, finance and construction, among others, now participate in some type of alternative risk planning program to better insure the risks of its business affiliates.


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