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Tax problems solved.
No matter where in the world you are.
by: Anthony Parent 2018-01-09
Tax reform bill did not impact the fantastic benefits of Captive Insurance. One of the first painful lessons an entrepreneur or business owner learns about this world is that litigation is expensive and it is exhaustive having your entire life subject to the whims of the court. Usually after the first law suit, a business person will immediately look into asset protection. And in that rush, sometimes less than optimal decisions are made.
Many promoters learned that business owners are incredibly agitated about litigation and will offer what they claim are lock solid asset protection plans that MUST BE OBTAINED NOW OR ELSE. Solicitations I’ve seen are:
The problem with many of these plans is that they can create more risk than they solve. First, tax compliance and accounting cost go way up. And worse, if an offshore entity is involved the tax compliance costs are even higher. Yet ever worse, the penalties for getting even technical things wrong are met with a fury unmatched by any domestic tax issues. Does it make sense to create an asset protection plan that could potentially protect you from a business or person, but puts you directly in harms way of a much more powerful and angerous organization --- the IRS.
The second issue is that these complicated asset protection plans have real formalities that must be followed or a court could completely ignore the structure. This is called piercing the corporate veil. If you have a trust or structure but treat all the income assets as you piggy bank, and fail to follow corporate requirements like having meetings, all your complicated work can be completely undone.
A bad asset protection plan, and which there are plenty of, can create more harm than good. It can offer no true protection yet wildly increases compliance costs and compliance risks.
Yet there is one more problem. A problem that is overlooked until it happens.
What if someone gets hurt? What if that person who got hurt was someone you kind of liked?
Now let us suppose you have a rock-solid asset protection plan that completely protected your business from both illegitimate claims and legitimate claims. About those legitimate claims…do you want to be known as the guy who beat someone out? What if you have to see that person at kid’s soccer game. At church? Is being uncomfortable your goal in working so hard?
A true asset protection plan needs to protect one of your most valuable assets — your reputation.
That’s why we shake our head at most advanced so claimed asset protection plans. They fail to achieve their stated goals. Basic protections like having a limited liability like a Corporation, LLC, or LLP go a long way. And so do following corporate formalities. And then after thse are done corectly many times we will suggest simply to increase an insurance policy to protect assets. and that way if something bad happens. everyone can remain friends.
But sure enough there are problem with insurance. It’s expensive is one. And sometimes you can’t even find coverage for your type of business. But there’s another problem/opportunity that I will explain with one of the first lessons I learned in business.
A friend of mine owned a bike shop for years. I asked him while I was in law school, "do you have any regrets?" Immediately he said “I had a chance to buy my own building in 1992, but I rented instead. I am haunted by the stupid decision every day.” And true, bike retail has suffered over the year with online sales, to a point where a bike shop isn’t really worth all that much. But the real estate it was sitting on, why that is really be worth something. Sure enough, the property my friends bike shop is on now is worth $1.5 million dollars. The only problem: He doesn’t own it.
Lesson learned --- I bought my own building as soon as I could. Thinking 'Why should someone else get the benefit of the opportunity I create, if I can capture it efficiently, like with owning my own property?' In a real way, regardless of however my business does, I diversified my portfolio. And created a private pension plan by having an asset that can generate passive income.
Like your own high rent payments you collect yourself, wouldn’t it be nice if your high insurance premiums could benefit you instead of others?
Well you can. You can own your own insurance company and that is essentially what a captive insurance company is.
If someone brings a real claim against you, you pay it with little emotion or sting to your operations. If someone brings a frivolous claim against you, their hearts are going to sink a bit once they realize that there is a captive insurance company backing you up. They won’t be able to exert the pressure on you if you were uninsured or underinsured or had some nonsense asset protection plan that you didn’t follow. The plaintiff's attorney will look for some small token amount just do he can get out of a case he will lose money on for the next four year. The best kinds of lawsuits are the ones not filed. Second to that, the ones immediately settled. Captive insurance helps achieve both goals.
If you do it right, you could strip out a tremendous amount of taxable income legally. Your premiums, which under the structure we like the best, can reach up to $2 million dollar per year. Your premium is 100% tax deductible. You premium is deductible to your operating business, but does NOT count as income to your captive This is a great one-sided equation! What you do typically have to pay taxes on is the income it generate every year. Yet essentially what you’ve done is taking your marginal tax rate down and realized the benefit of all the opportunities you create.
You have the choice of having your captive insurance company offshore (typically Bermuda) or domestic. There are reasons to be offshore, but again, as offshore compliance experts who fully understand and appreciate all the costs of a properly run offshore entity, we often suggest to our clients a domestic captive is a better choice.
A properly set up and maintained Captive Insurance Company offers incredible true asset protection that will protect your reputation and people you care about all while offering a real tax savings year after year.
We help US business and taxpayers around the globe. If you’d like to talk to a member of our tax team about Captive Insurance or any other potential tax strategies contact us at email@example.com 888-477-4258.