Unsure how to set up your captive insurance company structure? Luckily, there is a typical structure to follow.
As a reminder, a captive insurance company is a business that sets up its own insurance to cover its own risks, and the majority of captive insurance companies are structured in a certain way. The primary captive insurance structure is a C-corp, or an LLC that is taxed as a C-corp. A c-corp (C corporation) is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity
So the main point is that the business must be a separate entity from the captive insurance company. Broken down further, a typical capture insurance structure looks like this:
The business, which is on top, pays a premium to the captive insurance company. The captive insurance company is in the middle. When dividing dividends, it goes to the shareholders. Shareholders are the ones who own the captive insurance company, and in the vast majority of cases, the shareholders of the captive insurance company are the same shareholders as the original business.
Regardless of the structure chosen, there are some basics common to all captive insurance structures. One of these is the participation of a risk-sharing partner or traditional insurer. Risk-sharing partners offer such necessary and desirable services as certification of coverage and limits, reinsurance, loss control, and mitigation, claims reserving, adjustment, and oversight, risk management, and underwriting and regulatory response and assistance. This often-overlooked service has become one of the most valuable services offered by insurers to captive insurance companies today.
When a business needs to establish a captive insurance company, it must carefully choose a risk-sharing partner, as providing certificates to outside parties is usually a material service.
The rules around captive insurance company structure have changed within the last few years. The Protecting Americans from Tax Hikes (PATH) Act was legislation issued in 2017. The law changed how captive insurance companies could be structured. Before the PATH Act came to be, the business owners and the captive insurance company owners could have been separate people. In some circumstances, you have captive insurance management partners and then a patriarch or matriarch controlling the top-level business. This was commonly seen in families. This allowed parents to get money past the estate and gift tax line to their children.
The IRS did not accept this as a legitimate means of intergenerational wealth transfer. The PATH Act was created to protect taxpayers and their families against fraud and permanently extend many expiring tax laws. Under the law, the children, spouses, or other descendants of the business owners can own up to 2% of the captive insurance company. Capital insurance arrangements are typically deductible, so there is still a tax benefit.
New captive structures are being created every day, and diversity in approach will benefit the whole industry. However, any structure will ultimately need to reflect the information above.
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