Why Form A Captive

What is a small Captive Insurance Company (“Captive”)?

A Captive is a state licensed insurance company which does not receive more than one million two-hundred thousand dollars ($1,200,000) in premium in any one tax year. It is generally formed to insure extraordinary property and casualty insurance risks of a group of related companies. A captive must qualify for risks shifting/risk distribution by insuring the risks of a number of related companies, covering third-party risk or participating in an insurance pool. It is generally owned by the same shareholders as the insured company.

What are the Tax Benefits Provided to Captives?

  • Companies are entitled to an ordinary deduction for premiums paid to Captives.
  • Captives are exempt from all income taxes except for tax on its investment income.
  • Captive earnings can grow tax deferred if invested in long-term investments, tax-free bonds and instruments or insurance products.
  • Distributions to Captive shareholders are qualified dividends currently taxed at the 20% federal rate.

Why Form a Captive?

  • To insure extraordinary risks that may not be available in the market or would be too expensive.
  • To reduce third-party insurance costs by self-insuring all or a portion of a company’s risks.
  • To develop a tax deductible reserve to cover future contingencies.
  • To grow the reserves of the Captive on a tax deferred basis and to dividend them at a reduced tax rate.
  • As a means of providing deductible and tax-favored executive compensation to key employees.
  • To transfer assets of the insured company to children and grandchildren without paying gift tax by having them, or trusts for their benefit, own all or part of the Captive.
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