The IRS repeatedly challenged Captive Insurance Companies on the basis that the premiums paid by the insured to their commonly owned Captive were non-deductible based upon the “economic family theory”.  After the IRS lost several court cases using this theory, including a $600+ million challenge against a Captive owned by United Parcel Service in 2001, the Service resigned itself to the legitimacy of Captive Insurance Companies and soon thereafter abandoned its economic family challenges to Captives. (Rev. Rul. 2001-31) The IRS has since issued a great deal of guidance to assist Captive owners in their proper structuring, management and reporting. (Rev. Ruls. 2002-89; 2002-90; 2002-91 and 2005-40)

Nearly all major corporations have Captives. Some corporations have multiple Captives that serve different risks. For instance, a corporation may have one Captive that primarily covers the corporation's general liability, environmental liability, and product liability risks, and then another Captive that insures the employee benefit liabilities of the corporation, such as workers compensation and healthcare.  Most of our Captive clients elect IRC 831(b) status which allows the Captive to receive the premium income tax free up to $1,200,0000 in premiums per year.

More than half of the states have now passed Captive Insurance enabling statutes, and more than a half-dozen of those states now aggressively cater to the domestic captive market. Captives are now being formed for small and medium-sized profitable businesses that are able to pay as little as $250,000 per year in premiums to their captive. Our Captive Insurance practice is primarily domestic in order to avoid the Government’s prejudice toward offshore planning.

Many advisors are only now becoming aware of the concept of the Captive Insurance Company and introducing it to their clients. In addition to serving an insurance function, Captives can also legitimately serve as a powerful estate planning tool by having the Captive owned in part or entirely by a dynastic trust for the benefit of the heirs of the insured’s owners. Essentially, this affords the wealthy business owner the opportunity to transfer up to $1,200,000 per year to successive generations free from gift, estate and generation skipping transfer taxes!  Captives are also excellent asset protection vehicles, as the assets of the Captive are not on the insured’s balance sheet.

MIJS assists prospective Captive owners and their advisors in evaluating, designing, and implementing Captive solutions. We also review existing Captive structures and suggest ways that they can be used more efficiently. We formed MIJS Captive Management, LLC in 2008 for the purpose of managing our clients’ Captives.  We also have relationships with experienced and reputable insurance actuaries, underwriters, and CPAs who specialize in Captive Insurance arrangements. We are also a member of the Kentucky Captive Association.

For more information, visit our new Captive Website, www.mijscaptive.com.

ATTORNEYS:
Matthew J. Howard, Partner

Alexander T. Galloway, III, Partner