In this first installment Andrew Cavenagh, Chairman of SIIA’s Alternative Risk Committee, has posed four questions about the 831(b) captive structure and invited comments by four members of the ART industry. The 831(b) structure is derived from that numbered section of the IRS code that exempts from income taxes any underwriting profits for captives writing less than $1,200,000 in annual premiums. These structures have proliferated in recent years, but there are differing opinions on their merits.
Ideas for future SIIA 4X4 topics may be passed along to Andrew Cavenagh at Cavenagh@paretocaptive.com
Fact or Fiction. The recent proliferation of 831(b) captives is good for employers.
Jay Adkisson: Fact. The more options for employers, the better.
Bill Ford: Fiction. Like other brands of aluminum siding, these vehicles will soon separate the unwary from their bankrolls.
James Landis: Employers? It is good for entrepreneurial owners who want a risk management tool with great tax and financial planning benefits.
Dick Goff: Fact. Employers who own profitable businesses could not find a better funding tool for the purpose of wealth accumulation, estate planning, company perpetuation or even golden handcuffs for key employees.
Fact or Fiction. The recent proliferation of 831(b) captives is good for the alternative risk community.
Jay Adkisson: Fact. 831b captives are one of the main growth engines of the ART community.
Bill Ford: Fiction. Good for short-term commissions much like those received from selling aluminum siding to brick homes.
James Landis: Fact. It is another arrow in their quiver for mid-market companies. These captives do not compete with group captives, but can complement them well.
Dick Goff: Fact. Indeed in that 831 (b) utilization exposes business owners and supporting professionals to the World of ART and to the many benefits which it brings by assisting successful business owners to take control of their business’ or company’s risk and it’s funding.
Fact or Fiction. Without the 831(b) tax regulations, there would be drastically fewer captives with premiums below $1.2m.
Jay Adkisson: Fact. The promoters of captives as tax shelters would not have an easy product to sell.
Bill Ford: Fact. They would move to other toxic cell captives that make great revenues for the providers. Just think alternative weapons of financial self-immolation.
James Landis: Fact. But it is not the regulations; it is the case law plus Revenue Rulings 2002-89 and 2002-90 that make this concept attractive.
Dick Goff: Fact. A captive formed without the benefit of 831(b) tax regulation, is not an efficient funding structure for the purposes of wealth accumulation or estate planning purposes. So yes, there would be fewer captives today, not to forget that there would be fewer domiciles with enabling ART legislation, both domestically as well as offshore.
Fact or Fiction. The fact that so many 831(b) captives are initiated at the behest of accountants and tax advisors is an indicator that these are primarily for tax purposes and insurance is a secondary motivation.
Jay Adkisson: Fact. Some truths are self-evident.
Bill Ford: No duh!
James Landis: Fact. Because those folks know nothing about risk management or the pricing of risk so they cannot present the captive in the correct light as a risk management tool FIRST. If you don’t get that part right, none of the other tax benefits can follow.
Dick Goff: Fact. Though the tax treatment associated with 831(b) captives is certainly attractive, one must remember the fact that because of it, it allows for interesting wealth accumulation, estate planning and company perpetuation funding designs which benefits should certainly out weight the tax savings motivation.
About the Panelists:
Jay D. Adkisson is a partner of the law firm of Riser Adkisson LLP with offices in Newport Beach, California.
Bill Ford is the CEO of Privately Held Insurance, Inc., an Atlanta based captive management company.
James Landis is the Managing Partner of Intuitive Captive Solutions, LLC.
Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker.
SIIA 4X4 is a new feature enabling members to comment and debate on various topics – all part of the “Connection” experience enriching your membership. All members are invited to jump into the conversations and also to suggest future SIIA 4X4 topics.
Great piece on clarifying what 831b is really about. There's always the pros and cons to everything but having additional tax options available may help some businesses during this recession.
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