Are Captives the new 412, 419 and the One Man ESOP

I read recently where some believe that captive insurance companies may become the next 412 and 419 problem for unsuspecting companies. Designed under IRS Code 831(b), these captive insurance companies are designed to insure the risks of an individual business. In theory and if properly designed, the premiums are deducted when paid to a related company, and depending on claims, profits can be paid out as dividends and when liquidated, the proceeds are taxed at capital gains rates.

The problem with Captives is that the are expensive to set up and operate. When I last looked into this issue, I was told that in order to set up a captive, you needed at least $1,000,000.00 per year in premium spent to make it worth the administrative cost. Captives must be opetate as a true risk assuming entity, not simply a tax avoidance vehicle.

Reports indicate that the IRS is looking into the sale of life insurance to fund Captives. This sounds very familiar.

Chris Hellums can be contacted at Chrish@PDKHLaw.com