Who Should Form A Captive Insurance Company?

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I’m pleased to announce that, in conjunction with the great people at the TaxConnections website, we’ve published a new book on captive insurance titled “Who Should Form a Captive Insurance Company?”.  You can buy a copy HERE.  Cost: $4.98.

To help potential captive owners and professionals determine if forming a captive is the right decision for them, I’ve written the “10 questions” one of which is, “Have I started an asset protection plan?”

The phrase “asset protection” is bandied about a great deal. There are websites that claim to provide “asset protection” advice and services, various companies who continually tell us about the importance of asset protection and numerous books that help to educate the public on this topic of law. After looking at all the hoopla, you’d think that if you didn’t engage in some type of plan, you were foolish beyond your years. However, often missing from this discussion are answers to two questions: what exactly is asset protection and do I need to engage an attorney to create and oversee an asset protection plan?

Before providing a definition, let’s pull the lens back and take a 30,000 foot view of an individual’s financial and legal life. There are several events which can negatively impact their financial well-being. In general, these are bankruptcy, litigation, divorce, physical/mental incapacitation and death (this actually impacts the decedents family, but it can still harm a family financially if not dealt with properly). Asset protection looks at each of these events, and then asks this fundamental question: “how can we mitigate the financial damage these events have the potential to cause?” Or, put another way, asset protection is the legal discipline of mitigating , or attempting to mitigate, the negative impact of various financially and legally catastrophic events. As should be obvious from the previous list of events, asset protection “law” actually involves small and large pieces of a number of different legal disciples, but being chiefly comprised of estate planning, debtor/creditor law, business entities, tax law and litigation. It also helps to have at least a basic knowledge of economics and financial dealings, if not a full-fledged thorough understanding thereof. And, some grounding in international law (especially taxation) will probably help. In short, asset protection law is really a hodgepodge of various legal concepts and ideas.

Pay particular attention to the phrase “attempting to mitigate.” No asset protection plan is fool-proof; the success thereof depends a great deal on the facts and circumstances of the claim involved. As an extreme example, assume a client is a doctor who performs surgery while intoxicated and seriously mains a patient. If this case gets to a jury, expect a large pay-out — and don’t expect any sympathy from a creditor attempting to enforce the judgment. And then there is bankruptcy, where the court has tremendous power and where the definition of “bankruptcy estate” is extremely broad — in fact there are very clearly written statutory exemptions to the definition of bankruptcy estate and, frankly, that’s about it. In short, anyone promising you the moon regarding an asset protection plan is pulling the wool over your eyes regarding what is possible.

Now that we’re defined asset protection, the next questions is who should engage in asset protection? There are several ways to answer that question:

1.) Are you in a line of work that attracts a high degree of litigation? While we all face the possibility of litigation, some professions are more likely to be targeted than others. So, if you’re in the line of fire, an asset protection plan makes sense. Here is a list of businesses that are more likely to be in the “legal line of fire:”

• Doctors and other professionals
• Manufacturers
• Construction Related Professions
• Oil and Gas
• Commercial Property Owners
• Transportation Companies

While the list isn’t exhaustive, it does give you an idea of who is a more likely target.

2.) Once an individual reaches a certain income and/or asset level, they naturally become a target. I use the “accredited investor” definition ($1 million in assets and/or $200,000/year in income for the last two years) as a standard bench mark. At this level, some asset protection is mandatory.

3.) All businesses with assets over $1 million should have an attorney look at their structure and operations to minimize liability.

There are other situations that require some planning, but these are less comprehensive and fall under other disciplines in addition to legal asset protection. For example, all individuals should consider whether or not they want to formally sign an advance directive decree, but this is less about asset protection and more about estate planning. And purchasing life insurance or a disability policy — while clear designed to protect assets — is as much a financial or insurance decision.

However, if you are in one of the above mentioned categories — or you have clients that are in these categories — an asset protection plan is probably needed and warranted.

In accordance with Circular 230 Disclosure

Mr. Stewart has a masters in both domestic (US) and international taxation from the Thomas Jefferson School of Law where he graduated magna cum laude. Is currently working on his doctoral dissertation. He has written a book titled US Captive Insurance Law, which is the leading text in this area.

He forms and manages captive insurance companies and helps clients in international tax matters, US entity structuring, estate planning and asset protection.

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