While captive insurance companies have been used by large companies for over 60 years, their use by small and medium sized companies is still in its infancy. There are numerous reason for this, but perhaps the most important is the simple lack of knowledge.
While captive insurance companies have been used by large companies for over 60 years, their use by small and medium sized companies is still in its infancy. There are numerous reason for this, but perhaps the most important is the simple lack of knowledge.
While captive insurance companies have been used by large companies for over 60 years, their use by small and medium sized companies is still in its infancy. There are numerous reason for this, but perhaps the most important is the simple lack of knowledge.
In conjunction with the great people at TaxConnections, we’ve published a new eBook 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 determine if they should form a captive, I’ve written the “10 questions,” one of which is:
Can I negotiate the coverage terms with my current insurance carrier, or, do they hand me a policy to sign?
In conjunction with the great people at TaxConnections, we’ve published a new eBook 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 determine if they should form a captive, I’ve written the “10 questions,” one of which is:
Has there been a problem with my existing property and casualty insurance plan?
In conjunction with the great people at the TaxConnections website, we’ve published a new eBook on captive insurance titled “Who Should Form a Captive Insurance Company?”. You can buy a copy HERE. Cost: $4.98.
Part II – A captive insurance company is often a key piece of a larger puzzle assembled for clients. For example, not only is a captive a great way to limit the impact of “stochastic risk” or provide more effective asset protection (see last week’s post), it can also be incorporated into an estate plan. Therefore, one of the key questions to ask when looking at forming a captive insurance company is, “have I started to put together an estate plan?”
Estate planning is the process by which an attorney and his client: Read More
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 Read More
The third prong of the Harper Test is “whether the arrangement was for “insurance” in its commonly accepted sense.” The case provides further guidance in this paragraph:
Rampart was both organized and operated as an insurance company. It was regulated by the Insurance Registry of Hong Kong. The adequacy of Rampart’s capitalization is not in dispute. The premiums charged by Rampart to its affiliates, as well as to its shippers, were the result of arm’s-length transactions. The policies issued by Rampart were valid and binding. In sum, such policies were insurance policies, and the arrangements between the Harper domestic subsidiaries and Rampart constituted insurance, in the commonly accepted sense. Read More
In looking at the cases, a few points immediately become apparent.
First, all the captives that were challenged by the Internal Revenue Service4 were formed because of business necessity. They are all great examples of the business purpose test outlined in the Frank Lyon case, where has the following factors:
1. there is a genuine multiple-party transaction
2. with economic substance that is
3. compelled or encouraged by business or regulatory realities,
4. that is imbued with tax-independent considerations, and Read More
Today, I want to turn to the Harper Test, which states that a captive must comply with the following three factors:
(1) whether the arrangement involves the existence of an “insurance risk”;
(2) whether there was both risk shifting and risk distribution; and
(3) whether the arrangement was for “insurance” in its commonly accepted sense.
I’ve already discussed the idea of risk shifting and risk distribution. For the next few posts, I want to focus on factors 1 and 3, starting with one, that the arrangement involves the existence of an “insurance risk.” Read More
Following is an excerpt from my book U.S. Captive Insurance Law:
After mentioning the general facts, the appellate court first noted, “It is not perfectly clear on what judicial doctrine the holding rests.” Next, the court noted that this was essentially a sham transaction case, with the IRS arguing that the court should not respect the transaction, because its only motive was tax avoidance. The court first outlined the basic concept of the sham transaction doctrine:
This economic-substance doctrine, also called the sham-transaction doctrine, provides that a transaction ceases to merit tax respect when it has no “economic effects other than the creation of tax benefits.” Even if the transaction has economic effects, it must be Read More
Analyzing UPS’ situation before and after it established the captive, the tax court noted that UPS performed all the work related to the EVCs before and after the transaction:
Before January 1, 1984, petitioner performed all the functions and activities related to the EVC’s and was liable for the damage or loss of packages up to their declared value. After January 1, 1984, petitioner continued to perform all the functions and activities related to EVC’s, including billing for and receiving EVC’s, and remained liable to shippers whose shipments were damaged or lost while in petitioner’s possession. Petitioner continued to receive shippers’ claims for lost or damaged goods, investigate and adjust such claims, and pay such claims out of the EVC revenue that it had collected from shippers. The difference between petitioner’s EVC activity before and after January 1, 1984 was that after Read More
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