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:

1.) Work to minimize the impact of estate taxes,

2.) Make sure the client’s estate is disposed of in a manner consistent with the client’s wishes and

3.) Plan to lower the negative impact of the client’s death on his loved ones.

If that seems like a lot, it is because there is a great deal involved. In addition to being a lawyer, an estate planner must be part psychologist, family counselor, financial adviser and loyal confidant.

Do I Need to Form An Estate Plan?

The answer is it depends. The question usually begins by looking at the potential for the estate to be taxed under federal estate tax law. Here, an individual has a $5 million credit against estate taxes. In addition, this amount is “portable,” meaning that if you are married, your spouse can give you the unused portion of their estate tax credit when they die. This effectively means that all individual estates under $5 million will pass without federal tax implications, and all married estates worth less than $10 million will pass without federal tax implications.

But, federal taxes aren’t the end of the story. For example, are there state taxes you have to worry about? In addition, are there any special plans you want to make? For example, do you want to make a gift to your school? Or do you want to make sure your children can afford college? These are all non-tax questions that need to be answered as part of the estate plan process.

Put another way, while taxation is usually a key motivator in forming the plan, there many non-tax reasons for putting together an estate plan. And all of these should be considered.

Should I Just “Do It Myself?”

Thanks to various services, individuals now have the ability to write their own will or trust. This has led many people to think they can simply “do it themselves.” While this may sound like a good idea, it’s not. Suppose you have a problem with your knee, so you go to the WebMD website and look up “knee problem.” After doing a lot of reading, you determine you need a new knee joint. So, you now read how to perform the operation. However — are you really capable of doing this?” The obvious answer is no. While you are now better informed about the process, you haven’t performed surgery before and don’t have the credentials to do this yourself.

The same is true of the law. While it may seem that the law is merely a series of inter-locking documents, it’s actually far more complicated. Doing it yourself will probably lead to problems you don’t need. Put another way — I have yet to see a self-made estate plan that works.

How does a captive fit into an estate plan?

The following is an excerpt from my book, US Captive Insurance Law:

Sixth, captives can be used as wealth transfer vehicles. Here is the general plan. A company owned by a high net worth individual establishes a captive. The captive has written premiums lower than $1.2 million. As a result, the captive is taxed on its taxable investment income, which is usually lower than net premiums received. At the same time, the estate’s beneficiaries are shareholders of the captive. It is best if they own the captive through a trust to protect the shares from future creditor’s claims. The children receive the benefit of increased share prices caused by an increase in the captive’s overall net worth.

For those of you who are familiar with a family limited partnership, the overall plan or concept is very similar.

As the above information indicates, a captive can become central to an estate plan, as it not only helps to mitigate risk but also transfer wealth between generations.

In accordance with Circular 230 Disclosure