USE OF CAPTIVE INSURANCE IN ESTATE AND BUSINESS PLANNING

By Gordon A. Schaller, Esq.^* and Scott A. Harshman, Esq.^**

I. INTRODUCTION

Many businesses face rising insurance costs and increasing self-insured risk. In response, an increasing number of businesses are implementing captive insurance programs.

A captive insurance company is a subsidiary or affiliate of a business entity (or entities) formed to insure or reinsure the risks of those entities. The affiliated insured companies may deduct reasonable insurance premiums paid to a properly structured captive. In addition, the captive insurance company is provided with special tax incentives, so that premium income may be nontaxable. This creates an exceptional opportunity for the owners of mid-market companies to transfer substantial wealth without gift, estate or generation-skipping tax consequences to the extent the captive insurance company is capitalized and owned by or in trust for younger generations. Captive ownership can also be structured to provide incentives for key management and business succession. These results are available by statute and IRS "safe harbor" rulings to carefully planned and implemented captives.