Warnings against certain captive insurance companiesBlog added by Nicholas Paleveda MBA J.D. LL.M on September 18, 2013
Nick Paleveda MBA J.D. LL.M

Nicholas Paleveda MBA J.D. LL.M

Sanford, NC

Joined: March 27, 2012

Professor Beckett Cantley teaches at the John Marshall Law School and is also an adjunct at the Northeastern University Graduate Tax Program, where he published two papers on captive insurance companies. The first one is titled "Repeat as necessary: Historical IRS Policy Weapons to Combat Conduit Captive Insurance Company Deductible Purchase of Life Insurance." The second one is titled "Steering into the Storm: Amplification of captive Insurance Company Compliance Issues in the Offshore Tax Crackdown." Both of these articles explore potential IRS attacks on captive insurance companies purchasing life insurance. They also explore tax-deductible insurance issues in general, including 419 and 412(e)(3) plans.

What should a producer do?

A producer can educate himself about the potential risk of a captive insurance company by reading these articles. The producer should also work with a licensed attorney to limit the exposure to the purchase of the product. You can refer to Berry et al v. Indianapolis Life, where the federal district judge dismissed the producers because they were not attorneys and the clients could not and should not rely on them for legal advice.

Is it safe to go into these waters?

The J.D. degree stands for, well, it "just depends." Like most tax transactions, structure, form and intent are important. There are legitimate uses of captive insurance companies. The Florida Bar (where I am licensed) has had or currently maintains a captive for malpractice insurance. The IRS at one time made captives a "listed transaction." The IRS then withdrew the listing, as they did not find abuse in the area. Setting up a captive just to purchase life insurance would probably sink into the offshore ocean. Setting up a captive to insure risks that are otherwise difficult to insure or expensive to insure would probably be sustained. For example: hurricane insurance in Florida.

New captive insurance company statutes: Texas is now a player in 2013

Nevertheless, captives will continue to grow as state statutes continue to evolve. Florida has new rules which took effect July 1, 2012. Texas also recently passed a law allowing captive insurance companies on June 14, 2013. No question this will be a growing industry; the remaining question is how will our friends at the IRS treat this newcomer.
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