Year End Tax Planning Strategies Profitable
Business Owners Should Consider
Captive Insurance Company and Defined Benefit Plans
WLG ALERT
4th Quarter 2014
Most successful business owners are great at bringing in the business. In the business world they are typically
called “rainmakers”. Which brings me to my next point, bringing in the business is one side of the equation, a
very important component might I say, but we all know it’s not what we bring in that counts, it’s what we get to
keep that matters. With year-end coming upon us rather quickly, the decisions we make in the last quarter of
the year can either create large tax obligations or large tax deductions.
As most highly successful entrepreneurs would agree, income tax rates are very high and are likely to continue
to increase. In some states, the combination of the federal and state income tax rate could put you in the 50% or
more marginal tax bracket. With all this said, now is the perfect opportunity to reduce income tax liability
utilizing strategies which are still permitted by law. Two such strategies would be establishing a defined
benefit plan and/or captive insurance company.
Defined Benefit Plan
A defined benefit plan is a qualified retirement plan that allows for substantial tax deductions as seen is the
chart below. Since these plans generate above the line deductions, a qualified retirement plan is a great way to
reduce your current year income tax liability on the federal, state and local levels while providing for your
future retirement years.
For example, a tax payer age 65 earning $2 million per year, can contribute $363,190 into a defined benefit plan
thus reducing their adjusted gross income to $1,636,810. Based on the 50% rate referenced above, this can
potentially save over $180,000 in current income tax liabilities while saving money for future retirement
years. This type of tax and retirement planning cannot be accomplished by only utilizing an ordinary 401k or
profit sharing plan which is limited to contributions of $52,000 per year.
Below is a chart showing the amount of contributions which can go into a defined benefit plan based on the age
of the participant. Please be aware there are other costs which must be considered when implementing a
defined benefit plan.
Age
Contribution
40
45
50
55
60
65
70
$84,626
$123,900
$197,056
$264,137
$261,705
$363,190
$497,798
The figures in this chart are the maximum first year contributions to a traditional split funded defined benefit plan based on the maximum retirement benefit for 2014. The figures also assume each participant has a normal
retirement age of 62 or 5 years of participation, if later; a maximum salary of $260,000; and a death benefit based on Rev. Rul. 74-307.
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WLG ALERT
4th Quarter 2014
Captive Insurance Company “CIC”
Business owners are often drawn to captives for the income tax savings that can be realized. Premiums paid to
a captive insurance company are generally a tax deductible business expense under Section 162 of the
Internal Revenue Code. In addition, a captive with net premium up to $1.2 million per year may elect under
IRC Section 831(b) to be taxed only on its investment income which means the $1.2 million annual premium
is not considered income by the “CIC”. This ability to accumulate surplus from underwriting profits, with
minimal or no tax, is seen by many entrepreneurs as one of the attractive features of forming a captive.
But tax breaks are not the only advantage, captive insurance companies may help, for example, manage risk of
loss of a business license, reputational risk, financial loss due to regulatory changes or environmental losses.
Today, most Fortune 1000 companies, as well as many smaller ones, have decided to go the captive route for
the following reasons:
a. Investment Income - Could invest the captive’s reserves and surplus allowing the investment income to
benefit the owner of the captive rather than a traditional commercial insurance carrier.
b. Incentive for Loss Control - A powerful incentive to implement loss control measures and reduce claims
experience is provided because underwriting profits belong to the owner of the captive insurance company.
c. Increased Coverage Capabilities - Could provide coverage for risks that are only inherent to that specific
enterprise, which is typically unavailable through traditional property and casualty carriers.
d. Greater Control Over Claims - Could have better control over the review process along with how claims are
handled.
e. Underwriting Flexibility - Could create customized features, which better suit that enterprise’s needs.
f.
Capture Underwriting Profit - Could capture underwriting profits by managing the underwriting risks of the
captive effectively.
A properly designed captive insurance company arrangement can provide significant risk mitigation, tax mitigation,
wealth accumulation opportunities as well as allowing for efficient and tax-advantaged wealth transfer and asset
protection strategies.
As referenced above, a “CIC” can be utilized as an effective wealth transfer vehicle. For example, a high-networth individual may choose, with the assistance of estate planning counsel, to implement an irrevocable trust
for the benefit of his children or grandchildren. The irrevocable trust may, in turn, own 100 percent of the
captive’s shares, providing an effective mechanism to benefit trust beneficiaries via increases in the captive's
overall net worth, resulting from increases in its investment portfolio over time. When owned by an asset
protection trust, capital and surplus of the captive insurance company can be protected from litigation risk. This
arrangement can play an effective role in protecting assets from future creditors' claims.
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WLG ALERT
4th Quarter 2014
Conclusion:
Defined benefit plans and captive insurance companies are great strategies which may be a great fit for you and
your business, however they can take a good deal of time to establish. If you are considering taking advantage
of one or both of the strategies referenced above, I would highly recommend starting the process yesterday. If
you have questions on how these strategies fit into your year-end planning, we would be honored to have the
opportunity to discuss this article further.
Chad L. Reyes, is the president and CEO of Wealth and Legacy Group (WLG), a boutique life insurance firm with a
deep focus in risk management, advanced pension plan design, wealth transfer and charitable planning. WLG
predominantly focuses on a collaborative basis with CPA Firms, trust and estate law firms and wealth management
firms who serve the high-net-worth and ultra-high-net-worth. Mr. Reyes and his team have over 50 years of combined
experience working with families of wealth and the trusted advisors who serve these families. His firm routinely
provides CPAs with CPE credits in areas which his firm specializes. He can be reached at 646-402 Ext.301 or
[email protected].
The foregoing information regarding estate, charitable and/or business planning techniques is not intended to be tax, legal or investment advice and is provided for
general educational purposes only. Neither Wealth and Legacy Group, nor its subsidiaries, agents or employees provide tax or legal advice. You should consult with
your tax and legal advisor regarding your individual situation.
1000 SOUTH AVENUE | STATEN ISLAND | NY | 10314 | P: 646.402.6300 | F: 866.475.3096 | [email protected]
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