Portfolio question. I have a captive insurance company.

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jacoavlu
Posts: 624
Joined: Sun Jan 06, 2013 12:06 pm

Portfolio question. I have a captive insurance company.

Post by jacoavlu » Sat Apr 11, 2015 10:44 am

I am a physician 35 yrs old, married w a few young kids. I feel like I'm on the right track with regards to retirement and saving, just looking for any constructive input, if I could be doing anything better.

I'm a partner in a small group, we have a 401k-Profit sharing plan, I max the 401k ($18k/yr) and the profit sharing amount varies but some years I'll get an additional $15k or so from that. I have been doing backdoor Roths for my wife and I the past few years (income too high for deductible IRA or straight Roth) and plan to continue to do so. My wife stays at home so doesn't have any retirement plan, just her Roth. All of these funds are at Vanguard, I manage them. No other IRAs.

I don't have any taxable investment accounts. I have 529 plans for each of my 4 kids invested in our state plan, $10k/yr contributions are state-tax deductible.

Our practice also has a captive insurance company we started two years ago. I anticipate I will be paying premiums to our captive of $100k-$150k per year going forward and anticipate most of that accumulating. Premiums are tax deductible to our practice. We don't have any medical malpractice or life insurance in our captive. We are insuring against risk that we really don't anticipate encountering, business interruption, catastrophic equipment loss, etc. We would really try hard not to file any large claims so as to avoid having to remove significant funds from the captive, but would have funds there if we really needed to. My captive funds are within an orginization account at Vanguard. I would anticipate that at the point that I retire, my funds would be distributed to me from the captive, the entire amount taxed as capital gains (not income).

Our captive is a C Corp. My understanding of the tax implications of our captive year to year is limited at this early point, but I know that as a C Corp the captive pays taxes on investment income different than an individual would. My ownership of the captive is 25%, we split the tax bill, so while I may make investment choices within the captive to minimize taxes yearlya, I can't control what my partners do with their monies - their monies which do affect my tax bill, in a way. (Two partners have their money privately managed, the other manages his own and is just in cash now).

So at this point I'm trying to make sure I'm not overlooking anything. Should I be holding more bonds in one place and more equities in another? All of my money at this point is tax advantaged in one way or another. I suppose the captive account money would be the least tax advantaged in that the corp does pay yearly taxes in investment income, but I also hesitate to invest all that money in equities. (Our captive always maintains a separate account of $125k cash per insurance commission requirements)

So far I've elected to try to maximize money going to the captive to reduce my yearly tax bill. As a result I don't contribute relatively that much to the 529 plans, just enough there to hit the maximum state tax deduction ($10k/yr).

Thanks largely to this forum (Taylor!) I've chosen to follow a three fund portfolio approach and to keep costs low. I've tried to aim for about "age in bonds" allocation, the remainder equities, 30% of that foreign.


So here's what I got. All funds are at Vanguard in Admiral Index funds. Even the 529 funds are in Vanguard. For brevity TSM=Total stock market (US), TBM=Total bond market, TISM=Total international stock market.

Total: roughly 615k, 67% equities, 33% bonds

401k-Profit sharing:
TSM - 90k (about 45k of this is Roth 401k money)
TISM - 42k
TBM - 77k
Anticipate contributions of $18k-40k/yr going here

Roth IRAs:
TSM - 40k
Anticipate contributions of $11k/yr going here

Captive:
TSM - 155k
TISM - 61k
TBM - 100k
Anticipate contributions of $100k-$150k/yr going here

529 plans:
TSM - 25k
TBM - 25k
Anticipate contributions of $10k/yr going here


Thanks much in advance for any input.

Lafder
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Re: Portfolio question. I have a captive insurance company.

Post by Lafder » Sat Apr 11, 2015 11:30 am

Is this a fact or opinion ? "I would anticipate that at the point that I retire, my funds would be distributed to me from the captive, the entire amount taxed as capital gains (not income)."

I had never even heard of captive insurance until your post.

lafder

livesoft
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Re: Portfolio question. I have a captive insurance company.

Post by livesoft » Sat Apr 11, 2015 11:34 am

Captive insurance? Is that what was written up today as a possible tax dodge?
http://www.nytimes.com/2015/04/11/your- ... lters.html
Is that article what prompted your post?
The question is whether these small captives have gone too far. This year, the Internal Revenue Service placed them on its annual “Dirty Dozen list of tax scams.” Small captives now share space with phishing, identity theft and offshore tax avoidance.
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ResearchMed
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Re: Portfolio question. I have a captive insurance company.

Post by ResearchMed » Sat Apr 11, 2015 11:41 am

livesoft wrote:Captive insurance? Is that what was written up today as a possible tax dodge?
http://www.nytimes.com/2015/04/11/your- ... lters.html
Is that article what prompted your post?
The question is whether these small captives have gone too far. This year, the Internal Revenue Service placed them on its annual “Dirty Dozen list of tax scams.” Small captives now share space with phishing, identity theft and offshore tax avoidance.
"Tax dodge" is apparently if there isn't a "real" risk(s) being insured.

IANAL/etc., but it seems possible that OP's insurance needs are "real".

This is compared to one of the examples of insuring *specifically* (and perhaps only) in case the office is attacked by terrorists... while the "regular" insurance needs are placed with a "real" insurance company.

RM
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ResearchMed
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Re: Portfolio question. I have a captive insurance company.

Post by ResearchMed » Sat Apr 11, 2015 11:42 am

ResearchMed wrote:
livesoft wrote:Captive insurance? Is that what was written up today as a possible tax dodge?
http://www.nytimes.com/2015/04/11/your- ... lters.html
Is that article what prompted your post?
The question is whether these small captives have gone too far. This year, the Internal Revenue Service placed them on its annual “Dirty Dozen list of tax scams.” Small captives now share space with phishing, identity theft and offshore tax avoidance.
"Tax dodge" is apparently if there isn't a "real" risk(s) being insured.

IANAL/etc., but it seems possible that OP's insurance needs are "real".

This is compared to one of the examples of insuring *specifically* (and perhaps only) in case the office is attacked by terrorists... while the "regular" insurance needs are placed with a "real" insurance company.

ADDED: Is true "self insuring" (actually setting aside the premiums, not just "we'll pay it somehow if ever needed") the same as captive insurance?

RM
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jacoavlu
Posts: 624
Joined: Sun Jan 06, 2013 12:06 pm

Re: Portfolio question. I have a captive insurance company.

Post by jacoavlu » Sat Apr 11, 2015 12:17 pm

Hello all

I wan't intending for this to be a discussion of captives per se, but I am happy to discuss. I must admit my depth of knowledge is limited. I'm learning more slowly over time. The decision to form a captive insurance company was made before I was a senior partner.

I read the article. Red flags are going to go up if the entirety of one's income goes to pay premiums to a captively held insurance company. Similarly, if your're insuring against terrorist attacks, or a hurricane if you're business is in South Dakota. More attention comes if you're captive is domiciled out of the United States. Or if behavior of the company with regards to premiums paid and loans taken/distributions taken gives the appearance of recharacterization of income.

So we try to stay well within the limits of the letter of the law. And as of now, it is fact that the law is such that if we were to dissolve the captive (which we do not anticipate doing for many years) the reserve funds within the captive would be taxed to the owner at capital gains rates. We are not taking any loans/distributions now.

jacoavlu
Posts: 624
Joined: Sun Jan 06, 2013 12:06 pm

Re: Portfolio question. I have a captive insurance company.

Post by jacoavlu » Sat Apr 11, 2015 12:24 pm

ResearchMed wrote:
ADDED: Is true "self insuring" (actually setting aside the premiums, not just "we'll pay it somehow if ever needed") the same as captive insurance?

RM
[/quote]

No, it is not the same.

A captive insurance company is a legitimate insurance company. It must (should?) satisfy the criteria of risk sharing and risk distribution. Feasability studies, tax ID, articles of incorporation, annual meetings, files tax returns, etc. Expensive to setup and maintain. But not uncommon.

There are some states that seem to encourage them. Google "vermont captive" or "montana captive".

dhodson
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Re: Portfolio question. I have a captive insurance company.

Post by dhodson » Sat Apr 11, 2015 12:51 pm

Good luck with the captive.

I looked into it and felt it wasn't worth the risk. If it's a real risk you are insuring against then you will need cross or reinsurance. If the premiums are outrageous for the risk or the risk isn't real then additional good luck. I always find people with these things are vague about what they are insuring.

jacoavlu
Posts: 624
Joined: Sun Jan 06, 2013 12:06 pm

Re: Portfolio question. I have a captive insurance company.

Post by jacoavlu » Sat Apr 11, 2015 1:59 pm

dhodson wrote:Good luck with the captive.

I looked into it and felt it wasn't worth the risk. If it's a real risk you are insuring against then you will need cross or reinsurance. If the premiums are outrageous for the risk or the risk isn't real then additional good luck. I always find people with these things are vague about what they are insuring.
There is real risk involved and as you say yes there is "cross" insurance. To satisfy risk sharing and risk distribution (the definition of legitimate insurance per the IRS) we are in a risk pool with similar groups. 51% of premiums paid remain within the risk pool for the year that they apply to. There have in fact been claims within the pool the past two years.

But to be clear it's a form of tax avoidance. An expensive, legal one.

ResearchMed
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Joined: Fri Dec 26, 2008 11:25 pm

Re: Portfolio question. I have a captive insurance company.

Post by ResearchMed » Sat Apr 11, 2015 5:11 pm

jacoavlu wrote:
dhodson wrote:Good luck with the captive.

I looked into it and felt it wasn't worth the risk. If it's a real risk you are insuring against then you will need cross or reinsurance. If the premiums are outrageous for the risk or the risk isn't real then additional good luck. I always find people with these things are vague about what they are insuring.
There is real risk involved and as you say yes there is "cross" insurance. To satisfy risk sharing and risk distribution (the definition of legitimate insurance per the IRS) we are in a risk pool with similar groups. 51% of premiums paid remain within the risk pool for the year that they apply to. There have in fact been claims within the pool the past two years.

But to be clear it's a form of tax avoidance. An expensive, legal one.
If I understand, you are in fact distributing almost half of the premiums each year?

I'll pass on tax legalities of the fine tuning, as I am not even close to an expert, and assume this is structured as a known and legal strategy.

However, if all of the "similar groups" are doing this, is there going to be enough in the kitty for one (or two or three) eventual catastrophic claims?

That would probably be especially difficult in the early years of any new captive insurance company even if they keep ALL of the premiums for real potential insurance needs, and don't distribute any out except for required claims.

RM
This signature is a placebo. You are in the control group.

jacoavlu
Posts: 624
Joined: Sun Jan 06, 2013 12:06 pm

Re: Portfolio question. I have a captive insurance company.

Post by jacoavlu » Sat Apr 11, 2015 5:22 pm

Premiums paid from our practive to the captive stay within the captive. 100% of these funds are within the captive. In other words, we (the owners of the captive) have not taken any money out in the form of loans, distributions, etc.

Only 51% of the premiums paid, however, are subject to the risk pool. The other 49% of premiums paid are within the captive, but not subject to risk of loss from a claim by someone else in the risk pool.

Make sense?

jacoavlu
Posts: 624
Joined: Sun Jan 06, 2013 12:06 pm

Re: Portfolio question. I have a captive insurance company.

Post by jacoavlu » Sat Apr 11, 2015 5:25 pm

Taking distributions, loans, etc, especially early in the life of a captive, draws red flags understandably because at that point it sure looks like you're just recharacterizing income.

(Instead of taking money as income, you're paying a tax deductible premium to the captive, and at the same time taking a distribution taxed at capital gains rates.)

jacoavlu
Posts: 624
Joined: Sun Jan 06, 2013 12:06 pm

Re: Portfolio question. I have a captive insurance company.

Post by jacoavlu » Sat Apr 11, 2015 5:43 pm

ResearchMed wrote:
However, if all of the "similar groups" are doing this, is there going to be enough in the kitty for one (or two or three) eventual catastrophic claims?

That would probably be especially difficult in the early years of any new captive insurance company even if they keep ALL of the premiums for real potential insurance needs, and don't distribute any out except for required claims.

RM
I don't think catastrophic claims are "eventual". Most risks events insured against, while real, are unlikely.

dhodson
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Re: Portfolio question. I have a captive insurance company.

Post by dhodson » Sat Apr 11, 2015 6:25 pm

Then 49% of premiums are excessive

jacoavlu
Posts: 624
Joined: Sun Jan 06, 2013 12:06 pm

Re: Portfolio question. I have a captive insurance company.

Post by jacoavlu » Sat Apr 11, 2015 6:45 pm

dhodson wrote:Then 49% of premiums are excessive
not sure what you mean. I apologize I'm sure my attempted explanation is just muddying things. I'm at the limits of my knowledge on this.

If anyone wants to know a lot more about captives I can hook you up with a specialist who can tell you all you want to know and more :|

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