October 16, 2018

Closely Held Insurance Companies (CICs)

It seems that half the world is on spring break this week and next week. Because of that, I will have a brief but interesting newsletter this week on CICs and will not be doing a newsletter next week.

I thought many readers would find a discussion about CICs interesting for several reasons such as: 1) CICs are not well known but can be a very useful and practical tool to help advisors grow their practice; 2) CICs are one of the best wealth transfer tools available to medium to small business owners, 3) CICs can be terrific asset protection tools, and 4) for those who make money from financial planning and insurance, a CIC is a terrific way to get money under management or to sell large amounts of life insurance.

What is a CIC?

A CIC is just what it sounds like; it literally is a client’s own insurance company that can sell insurance to a number of different people or entities (although most of the time the CIC will sell insurance to the client’s own small business).

How Does a CIC Work as an Asset Protection Tool?

CICs are typically created offshore due to the lower initial capitalization requirements.  Because CICs can be created offshore, they have unique asset protection features.

How can a CIC work to transfer wealth to the next generation gift and estate tax free?

Example: Mr. Smith has a manufacturing company which he owns 100% of the stock.  Mr. Smith generated $1,000,000 of take-home income after expenses from his company and he does not need all of the money to live on.  Mr. Smith is 58 years old with 3 children, a spouse, and a net worth including the value of his company of $7,000,000.

Mr. Smith could set up a CIC that could be owned entirely by his children (or a trust for their benefit). Mr. Smith’s company would then purchase $300,000 to $500,000+ worth of insurance from the CIC for various types of insurance coverage (insurance the company would normally not buy but could).

Mr. Smith’s company would pay this premium each year and several good things are accomplished with this scenario:

1)  Mr. Smith transferred $300k-$500k into an offshore CIC which is owned by his children.  This transfer was done without gift taxes (and with a good claims’ history, the children will be able to keep that money).

2) Mr. Smith did not have to take the money home and pay income taxes on it.

3) Mr. Smith did not have to figure out how to asset protect the money he would have taken home after tax (in the 40% tax bracket) since the money has not only been transferred to the children’s CIC but is in an offshore CIC.

The money in the CIC is there in the event there are any insurance claims, but realistically that money will be used by the children as part of their inheritance.

How can CICs be used to sell life insurance?

Today CICs are usually setup where the investment gains on premiums accumulated are taxable.  Many clients do not want growth on the money in the CIC taxed and the main tool to avoid this tax is life insurance.  Now with the advent of high cash value indexed UL products, the use of life insurance is even easier to use in a CIC as the primary investment.

Additionally, the CIC for many clients will be a wealth transfer tool and as many people are aware, life insurance is the tool of choice when trying to transfer the maximum amount of guaranteed wealth to the next generation.

What if the client wants access to money in the CIC?

This is a bit tricky and can not be fully explained in this newsletter, but through a very simple preferred LLC structure (which will be discussed on Thursday, March 29, at 3:00 during a FREE webinar), the client can actually get access to sizable amounts of cash from the CIC income tax free. The preferred LLC structure uses life insurance as the investment where the owner (in our example Mr. Smith) would have access to the cash value income tax free.

Summary

CICs are not well known but are a very powerful tool for business owners who have surplus income they do not want to take home and pay taxes on and can be a terrific wealth transfer tool when trying to move money to the next generation.  Selfishly from an advisor’s standpoint, you can use this topic to cultivate new clients and if you make your living from life insurance, you can really sell very large policies inside the CIC.

By: Roccy DeFrancesco, JD, CWPP™, CAPP™, CMP™