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Using CICs in an Obama Administration

In part my last newsletter addressed some concerns with the changes that may come with the election.  Well, the election has come and gone and apparently people wanted “change” since Mr. Obama is now preparing to serve as our nation’s President.

Many people are wondering how this “change” will affect them.  If you are a small business owner or a high-net worth individual, chances are significant that you will be affected.  Over the past several months the government has been working to bailout some of our lenders and other large institutions but no one will be bailing out the medium to small employer. Small employers are on their own and steps must be taken to protect their assets from being taken by all creditors including the incoming government via taxes.

The bad news, before the election Obama said that tax law changes will only affect those who earn at least $250,000+.  The really bad news, now that the election is over, there are already discussions about dropping that number down to $200,000 or less.   The good news, there are plans that can be used to protect your money from creditors and from the government’s taxes.

First, let’s address what changes may be coming.  It has been said that Obama is seeking to put a stop to offshore tax havens and loopholes where people are avoiding taxes.  He has also stated that tax planning structures like trusts, domestic and offshore; Family Limited Partnerships; and S-Corps may be subject to scrutiny.

Captive Insurance Companies (CICs)

One tool medium to small business owners can look to are CICs.

Most in the industry think of a CIC as a tool only for businesses who have an extra $300,000+ a year to pay premiums into such a structure.  The fact is that there are small CIC structures clients can get into where their deductible insurance premiums are as low as $100,000.

CICs are a terrific risk mitigation tool because they help a business insure against risks that the business currently self-insures against (meaning, if there is a claim against the company, the claims will be paid for out of the company’s profits or assets).

With a good claims history in a CIC they can work as a tremendous wealth building and estate planning tool.

Did you know that you could setup a CIC and have it owned by an irrevocable trust (IT)?  Why would you do that?  For clients who have estate tax problems, having a CIC owned by an IT for the benefit of the client’s heirs moves a tax-deducible dollar out of the estate without gift taxes; and, with a good claims history whatever is in the captive will then pass to the heirs estate tax free.  This is a very powerful planning structure for reduction of taxes, accumulation of wealth, and estate planning.

While CICs are not asset protection tools, if the CIC is owned by an IT, the assets of the CIC are not subject to the creditors or the business.

Additionally, if a business owner wants to own the CIC personally so he/she can eventually remove money not used to pay claims at the long term capital gains tax rates (typically when the client is in retirement), it would be prudent to set the CIC up in an offshore jurisdiction and have the CIC owned by an offshore asset protection trust.  This is the most secure structure a client has at his/her disposal.

Side note on cash value life:

With the continued theme of risk mitigation, one of the best investment mitigation tools inside a CIC is a high cash value life insurance policy.  It will protect the CIC’s money from going backwards due to market declines (how’d you like to have had $1,000,000 in stock in your CIC 18 months ago?).  You’d have lost about 45% of that value.  With the current state of the economy and the market, if you are seeking to hedge risk, allocating a portion of your money to a high cash value life insurance policy is recommended.

Additionally, investments in a CIC are taxed at the C-Corp. rates, as you know money is allowed to grow tax free in a cash value life policy so using a high cash value policy simply to grow wealth and increase reserves is also a good idea.

We at the APS™ believe so strongly in the proper use of CIC as a risk mitigation tool for your small to medium business owner clients we had two different speakers cover various aspects of CICs at the recent APS™ Forum in Las Vegas.

If you have profitable medium to small business owner clients and you want to be proactive to help them protect and grow their wealth during an Obama presidency, you should learn about CICs to help your clients from the inevitable tax problems coming our way.

Educational PowerPoint Presentation

To view an educational PowerPoint on CICs go to this page.


Roccy DeFrancesco, CWPP™, CAPP™, CMP™