Before getting started I did want to make mention of last week’s newsletter titled: Market to Crash Because of Debt Super Cycle. I recently read a report by an industry expert that I believe everyone in our industry should read.
To download the 23-page Debt Super Cycle report that explains why a world debt crisis could be the catalyst for a major market crash, click on the following link:
Captive Insurance Company (CIC) Changes are Coming and NOT for the Better
I thought this was important enough to do a webinar on. Therefore, I recruited my rock star attorney buddy, Jim Duggan, JD, MBA, to be a guest speaker to discuss the impending problems with CICs.
Webinar February 25, 2016, at 1:00 pm EST.
To sign up to learn more about the problems CIC will have to deal with and how that will affect clients that currently have them, as well as how the rule changes will affect future sales of CIC, click on the following link:
If you didn’t notice, President Obama signed into law The Protecting Americans from Tax Hikes Act of 2015 (“The PATH Act”). The Act extended certain business and individual income tax provisions that had expired at the beginning of 2015 (which is good), but it also changed the laws dramatically as they pertain to CIC.
Background information on small CICs (831(b))-CICs have been around for years and have become a tool that many small to medium sized businesses use. CICs are used to insure risks that otherwise are not insurable, but they are also used because with a good claims history, they can be nice tax-favorable wealth accumulation tools.
Many business owners who have estate tax problems have used CICs as what some call the best wealth transfer tool available today (but may no longer be as you’ll read).
-The premium limit for small CIC was $1.2 million.
-There used to be no restrictions on ownership interests (could be owned by children, trusts, LLC, etc.).
What’s changed under The Path Act?
–Premium has INCREASED from $1.2 million a year up to $2.2 million a year (so that’s good)
-New eligibility requirements/restrictions-beginning in 2017, a CIC must meet one the following tests:
(i) A premium concentration test; or,
(ii) A no excess ownership test
These tests are ONLY an issue with CICs that do NOT have common ownership with the companies paying premiums to the CIC.
For example, assume Business A is owned 100% by John Smith.
-If a CIC is owned 100% by John Smith, then the new rules would NOT apply.
-If the CIC was owned by John Smith’s children or a trust for their benefit, then the new rules would apply.
If the rules apply, major changes may be needed
If the new rules do apply, then in my above example where John Smith’s children own the CIC, there are three options to fix the rule violation.
1) The CIC will have to take on 80% risk from other sources outside of his company (the old rule was 50% risk which was considered a safe harbor).
2) The CIC ownership will have to change so that John, or an entity that he owns 100% of, owns 100% of the CIC.
3) Change ownership in the parent company. The new regulations can be a great excuse to implement intergenerational wealth transfer techniques. By changing ownership of the primary business from John Smith in my example to a trust for the benefit of children (the same trust that may also own the CIC interest), you are really helping Mr. Smith complete or round out his estate planning (something that many put off until too late).
As of right now there is no grandfathering of existing CICs. If this doesn’t change, there are thousands of CICs that will have to take what could be painful or risky steps to come into compliance.
If you have clients with CICs or if you want to have clients with CICs, you better understand these new rules (which is why you should sign up for the CIC webinar we are doing on the 25th).
Roccy DeFrancesco, JD
Founder, The Wealth Preservation Institute
144 Grand Blvd
Benton Harbor, MI 49022