Reportable Transactions and 419 Plans Litigation - Welfare benefit, Medical, Retirement plan benefit and design, Pension specialists, 412i Lawsuits, 419 lawsuits, IRS Audits, 412i Problems, Expert Witness Lance Wallach
Showing posts with label Captive. Show all posts
Showing posts with label Captive. Show all posts
Lance Wallach Life Insurance: Captive Insurance Buyer Beware
Lance Wallach Life Insurance: Captive Insurance Buyer Beware
Is a captive insurance cell the way to go? - Accounting Today - Captive Insurance: Achieve large tax and cost reductions by renting a “CAPTIVE”. Most accountants and small business owners are unfamiliar with a great way to reduce taxes and expenses. By either creating or sharing “a captive insurance company”, substantial tax and cost savings will benefit the small business owner.
To read the entire article, click here
Is a captive insurance cell the way to go? - Accounting Today - Captive Insurance: Achieve large tax and cost reductions by renting a “CAPTIVE”. Most accountants and small business owners are unfamiliar with a great way to reduce taxes and expenses. By either creating or sharing “a captive insurance company”, substantial tax and cost savings will benefit the small business owner.
To read the entire article, click here
Reduce Costs, Plan Your Estate, and More with a Captive
National Society of Accountants
Member Link
July 2008
By LANCE WALLACH, CLU , ChFC
Your clients who are business owners are likely to be approached with information concerning a relatively new financial instrument called captive insurance. The term captive insurance is generic and refers to a broad spectrum of alternative insurance structures with the purpose of providing greater benefits than traditional insurance.
Specifically, captive insurance can help your business clients potentially greatly lower their insurance costs, have more control in managing their insurance, and obtain coverage that might otherwise be unavailable or unaffordable. Some forms of captive insurance allow an insured or its assign to maintain an ownership interest in the underlying insurance company. As with any successful business, an owner of a captive can work with his or her advisors to best manage their insurance company. Another potential benefit is that of business and estate planning.
This author stresses that a captive should never be formed unless the primary reason is business purpose. Captives should never be marketed by advisors as “wealth management” or “estate planning” tools. In fact, improper marketing of an otherwise compliant captive can lead to the loss of the captive’s tax status as an insurance company, resulting in taxation and penalties of nearly one hundred percent of premiums.
Yet it is a fact that a successful captive may be useful in business and estate planning. Ownership of a captive may be facilitated by a partnership or trust which is owned, controlled, or benefits a business owners’ descendants.
As an example, suppose that a business owner (Senior) wants to establish a captive insurance company in order to lower his insurance costs. The insurance company could be owned by a generation skipping trust currently controlled by Senior’s children. The captive’s premiums must be actuarially verifiable and the coverage must be wholly justifiable. The insurance sold by the captive needs to comport with all relevant statutes from both a regulatory and an IRS standpoint. If the captive’s claims are less than actuarially anticipated, it may have retained earnings or profits. Depending on the type of captive insurance company, the tax rate levied on underwriting profits can be as little as zero percent. Over time, the insurance company’s profits may be distributed as capital gains, dividends, or even loans to the beneficiaries of the insurance trust. The captive could even provide a funding source for future business opportunities.
The ultimate effect of a compliant and successful captive could be to transfer a portion of the pre-tax premiums from Senior’s business over to Senior's children, grandchildren, etc., without income, gift, or estate tax. The bottom line for any accountant or wealth advisor is that captives should be looked at as a way to garner significant insurance cost savings with a possibility of secondary benefits.
Again, the author cannot overemphasize the importance that the captive must be designed to and operate as a compliant insurance company. The company must have real losses, real exposure to third party risk, and cannot be in any way an alter ego of or a savings account for the business owner.
Captives can be a tremendous tool in helping businesses lower their insurance costs. This author has seen an example of businesses saving millions of dollars in a few short years by properly using captives. Equally stunning , however, are the adverse tax consequences of an improperly marketed or managed captive. The advisory team chosen for this type of work should have many years of captive insurance experience and, ideally, should be supported by a large regional or national law firm.
Lance Wallach speaks and writes about benefit plans,estate planning, insurance and more. He has authored numerous books, including The CPA's Guide to Life Insurance, published by Bisk CPEasy.He was the National Society of Accountants Speaker of the Year. He can be reached at 516 9385007 or lawallach@aol.com. For more articles visit WWW.VEBAPLAN.COM.
The information contained in this article is not intended as legal, accounting, financial, or any other type of advice for any specific individual or entity. You should seek such advice from an appropriate professional.
Member Link
July 2008
By LANCE WALLACH, CLU , ChFC
Your clients who are business owners are likely to be approached with information concerning a relatively new financial instrument called captive insurance. The term captive insurance is generic and refers to a broad spectrum of alternative insurance structures with the purpose of providing greater benefits than traditional insurance.
Specifically, captive insurance can help your business clients potentially greatly lower their insurance costs, have more control in managing their insurance, and obtain coverage that might otherwise be unavailable or unaffordable. Some forms of captive insurance allow an insured or its assign to maintain an ownership interest in the underlying insurance company. As with any successful business, an owner of a captive can work with his or her advisors to best manage their insurance company. Another potential benefit is that of business and estate planning.
This author stresses that a captive should never be formed unless the primary reason is business purpose. Captives should never be marketed by advisors as “wealth management” or “estate planning” tools. In fact, improper marketing of an otherwise compliant captive can lead to the loss of the captive’s tax status as an insurance company, resulting in taxation and penalties of nearly one hundred percent of premiums.
Yet it is a fact that a successful captive may be useful in business and estate planning. Ownership of a captive may be facilitated by a partnership or trust which is owned, controlled, or benefits a business owners’ descendants.
As an example, suppose that a business owner (Senior) wants to establish a captive insurance company in order to lower his insurance costs. The insurance company could be owned by a generation skipping trust currently controlled by Senior’s children. The captive’s premiums must be actuarially verifiable and the coverage must be wholly justifiable. The insurance sold by the captive needs to comport with all relevant statutes from both a regulatory and an IRS standpoint. If the captive’s claims are less than actuarially anticipated, it may have retained earnings or profits. Depending on the type of captive insurance company, the tax rate levied on underwriting profits can be as little as zero percent. Over time, the insurance company’s profits may be distributed as capital gains, dividends, or even loans to the beneficiaries of the insurance trust. The captive could even provide a funding source for future business opportunities.
The ultimate effect of a compliant and successful captive could be to transfer a portion of the pre-tax premiums from Senior’s business over to Senior's children, grandchildren, etc., without income, gift, or estate tax. The bottom line for any accountant or wealth advisor is that captives should be looked at as a way to garner significant insurance cost savings with a possibility of secondary benefits.
Again, the author cannot overemphasize the importance that the captive must be designed to and operate as a compliant insurance company. The company must have real losses, real exposure to third party risk, and cannot be in any way an alter ego of or a savings account for the business owner.
Captives can be a tremendous tool in helping businesses lower their insurance costs. This author has seen an example of businesses saving millions of dollars in a few short years by properly using captives. Equally stunning , however, are the adverse tax consequences of an improperly marketed or managed captive. The advisory team chosen for this type of work should have many years of captive insurance experience and, ideally, should be supported by a large regional or national law firm.
Lance Wallach speaks and writes about benefit plans,estate planning, insurance and more. He has authored numerous books, including The CPA's Guide to Life Insurance, published by Bisk CPEasy.He was the National Society of Accountants Speaker of the Year. He can be reached at 516 9385007 or lawallach@aol.com. For more articles visit WWW.VEBAPLAN.COM.
The information contained in this article is not intended as legal, accounting, financial, or any other type of advice for any specific individual or entity. You should seek such advice from an appropriate professional.
Help with Common IRS Problems: Section 79 Plans: The Team Approach to Tax, Financ...
Help with Common IRS Problems: Section 79 Plans: The Team Approach to Tax, Financ...: Section 79 Plans: The Team Approach to Tax, Financial and Estate Pla... : by Lance Wallach CPAs are the best and most qualified professio...
Large IRS Fines Continue For 419, 412i, Captive Insurance and Section79 Plans
Lance Wallach battles IRS Audits Every Day
By Lance Wallach
Taxpayers must report certain transactions to the IRS under Section 6707A of the Tax Code, which was enacted in 2004 to help detect, deter, and shut down abusive tax shelter activities. For example, reportable transactions may include being in a 419,412i, or other insurance plan sold by insurance agents for tax deduction purposes. Other abusive transactions could include captive insurance and section 79 plans, which are usually sold by insurance agents for tax deductions. Taxpayers must disclose their participation in these and other transactions by filing a Reportable Transactions Disclosure Statement (Form 8886) with their income tax returns. People that sell these plans are called material advisors and must also file 8918 forms properly. Failure to report the transactions could result in very large penalties. Accountants who sign tax returns, which have these deductions, can also be called material advisors and should also file forms 8918 properly.
The IRS has fined hundreds of taxpayers who did file under 6707A. They said that they did not fill out the forms properly, or did not file correctly. The plan administrator or a 412i advised over 200 of his clients how to file. They were then all fined by the IRS for filling out the forms wrong. The fines averaged about $500,000 per taxpayer.
A report by the Treasury Inspector General for Tax Administration (TIGTA) found that the procedures for documenting and assessing the Section 6707A penalty were not sufficient or formalized, and cases often are not fully developed.
TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the Section 6707A penalty. Based on its review of 114 assessed Section 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.
The Section 6707A penalty is a stand-alone penalty and does not require an associated income tax examination; therefore, it applies regardless of whether the reportable transaction results in an understatement of tax. TIGTA determined that, in most cases, the Section 6707A penalty was substantially higher than additional tax assessments taxpayers received from the audit of underlying tax returns. I have had phone calls from taxpayers that contributed less than $100,000 to a listed transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419, or 412i plans but made no contributions and were fined a large amount of money for being in a listed transaction and not properly filing forms under IRC section 6707A. The IRS claims that the fines are non-a
CAPTIVE INSURANCE
The provisions of the Act?
The LRRA requires that members be homogeneous, i.e. engaged in similar businesses or activities that expose them to similar liabilities.
- Liability insurance only: Coverage provided by a RRG must be restricted to liability insurance, which is very broadly defined. Personal Risk Liability, Worker’s Compensation and Employers Liability, and Property & Casualty coverages are specifically forbidden to be underwritten by a RRG.
- State of Domicile: A RRG must be a corporation or limited liability association chartered and licensed as a liability insurer and authorized to do business as an insurance company in its state of domicile.
- Primary purpose and activity: The primary activity of an RRG must be the business of assuming and spreading all, or a portion of the liability exposure of its group member and its primary purpose must be the assumption and spreading of risk related insurance activity.
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