Companies and associations also set up small captives, or micro-captives, to protect themselves against P&C risks, particularly in situations where commercial coverage would be very expensive or difficult to find.
Micro-captive corporate users can deduct premiums from their taxable income, and micro-captives with a low level of premium income do not have to pay taxes on their premium income.
Due to the possibility that some micro-captive bonus payments may not be subject to any U.S. federal income tax, the IRS is concerned that some micro-captives may participate in abusive tax avoidance strategies.
The IRS now requires micro-captives to report their activities using Form 8886, Reportable Transaction Disclosure Statement, and it has staged several waves of enforcement action.
The link between life insurance and annuity
The IRS has strongly discouraged the use of micro-captives to provide ordinary life insurance, although it has allowed some activity-related mortality benefits in business interruption agreements. Mortality provisions could apply if a disaster results in the death of key people necessary to run a captive business.
In the past, some micro-captive owners have invested captive assets in a permanent life insurance policy.
In recent years, the IRS has suggested that placing micro-captive assets in life insurance might be abusive, and captive advisors have recommended owners not place the assets in life insurance.
It is possible, however, that some US micro-captives are life micro-captives and annuities formed years ago, before the current micro-captive rules evolved.
Analysts working for a predecessor organization to Finseca noted, in a copyrighted report published in July 2015, that (in some cases) a business owner with a genuine need for captive insurance might have a trust owner of a P&C captive and use the P&C captive – hold a trust to transfer wealth to younger generations of the business owner’s family.
(Photo: Allison Bell/ALM)
