The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 018 - Manage Risk and Reduce Taxes Using Captive Insurance Companies w/ Keith Langlands
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Join me and Keith Langlands, CPA as will discuss one of my favorite tax strategies - Captive Insurance Companies! This can be a powerful tool to self-insure against a wide variety of risks in your business, and will be structured in a way that can save you millions in taxes over the life of your business. Some of the many potential tax benefits include:
- Moving Income from 1040 to C-Corps with Lower Tax Brackets
- Qualifying for More Qualified Business Income Deductions
- Converting Ordinary Income to Capital Gains Income
- Creating Tax Advantage Vehicles to Invest in Securities
- Shifting and Timing of Income and Exit Tax Planning Opportunities
In this webinar we will discuss:
- How to Create Captive Insurance Companies
- What Kinds of Businesses Benefit from Captive Insurance Companies
- Risk Reduction Benefits of Captive Insurance Companies
- Tax Benefits of Setting up a Captive for Your Business
All right, guys. So I want to tell you about the interview that I just did, and you're about to listen to with Keith Langland on captive insurance companies. It is a very advanced tax and risk mitigation strategy. It's more of a risk, it's primarily for risk mitigation, but there are tons of tax opportunities as well. Very few people understand and know about this. So we have a great conversation on this to talk about what type of businesses qualify for a captive insurance company. And we also discuss the tax advantages and how to set it up and how does it function? You know, there's just so many cool things out there. And this is one of my favorite topics to discuss. And it's a great way to, again, to mitigate risk, reduce your taxes, and build wealth in a unique manner. And if you have a fantastic advisor, they'll be aware of these and many other strategies to really help you out with reaching your goals, reducing your taxes, and finding success. So stay tuned. It's going to be a fantastic episode. If you have any interest in our services, you can email info at markproworkspa.com and also send us referrals. We're always, always, always hiring. All right. Enjoy. Have a good one. All right, welcome everybody. I'm here joined by Keith Langland's CPA. And we are here to talk about captive insurance companies. Now, captive insurance companies are a lesser known opportunity to reduce your risk. And you are basically you're going to be forming a separate entity that's insuring interactivity. With this offers lots of opportunities and flexibility in how you insur your risk. And it also creates lots of tax opportunities based on the way that you structure that entity. And so today we're going to talk about, we're going to dive into the numbers and the details and how this all comes together. And then we're going to talk about who this works for, who this may apply to, and how we can go about exploring this. And you want to maybe explore this with your tax advisor, or if you are a tax advisor, I have a feeling a lot of the people listening to this, maybe CPAs and EAs, go to a guy like Keith, and you can start strategizing and seeing how this could maybe fit into the picture of your entity structure, risk mitigation, and tax strategy. So, Keith, let's start off in 60 seconds or less. Give us a quick introduction about who you are and what you do.
SPEAKER_00Thank you very much. Appreciate the time. Well, basically, I'm a reformed CPA out of Las Vegas. I have lived here for 40 plus years. I went to UNLV, got my accounting degree, worked for Price Waterhouse back in the day, had my own CPA for a number of years. And then I had a client bring me a captive many, many years ago. And unfortunately, it was an offshore captive, strictly designed for tax purposes. And uh it ended up in front of the IRS. And I got a crash course on how not to do captives. And uh I think I definitely need to upgrade my uh my uh my uh my web skills because I think I've been doing captives now for 18 years now. It's it's it's been a long, long journey. So uh we've probably done close to 300 captives over the years, and we strictly only do domestic captives and uh sold my CPA firm a long time ago. And uh needless to say, we've been uh very happy uh doing doing captives. So uh there's a right way and a wrong way to do it. I'm sure people will Google this after we're done today and uh say, oh gosh, I don't want to do that. But in the right hands, like ours, uh you'll be perfectly safe doing a captive insurance company. But uh uh so uh Mark, thank you again for the time and let's get into it.
SPEAKER_01Awesome, fantastic. So let's go into the basics here, and so I could explain this to our clients, but because this is such a un you know, it's a less common strategy, very few people are aware of it, and you've explained this many times. And the people who see this weird thing in the shadow in the background is because I have a light and my cat is grooming yourself in front of the light. I'm getting very distracted. Um, can you stop distracting me? Um can you explain, in your best words, what is a captive insurance company?
SPEAKER_00Yeah, actually, and first of all, I'll tell you that every Fortune 5, well, everyone that I know of, every Fortune 500 company has a captive insurance. Some have many, like McDonald's. They use it for a different purpose, but it's been out there for a long, long time. Captive insurance in a small to medium-sized firm is not designed to take away from a client's commercial insurance. What it's there to do is capture the the uncovered risk that every client has. Doesn't matter what business they're in. So, what we do is we go with their you, the professional, and we sit down with them and have the what keeps you up at night speech. So every client has deficiencies, no matter how great their commercial insurance agent is. And just about everybody discovered this, unfortunately, during the pandemic. There are exclusions, there are limitations, there are limits to every commercial insurance policy. Some commercial insurance policies aren't even available, or providers just exit out of the market because they just feel like they're not making any money in certain coverages. That's what we do. We go in and form a private insurance company for a business separate than the operating company, but owned identically with the same ownership of the operating company. And we look for those nooks and crannies. And we try to assist with higher deductibles, if possible, to save that client money in their commercial insurance. And that's our job to bring in an outside actuary. We have in-house underwriters that'll come in and figure out what those policies are. Now, granted, it's going to be different for every business, but that's that's basically what we do. The idea being is that every whether it's um uh general liability, whether it's deductibles on this, whether it's employee practices liability, public relations risk, what we're doing is we're we're kind of being like the AFLAC for businesses, is is how I like to put it in a nutshell.
SPEAKER_01Great. So you're you have a separate entity that is creating a pool of resources that can insure against a variety of risks here. And so what what's the advantage? Can you explain the advantage of doing this as opposed to using a private company and and what kind of risks can we insure against?
SPEAKER_00I first let me go from back forward on that. We have a we have a coverage, we have a package of about seven marketing documents that we've changed them up, obviously. We update them every year, but it's been the same seven for you know at least over a decade. Um, so what we included in that is a list of policies uh that come off a national database, and it consists of almost 90 policies, and a lot of those are what we refer to as DIC policies or difference in conditions. And from a layman's standpoint, think of them as pour-over policies. And a great example would be general liability DIC. So nearly every business has a general liability policy. You probably have one for your own practice, I do here, for whatever occurs in your in your practice. There are going to be exclusions, they're going to be a deductible, it's going to have a limit on that policy. So, whatever happens in your office, if it's an exclusion, this policy will cover it. Now you're going to be assigned a premium by an outside actuary of such and such dollars. Those premiums will go in to your captive on an annual basis. Should something happen, you'll be able to file a claim with our claims department, which we run internally, and you'll be able to pull that money back to your operating company for money you put away. So that's generally how it works. Now, again, we have all kinds of different uh it could be subcontractor risk for a construction company, it could be cyber risk for a software company, it could be uh there's just all kinds of different companies that that we we do work for. And again, we'll create a laundry list of items that uh uh a client might need. And so what we what we really try to drill into the the CPA or the enrolled agent's brain is that this is a risk management tool, first and foremost. Yes, the client has it in their mind that I'm going to save a lot of taxes, but that has been the problem with tax with people that do captives. They come to you and they say, Mark, I've got the best idea to come and I'm gonna save your client a million dollars a year. Do you want to hear about it? Yes, I want to hear about it. How can I do that? Well, that's the people that the IRS go after, okay? But that's why we're still standing and they're out of business right now. And the reason why we do that is we come in and we pitch it as a risk management device. Now, what I can tell you is with a large, large company, the limit right now under code section 831B. Now you want to ingrain that in your head, 831B. It's a code section that's been around since 1986. It was passed during the Reagan administration. Originally, it was at$1.2 million. Now, this provision is used by a lot of different, a lot of different uh sectors of business. It's used by agriculture, it's used by the auto industry for auto warranties. We use it for a lot of different things. We do new home warranties, we do product warranties, we do pizza warranties for Domino stole this idea from me years ago with the slip and fall, and the guy gets his pizza reimbursed. They stole that from me years ago. I should have patented it. So captives are used all over the place. But again, 2.45 million is the maximum you can do right now under that law. So you don't have to be a rocket scientist to figure out that if you just do a risk management presentation, the tax deduction or the tax benefit is going to fall out. Now you don't have to do that much. It'd be nice if we all did, and we can all retire early. But if you want to do a million, if you want to do 500,000, you want to do X, if you got two clients, you got two doctors that want to get together and and do one. That's that's an economy of scale. But that's where the tax benefit comes into play. But again, you don't want to go to your client and say, Wow, I've got this great, you know, I'm gonna send you tax estimates of what this thing will do for you because that's what the IRS is looking for. So a long-winded example, but again, uh come up with the risk scenario. Premium gets paid into the captive on various policies and and uh claims will will will be paid. Hopefully, there's a lot more going in than going out.
SPEAKER_01So yeah, and to talk about the the tax uh right, the tax advantages. So first it's primarily a risk management device, but uh the here's the tax benefits is that uh you know when you pay your insurance payments, when you have your insurance premiums, they are a deductible expense. However, this entity that you own, when they receive those premiums, they are not taxed on that as income because this could be a potential liability that they may owe back to the organization. And so you're putting money into this other organization into that pot, you're you're getting a deduction, and now it's placed into a vehicle that is not, you know, you have this untaxed fund, and and then it's gonna grow. You're gonna be taxed on your capital gains and dividend income. They're gonna take the funds and invest in securities, and it's gonna grow and be taxed on that. However, that initial principle, because it was never taxed as income, you're gonna have a bigger pot, a bigger pool of principle from which you can invest in other securities and grow. So it is you're gonna see the benefits of building wealth uh and the tax advantages. And also consider the fact, especially if you're a high income earner and many people using captives are, you got that flat 21% corporate tax rate, which is probably lower than your marginal tax rate if you're in a high income earner. And the C corps can also deduct, they're not subject to that salt cap limit on your 1040. You can only deduct$10,000 a year in state taxes. The captive insurance or the corporation can deduct more than$10,000 of state taxes against its federal taxes. And then also, you when you drive yourself in, you could potentially drive yourself into a low-enough bracket to get other benefits, such as things like qualified business income deduction and other potential opportunities, depending on how the numbers play out.
SPEAKER_00Yeah, you you just did the rest of my bit. We're done. Great job. You've been reading ahead. So uh yeah, a couple other things. Uh, it's uh I'm I'm not an attorney, so I don't profess to be one. Uh, it's one of the best asset protection devices that I've ever seen, just in the many years that I've been doing captives. It's uh it's extremely difficult to penetrate uh by creditors.
SPEAKER_01So you here. So let's say I'm in California and I'm playing, I'm paying some crazy state taxes here. If my if my insurance, if my captive insurance policy, could I place this in somewhere like Texas, where there's no state taxes? And now not only am I deducting my insurance premiums on the California side, the entity is domiciled to Texas and would be not paying any state income taxes. Is that a possibility as a potential state tax strategy?
SPEAKER_00Well, you using your example, uh, here's here's the way it here's the way it works. Most most most jurisdictions, um, with exception of California, I think New York has added uh captive legislation. Um it some of the newer jurisdictions, quite honestly, you really wouldn't want to put your captive in those jurisdictions because it's really far, it's really hard to find uh regulators. Um you really want to go where they're popular, um where they know what they're doing, quite frankly. The two jurisdictions that we mostly place are in North Carolina and Tennessee. Now we're licensed all over the place. We're licensed here in Nevada, uh, we're licensed in Arizona, Texas, um you name it. We're we're we're Utah, we're we're we're licensed everywhere. The key to to the key for everybody to understand is you have no nexus in the state that you're filing in. So let's say we place your captive in North Carolina, and I apologize, I had neck surgery three months ago, so if you that's why I'm holding my head up. Um, so when you register a captive in North Carolina, why are we doing that? Well, first of all, you have a flat premium tax there. That's the only, and we file the return. You have no other nexus in that. You won't file an individual return, you won't file a corporate return, you won't file anything. The maximum tax rate there is$5,000. So you can have$2.45 million, you can have all the interest income, dividend income you want. Uh federally, as you stated absolutely correctly, you have to deal with the federal aspect of it because you filed an$1120 PC for property and casualty, which is a C Corp return. So you have you had it exactly right. Um, but you have no other nexus. So when the when the captive license is over with, when you tell us 8, 10, 20 years down the road, then you no longer want to be a captive, we will think simply relinquish the license and it rolls to simply being a C corporation. You have no other obligation, you are no longer obligated. Uh at that point, you need to pick and choose where you want that corporation to be. My recommendation as a Nevada resident would be incorporate Nevada and move your assets there. Uh, if you're a California resident at that time, uh you don't have to be the wizard of oz to figure out that you'd probably be best to move to Nevada or Florida or Texas. Um, you know, that that's not me giving tax advice, that's common sense. Uh, and then like you, like you mentioned, your only tax on exit is uh to pay uh 1040 C Schedule C or take a liquidating dividend. I don't, you know, I I don't even do my own tax return anymore. I haven't done it in 15 years. Um, so I'll leave that up to people like you that are smarter than me. Uh but uh there and there are other strategies uh that I've seen people do on exit. I probably wouldn't recommend it. I mean, if you if you've taken one bite of the apple on the captive position, uh don't go bananas. You know, that's that's how people get in trouble. But uh yeah, that's uh so a couple other benefits, and and um you know, I again I I harped at the very beginning about making sure that you you you impress to your clients that it's a risk management tool. And it really is. I mean, we're covering really real risk, and and uh I know nobody wants to look back at the pandemic, but a prime example, we handle a lot of uh chain restaurants, a lot of beers, beers, a lot of taverns and and bars, um, slot bars, especially here in Las Vegas, and the government shut them down. And I'm I know this was news around the country, but they got shut down for the pandemic, and they said, Oh, no problem. I've got this uh I've got this business interruption insurance. No, that's not gonna work because the fine prince said, Well, that's only good if you have physical damage to your establishment. Oh, what the heck does that mean? Well, that means a Mac truck has to drive through your restaurant or lightning has to strike the building or a flood or something like that. Well, no tavern owner is going to be able to take on chubb or prudential to fight that. You're out, you're out. Tough luck. We have business interruption DIC coverage where that business would have been able to keep its employees, pay its rent, and reopen when the time came. That's that's what putting money away for a rainy day will mean. Hopefully that'll never come, but if it does, you're it's available and that happened.
SPEAKER_01Okay, so one of the most important questions here, and you know, I I could probably talk for hours on this, but and ask tons of questions, but uh, I don't know how some of our audience may not want to go as far in the wheeze as I would like, but most one of the most important questions here is can you describe the profile of who this may work for? When we're either for our to address my audience, that is other CPAs and EAs, and also my clients who may be interested. How do you assess the type of business owner that may um that may be appropriate to utilize a captive insurance company?
SPEAKER_00Yeah, that's a great question. And and the first thing I will tell people is. Yeah, for the most part, you know, obviously if a client has overwhelming amounts of commercial insurance, that's a no-brainer. If they have a lot of workmen's comp insurance, that's a different subject. They're probably looking for some type of group captive, which is something we don't do. But if they have an overwhelming amount of regular insurance, and we don't do health insurance either, but general I general, that's a club, that's a no-brainer. But and one thing to to it, you know, if we're talking six figures and above, obviously. But the other thing really it goes by gross revenue, and sometimes that can be deceiving, because we used to say anything above three million and above was an appropriate answer, but that got blown out of the water during the pandemic because we had a we had a client in Georgia that a C CPA sent me that was doing hunting and fishing videos on YouTube and Google, uh YouTube, I'm sorry. And his he would go out and film it, and his wife would put it on YouTube, and he ran up all these subscribers, and the CPA brought it. He didn't have any expenses. And we're like, okay, I'll run it by the actuary. And he had primary customer liability, he couldn't get any, he couldn't get any uh commercial insurance for it. He had a bunch of he actually went out of the country a couple times. It was the only time we ever used kidnapping ransom insurance. I mean, he ran up about 200,000 in premiums, and I'm like, okay, let's run it. And uh this year he grew to I think two and a half million in revenue because uh uh YouTube actually cut him off, but he ended up establishing his own channel, and now he's going great guns. I think he did 500,000 this year. So sometimes you never know, but it varies, but uh uh you know you you you really never know. Um if if anybody calls and asks, we have a one of that seven documents that we use is a one-page questionnaire. Um if they just give me the website, fill out a few pieces of information, uh we'll send no charge. We'll just send them back an analysis and say, you know, here's what we think. And uh rarely do we we rarely do we get the same type of business twice? It's always like reinventing the wheel. Uh, but uh you never know. But uh that's what makes doing this really exciting.
SPEAKER_01So yeah, okay, so I guess it's hard to really clearly define on a revenue basis, but what's the minimum, what's the minimum contribution we would want to make into this thing? I believe you said I've heard it's like around a quarter million a year.
SPEAKER_00What can you correct? Yeah, yeah, about a quarter of a million a year is is about it. And just to give you an idea of where we come up with that number, uh, in North Carolina, in every state, there's a minimum capital requirement. That's the non-deductible component that a state requires. Most states, um, and I need to brush up on Tennessee, I think they just lowered it down, but most states require$250,000 as a minimum capital. Well, I'm sure everybody out there say, well, gosh, man, my that's a big number. Um North Carolina only requires 60,000. So they the first year client has to put in 190,000 in premiums. So that's where we get the 250 from. Um and so you and this is just strictly a ballpark. In today's in today's numbers, 190,000, generally, you generally you can get away with uh about a million and a half of gross revenue. I think hopefully this is why I'm not a CPA. I'm still licensed, but I don't do math very well. So whatever 20% is to get to one nine, you know, to get to 190, you guys out there can do the math. But that a 20, I know it seems like a big number, but whatever whatever gets you to 20% back to that gross revenue, and again, you say, well, Keith, that's nuts because my commercial insurance is only 30,000. How can you get 190,000 of risk in a captive? Well, the way I do it, if I'm doing a seminar, and we're we're back on the seminar, live seminar trail now, hopefully the pandemic's over, but I'll do a big whiteboard and I'll draw this big circle on the whiteboard, and you draw this little piece of pie, and maybe it's 10, 15, and you'll color it in, and you'll say, Well, that's what your commercial insurance covers. All the rest of this stuff, that's what's your self-insuring. And I don't remember where I got that stat. It's probably gotten worse since the pandemic. Because every year you read insurance calls a policy, there's more and more exclusions being added to the policy. And most of the people they'll get the policy clients, they won't even read it, they'll just stick it in a drawer, wait till something happens.
SPEAKER_01So um what so basically there's uh tons of additional risks you can insure against uh with the captives are that aren't going to be covered in these conventional uh insurance instruments, such as loss of a key employee, um you know, some sort of obsolete of your product, right? Uh where are some additional common risks that you found that you're able to insure against that people typically cannot insure against with traditional forms of insurance?
SPEAKER_00Well, I think right off the top of my head, I think uh you know, social engineering risk, it's a very it's a very odd, it's an odd name for something that seems like it's happening quite a lot. But if your controller or your bookkeeper gets in, you're on you're the owner and you go on vacation and you're somewhere where there's limited cell phone, and she gets a request from somebody that looks like a real vendor and they need 10,000 or 20,000 as a sub and it looks like the real thing, but she doesn't really check the the wiring instructions and they end up wiring it to the wrong account. Turns out to be a fraudulent account. Well, the bank says, Well, it's not our fault. Maybe you're not the best customer in the world. Well, they say, screw you, take it to another bank if you don't like our customer service. Well, social engineering fraud is a big example. Uh you know, public relations are is a is a big one that you're seeing. We have a couple doctors, uh, plastic surgeons, uh, such like that. Um, that you know, you put something, you know, your advertising on billboards or you're on Yelp restaurants or like that in particular, competing restaurants are just, excuse my expression, or complete you know what's on this stuff. And they have to pay PR firms to go in and correct this stuff. It's very malicious stuff, and then that stuff is just, and when you were talking about key-man insurance, key-man is not the old type key-man insurance where you're where you've got the VP gal that was human resources anymore. It's the it's the guy or gal that that that's the uh that's the foreman out of the uh the track. You know, you you put that, you got to replace that guy or gal, and the whole thing backs up for a couple months. And now it's not as prevalent now because the housing market slowed down a little. But man, when housing was booming, you put a track down for a couple months and you know, everything backs up. You know, supply chain interruption, that's a big one now. It's it it's pricing uh for uh oil and all kinds, it's all kinds of things. And any just about anything that you can think, warranty reimbursement is a big one that we handle. I had somebody tell me one time that if there's nothing you can't warranty in a business if you figure it out, if you think about it hard enough. Anywhere from CPA or enrolled agent work all the way up and down the line. If you think about it hard enough, you can you can uh or if they're doing warranty work anyway, bring it in-house. That's what we did with home warranties. All this stuff is just standard policies that are just coming off the same computer. Take it and just rebrand it. You'd be amazed at the profit centers that you can create for your clients.
SPEAKER_01So, what I'm wondering now on the topic of who is maybe a good fit for us. So the majority of our clients are somewhat involved in real estate and real estate investing. So, for some of our clients, you know, right now uh they are using other insurance companies. Uh and uh they're you know, with all the tax advantages of investing in real estate, they're probably not even thinking about uh how else I can reduce my taxes. However, with bonus depreciation phasing out uh and all their uh uh all of their depreciation on these properties being front loaded, uh uh we're gonna be likely uh to you know exploring other uh uh opportunities to reduce their taxes in the upcoming years as we lose that bonus depreciation. Um but where maybe some so I'm thinking to myself some scenarios where it might make sense. Now, I don't think you could insure against a whole building in a captive because you if you know, I mean, and maybe and correct me if I'm wrong, but I would think that you know, if if you're a big time real estate investor, you probably couldn't put enough in a captive to insure against the building, but there are still tons and tons of other risks we can we could um that are present for a real estate investor that you could potentially create a captive for. What are your thoughts on this?
SPEAKER_00Yeah, yeah, you're right, you're right. What what we were what we refer to as the uh the frontline insurance is something that that that we cannot do because anytime a bank or a financial company is involved in the financing, they're looking for what's referred to as rated paper. And we can do that with a fronting carrier, but a lot of times it's more hassle than it and it's more costly than it than it's worth. Where where we come in handy on the on the real estate side is when monies are in the captive in a relative um percentage of the money. So let's say, and I'm I'm using an outside of a client we have right now, and you got to break it down for your own scenarios, but I think they have around 10 million in their captive. And what you were pointing out before is exactly right. Most of our clients are our standard uh investment portfolios, but let's say they need uh a million of that 10 as a as a downstroke on a piece of property and they need to move on it quickly. Uh, as long as they're using market terms on that, and they uh we we'll have them laid it out on a first trusteed on a on a home or uh a piece of property or something. Again, as long as it's uh, and this is the same true for every client. So it's not that money can't, the money that's in the captive can't be used, uh, but it's got to be at market terms. And the same thing would go for a construction company or uh manufacturing or or or anything like that. It's it's the people that go bananas and lend 60% of it back to the operating company with no notes and stuff like that. That's the stuff the IRS goes, but or you lend it back to yourself. It just silly things like that. There are just uh there's stuff the IRS looks out for. And we and we won't do it as a client. We'll drop you like a hot rock. So uh, but yeah, there's a lot of there's a lot of flexibility for uh uh and and speaking of uh just in to go back to your question, sorry, uh in in real estate in general, uh we do do things in terms of uh of lease guarantees and things that you can insure. The only thing you can and you cannot insure, whether it be real estate or anything else for that matter, is you can't insure market fluctuations or or things like that, things that would happen in the market. So you can't say, well, this building is worth 5 million. I want to insure against a downturn that it would go to four. You can't, you know, you can't insure that. You can't say if you're you're a petroleum company, well, we're worried about the price dropping in gas, or you know, those are things that are that are out of out of control on things. There's a difference between business risk and and in insurable or probability risk. Sometimes it's a it's a difficult uh it's a difficult determination between the between the two. But we're all always always willing to listen, you know.
SPEAKER_01So um, so you mentioned one, so we can insure against uh a tenant not paying their lease on time. What are some other potential um risks we can insure against uh as real estate investors using a captive?
SPEAKER_00So normally, normally the best way we're dealing with it, and I'll give you an idea, the same client has a number of apartments. Um, they have a number of apartments in Utah and Texas, and in particular in the in the Houston area. And as you can imagine, the the risk in Houston for flood insurance is a whole lot different than it is in Salt Lake. Uh the premiums are about 10 times higher in Houston than they are in uh in Utah in Salt Lake. So they had to carry a much higher coinsurance position uh in Houston on a number of buildings than they did. Uh, not only did we we assist them with putting them with a different commercial uh insurance agent that was put it together as a portfolio, but we were able to have a coinsurance position through their captive. So there's a lot of structuring that we do. Now that one's not an eight well, quote unquote, 831B captive. We also do the larger uh 831A captives, which still provide a lot of tax positioning. Those are the ones that uh you know the the Fortune 500 company companies get into. Those are a totally different tax structure, but very, very effective nonetheless. So uh there's a again, you can do security deposit, um uh security deposit positioning on a captive. The the the we started out do the same company, we started doing um lease, uh lease guarantees because they had they had investor positions and they still do on a number of different buildings. It was really a way for them to get guarantee the ROI uh on their on their buildings. Now we're starting to see more of that in the apartment uh buildings. You you can't necessarily call it where you can't really call it in uh what do they call it? I haven't been involved with them for a number of years. I'd have to ask my team about it, but it's basically a damage waiver on apartments um and and um uh in in lieu of their security deposit. So if somebody's coming in and and it's mostly it's not in the low, no offense to anybody that that owns a lower level apartment, but it's mostly like apartments in the$2,000 a month range. So it's higher level, higher credit, uh where they're waiving the first and last month security deposit. Uh in and in lieu of that, they're selling them a um a lease something. They don't call it a lease, uh it's not defined as an insurance policy because then you run into state regulators in all these different jurisdictions. It's it's you you avoid that. But um uh there's a lot of different kind of hard pressed to think of them right off the top of my head. But uh, I can definitely give you get you more information on that.
SPEAKER_01Awesome. Um another thing I'm wondering could you when the captive receives these funds, could they possibly use leverage? Because they're gonna be investing in securities. Is there ever an opportunity where they can leverage and invest more than the principal of what you put into as a premium if they could also use leverage to put additional funds into securities and have that those amounts grow?
SPEAKER_00Um not not not really, but there is uh there's there's to if I don't want to be wishy-washy on that, but yes and no, the the the jurisdictions don't really like leveraging the captive monies. But as an alternative, if if we were looking at putting, as an example, if we're looking to put a million dollars, if we have dedicated funds to go with the captive, there are there are premium financing companies, um you know, in a more traditional way that will finance the premium for the captive at a lower rate. And then that million dollars is available for other positioning. So let's just say for argument's sake that we're looking to do a life insurance positioning as well as doing the captive, as opposed to putting the money in the captive and then trying to do a life insurance positioning with that money or whatever we were going to try to do with the positioning of the money with the captive. Let's do the let's have the finance company do the financing on the captive at four and a half percent uh interest only for a year, and then let's use the million dollars for whatever the financial planner has planned for. It's it's the regulators love that idea much better than trying to go back and and do something else with it. Um, at least that's how it's been in North Carolina for us.
SPEAKER_01Okay, so you can let use leverage to put the contributions in your captive right off the full amount that you put into the captive, and now the leverage funds, now they've been shifted into the captive, and then they're gonna grow at a in at a you know at a in a tax advantage manner because you have a higher principal, and you're you're gonna give that dividend and capital gains income. Right, exactly.
SPEAKER_00And and and and please know whatever topic I'm talking about, whether it's brokerage, financing, whatever, um, we we only uh, and that's probably one of your questions coming up, we only charge to set it up, set up the captive, and to run it. And we also pay a referral fee on on the setup and the referral uh excuse me, on the management. That's all. We don't take any fees from from anybody. Um that you guys do your job, your gals, you guys do your job, and we do our job. And um that that's that's that's fine with us.
SPEAKER_01So yeah, and you know, so in turn in determining who this may be a good fit for, obviously, you'll you'd need a way to come up with the funds put into it. But it sounds like there's more than you would expect. There are just tons and tons of businesses who aren't aware of this and likely aren't aware of the potential risk they could insure against using a captive insurance company. And perhaps you could sit with your advisor or eventually get someone such as yourself, start thinking about the risks in your business and which ones are potentially insurable through a captive.
SPEAKER_00Yeah, quite absolutely right. I could I think quite frankly that IRS is the IRS has done an incredible PR job uh trying to shoot down captives for a legitimate reason in the way that there's been a lot of, I hate the word actors. I don't know who came up with that word a long time ago, but the bad actor, I've heard that so many times throughout my career. Um there's just a lot of there's a lot of bad captive managers out there. But there's a but quite frankly, as a CPA, and I think you'd agree with me, but there's a lot of bad everything out there. There's a lot of bad C B. Sometimes I wonder if like, how did you get your license? You know, our bad real estate agents and bad dogs, there's bad people everywhere. There's a lot of money. Well, let's let's be honest with you, there's a lot of money in this. Because it is, there is, okay. You're gonna get a lot of bad people that you know, some of these jurists, I had one people, one person tell me this is no offense to anybody that lives on an island, but they said never do a captive in a jurisdiction that you can't see when the tide goes out or in, whatever, whatever the saying is. But there's places where you go, you pay off the insurance commissioner, and that's how you get the captive's license. There's no actuarial, there's no policies, there's no nothing. Uh, if you want hurricane insurance in Nebraska, you know, I've had people tell me, oh, I did it with this Native American tribe and gosh knows where. Well, God bless you, it costs you$5,000 a year. Well, good luck when the IRS starts coming to you, because that's what's going to happen.
SPEAKER_01Can you tell me what a micro captive is?
SPEAKER_00Well, a micro captive is just it, it we that's what we do. It's just another terminology for small, small captives. It's you know, it's um, I think it's some terminology that the IRS came up with. Um, you know, somebody brought that up today or last week that uh the micro captives are on the dirty dozen list this year. Well, you've got to read the fine print. It's it's it's uh it's the foreign captives, potentially. Particularly in Puerto Rico. Okay. If you want to go down that rabbit hole, best of luck. And then somebody else asked me today, uh, that just didn't keep up with the news that they're they're still transactions of interest. They're not, they're not transactions of interest anymore. The Supreme Court overruled that. You don't have to file 8886s any longer. Um the uh district court in uh East Tennessee upheld that ruling. Uh so you know, people and all the IRS cases that went through the courts were just silly cases to begin with. I'd be glad to talk anybody anytime. Um the the the latest uh the latest case, Kaler was was just beyond a joke. Whoever decided to take that one to court should get their money back. So no.
SPEAKER_01So the in in recent legislative, so in the past, it used to be, I believe it was what we would call a listed transaction, correct?
SPEAKER_00Yes, what it had been for a number of years in the 8886s, we're just a we're just a way for the IRS to pull money, uh pull uh information out unconstitutionally. They they just they just didn't follow the rules. They'll probably, I don't think they're gonna take another shot at it. I think they'll leave.
SPEAKER_01Now it's no longer that it no longer has that status. So we know that's correct. So paperwork is not gonna raise the red flags that it you may have thought it would in the past. And also, if you're working with an advisor such as yourself who understands the law and how to do things compliantly, right, not just as a tax scam and a tax evasion tactic, right? Then you'll be all right. But then again, like so. That's why you know I meet so many people who are doing their own DIY tax plans. They come to me and they, you know, we only work with clients who are tax planning clients, and they say, Oh, well, we already found a Costa engineer, we don't need a tax plan. And we don't realize that there are so many other pieces to this, and oh no, there are all sorts of legal implications of the decisions we make and how we document things, and there's also so many opportunities that you're not gonna really understand, identify, and evaluate if you're doing this on your on your own part-time reading blogs and talking to your friends.
SPEAKER_00Right. No, and to be honest with you, uh, this came up for uh appeal in the like I said, in the Eastern uh district court, eastern Tennessee. Uh the judge held the ruling. The only thing that he did change was that CIC, which is one of my friendly partners, um, technically the IRS was supposed to return all of the data that they acquired uh during the 88, 86 days. Uh judge uh denied that the IRS had to return all those documents, which is a shame. Uh they had to return all of CIC's documents. Uh now we're having to go to court. Uh there's a class action suit that's going uh for the IRS to return all the documents, uh, because no, we we've never done anything, you know, anything wrong. So um so that that's the way that stands. But now it's no, it's no longer a transaction of interest. It was all BS in the first place.
SPEAKER_01So awesome. Um couple of things I'm thinking about as we approach towards the end of this. Um when we think about we so we've identified the tax advantages of having these deductions and and having a vehicle to invest in securities. Talked about the risk, um, the the risk mitigation opportunities here. Um now what I'm also wondering, now I I don't think we have enough time to discuss this because this can get really complex. But as far as when we retire or go out of business, you know, retire or no longer need the captive for whatever reason, there's a probably a multiple multitude of opportunities and ideas on how are we going to pull the money out of the C Corp, this captive insurance company in a tax advantage manner? How are we gonna do exit strategies? But one of the things that I'm thinking about immediately is the benefits of having this this captive insurance company is we can do some timing here. We can time on when we're recognizing this income, when we're getting the dividends, and and what and you know, based on you know what is our dividend tax rate, you know, all sorts of of considerations here on on how we're gonna eventually use these funds for for personal spendings or or what or move them to for some other purpose. Where are some of the things that you're seeing as as far as this goes?
SPEAKER_00Well, yeah, yeah, again, I I once we're quite honestly, once we're done, we're done. I mean, once we give up the once we are um um we go through the uh process of winding up the license, um we're we're pretty much out of the scene, and we turn it over to professionals like yourself. It comes up as a C corporation, and that's our rule. What what I've I what I've seen, uh, and I'm providing you know no advice to anybody, please understand that. Um, again, you you you go in the one thing I will tell you is that while the captive is in motion, you're exempt from the your accumulated earnings tax as a C corporation because you have all this potential liability as an insurance company because you're writing all these policies. Theoretically, you have a ton of liability, you've got all these policies outstanding that could theoretically hit. So you have to maintain this retained earnings. Now, the minute you stop being an insurance company, that doesn't mean instantly you have to liquidate. Now, most I can tell you out of experience that most times CPAs are smart like you will get to a period of time, usually near the end of the fourth quarter of a particular year, and say, okay, we're getting ready to go, or we plan well ahead of that, say we're gonna we'll shut it down, maybe we'll terminate the license at the end of the year or next year, and they'll let it run for another year so that they'll do even if they go to liquidate, they're gonna get it a good run to get barring any tax changes. Let's assume the cap rate is still the same. Well, you know, we do some planning around that, even if they're planning just to liquidate. But I've seen many other you know strategies where it's flipped into uh, you know, just moved into some type of invest, you know, investment position, uh, done other things with it. Um, you know, I think there's I you know, I'd honestly I'd leave it up to the people out there. You probably have much better advice. Just think, I mean, what can you do with the with the with the C corporation that's that's got a lot of assets in it, uh, knowing it it may come up, and it won't be for many years. You people out there have probably much more experience. You've got a C corporation sitting there with with uh stocks and bonds and cash. Um, now it doesn't have to be liquidated. I mean, assuming whatever ownership you have, those assets can be transferred. They don't have to be liquidated, you can just transfer the investment account, but you know, it's it's it's it it's just gonna be closed out at that point um at time. Um I I've seen some really stupid things, quite frankly, because um I've seen some doctors that um that have been under litigation uh from quite frankly for some malpractice issues. And as long as you're as long as you're a uh captive and you're writing premium policies, as far as I know, you're still maintaining that asset protection. Uh I think they got some of the dumbest advice possible, and you know, closing the captive down. Um, as far as I let as far as I know, it left him open for potential seizure of the assets, but that's what do I know? But uh at any rate, that's uh but another thing I'll point out that as long as there's something for the captive to insure, um, the captive can stay open. Now, if you're you know if you're writing two million dollars worth of premium every year, and then you sell the main entity and you go to you know writing insurance for a dry cleaning store or you know, or coin out laundry. I don't think writing$100,000 a year when you got$10 million in reserves is gonna make the service very happy, though. So but again, I'd probably leave it up to the experts on that.
SPEAKER_01Okay, yeah, there's uh there's an a new new of one of many areas of complexities in our in what we do in our tax planning and in the tax code. Um okay, fantastic. Well, uh Keith, thank you so much for your time today. I really appreciate this. Uh I don't have any additional questions at this time, but I really enjoyed our conversation. Can you tell the audience where they can find you if they want more information?
SPEAKER_00Yeah, they can go to synergicaptives.com or they can call me at uh 702-845-7656. The uh website has my just add Keith K-E-I-T-A, K-E-I-T-H as Synergicaptives.com. And you can you can look us up. Uh our new mark, but chip shots, the blanket behind me is my new golf venture. So uh I'm pretty much everywhere. So we're we're opening a new golf indoor simulator club here in Vegas. So cool, cool, and that'd be nice.
SPEAKER_01Um and uh so and anything else that you may ask of our rec our audience listening to the recording?
SPEAKER_00Uh just yeah, just check us, check it out. I mean, uh check out our website. And again, that you never know when a client's gonna be you know eligible for a captive. And uh send me the information. No uh there's no obligation. And trust me, I'm not gonna hound you. I'll send it to you. You're not gonna get on any mailing list. I'm not gonna sell your email address. And uh, you know, it's you don't like it, you don't like it. It's not for everybody. So uh, but you'll you'll be pleasantly surprised as to uh as to the process. So Mark, I really want to thank you very much for your time. Appreciate it.
SPEAKER_01Awesome, Keith. Thank you so much. This was really educational and and and enjoyable and helpful for me and and our audience as well. Appreciate your time. And if if you guys like this, subscribe to our podcast and our webinar, and uh stay tuned. We got more great stuff coming your way.