Owning Multiple 831(b) Captives

As previously disclosed (see taxation of captives), a captive insurance company must receive less than $1.2 million in annual premiums to qualify for the special tax treatment under IRC Section 831(b).  It is often beneficial to form multiple Section 831(b) companies to take advantage of this favorable treatment.  In an estate planning context, it might be beneficial to have a separate Section 831(b) company owned by each child or by a trust for each child.

The Code provided attribution rules to prevent abuse by formation of multiple captives [IRC 831(b)(2)(B)].  Generally, the controlled group rules under Section 1563 apply, with some noted exceptions.  In an brother-sister controlled group, five or fewer persons who are individuals, estates or trust own at least 80% of the vote or value of the stock, but only if such persons own an identical interest in each corporation

Under the constructive ownership rules, stock owned by a person under the age of 21 is constructively owned by his or her parent, and vice-versa [IRC 1563(e)(6)(A)].  An individual who owns more than 50 percent of the vote or value of stock shall be considered as owning he stock of his or her parents, grandparents, grandchildren, and children who have attained the age of 21 [IRC 1563(e)(6)(B)].

Therefore, when considering a client's wealth transfer planning opportunities, the estate planner should keep in mind that a separate Section 831(b) company can be owned by parents and any child or grandchild over the age of 21, without having the controlled group rules apply. 

For example, parent A has three children, B, C, and D, who are all over the age of 21, and A, B, C, and D each own 100 percent of separate Section 831(b) companies.  For purposes of the constructive ownership rules, A is not deemed to own the stock of B, C, or D, or vice-versa, because they are each over the age of 21 and there is no attribution among siblings.  Applying the general rule under section 1563(a), although there are five or fewer persons that own at least 80 percent of the sock of each company, none of them have identical ownership in more than one company, as they each own 100 percent of separate companies.

Such structures must be carefully analyzed to ensure that they make economic sense for the insurance planning being done for the group and that each Section 831(b) company meets the applicable federal tax requirements.