Estate and Business Planning

As introduced in Ownership of a Captive, there are numerous tax planning opportunities with respect to harvesting or assigning the growth in the value of the captive, as well as even the captive itself.

Ownership by or in Trust for Children and Grandchildren

If the captive is owned, directly or indirectly, by or for the benefit of the business owner's children or grandchildren, there will be a net wealth transfer without gift, estate or generation-skipping tax consequence.

Since the captive's assets are outside the taxable estate of the business owner and beyond the scope of the generation-skipping tax, this presents many additional estate planning opportunities, such as the purchase of life insurance.  It also creates an asset that is ideal for a generation-skipping dynasty trust, since there is no need to apply generation-skipping tax exemptions to the premium payments [See V.B. 3, ante.], although it may be necessary to do so with respect to the initial capitalization of the captive.

Family Limited Partnerships or LLCs

As with many estate planning structures, the captive insurance company could be owned by a family limited partnership (FLP) or a limited liability company (LLC).  The FLP or LLC could in turn be owned by various family members or trusts with differing classes of interest and rights.  This could provide continuing control by the senior generation over investments of the captive's surplus and distributions.  Caution must be used in structuring family limited partnerships and LLCs in light of the IRSs recent aggressive litigation positions in this area.  See the following cases for further information:

Estate of Bigelow v. Commissioner (9th Cir. 2007) 503 F.3d 955
Erickson v. Commissioner (2007) T.C.M. 2007-107
Rector v. Commissioner (2007) T.C.M. 2007-367
Estate of Korby v. Commissioner (8th Cir. 2006) 471 F.3d 848
Estate of Strangi v. Commissioner (5th Cir. 2005) 417 F.3d 468
Estate of Kimbell v. Commissioner (5th Cir. 2004) 371 F.3d 257
Estate of Thomson v. Commissioner (3rd Cir. 2004) 382 F.3d 367

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Ownership by Key Management

Another common ownership structure involves creating restricted shares for key management.  Since the captive is a C corporation, one of more special classes of stock can be designated with appropriate vesting and transfer restrictions as an incentive and retention tool for management.  This also provides incentives for employees to manage risk more effectively.  If the premiums paid to the captive are ordinary and necessary businesses expenses, they should not result in an element of compensation to the employee owning shares in the captive.