A closely held insurance company (CIC) has become a popular choice for small to medium-sized business owners who want to build and protect their wealth and legacy even after their death. A CIC has the ability to both protect business assets and interests, and at the same time, postpone and reduce tax when transferring real properties and/or money to the next generation. It makes the transfer of properties and assets easier and less costly, as an estate, gift, and income taxes can be reduced or even suspended.
A CIC is an insurance company not a product, which a business owner can actually own or own through an irrevocable trust fund.The business owner can then sell insurance to various people related to or working for him aside from selling insurance to himself. Selling insurance allows legitimate income tax deductions for the owner’s business and it can also defer gift and estate tax for his personal estate.
The risk management benefits of establishing a CIC cannot be understated. The captive can write policies covering particular risks which wouldn’t be insured by commercial insurance policies. According to Cloud Peak Law, a Wyoming law firm specializing in asset protection, many of the risks that the captive should cover can be found under the exclusions sections of the existing policies of the company.
To illustrate this, let’s look at an example.
If a business owner owns 100% of his company which has an annual income of $500,000, added with his other assets, his total net worth is $1 million. Through an irrevocable trust fund, he could buy insurance for his children worth between $10,000 and $900,000. The premiums would be paid by the company and this will be considered a legitimate fully tax-deductible expense.
The closely held insurance will give these benefits to the business owner:
1. Gift and income tax deferral – because the assets are now in a CIC, taxes would be deferred in payment because the account is owned by the irrevocable trust of the children
2. Income tax deferral – because the money was not used by the business owner, he does not need to pay income tax–the money went into the children’s insurance
3. Asset protection – assets are protected because real property and the business owner’s money are no longer under his name but in the names of his heirs listed under the irrevocable trust. Transferring of property becomes quicker and easier as it has been transferred and protected even before the grantor’s death.
Under the terms of the irrevocable trust, beneficiaries can claim their insurance depending on what is stated. The trust includes all details about who is going to get what, and when they can have access to the money and assets. All of these will be readily available in due time, as they are simply being protected by the CIC. Usually, money and assets sitting in the CIC are used as an inheritance for the business owner’s heirs.
Closely held insurance companies take care of the business owner’s irrevocable trusts and are responsible for the transfer of legal properties to their rightful owners after the grantor’s death. The CIC is simply used to protect the assets from expensive and unlawful costs. CIC and trust representatives are assigned to see and set forth the proceedings as well as handle claims and disputes about the trust.