Succession Planning after ATRA 2012 – Investment Opportunities

Fred M. Whitaker, P.C.'s Tax Planning Legal Blogs

Licensed for 27 years

Attorney in Newport Beach, CA

Fred M. Whitaker, P.C.

Free initial consultation, Credit cards accepted, Fixed hourly rates

Serving Newport Beach, CA

  • Serving Newport Beach, CA

  • Free initial consultation, Credit cards accepted, Fixed hourly rates

Managing Partner at firm Cummins & White, LLP

Serving Newport Beach, CA

Free initial consultation, Credit cards accepted, Fixed hourly rates

Awards AV Preeminent

Previously, we discussed a unique tool to reduce current taxation –
the Captive Insurance Company – specifically, Internal Revenue Code
Section 831(b) small insurance company captives.  In summary, you can
self-insure company risks and pay premiums to your own wholly owned
insurance captive.  Instead of paying tax on profits, you receive a
deduction for premiums.  Your Section 831(b) small insurance company is
allowed to earn up to $1.2mm per year in premiums without paying any
federal income tax on them.  It only pays tax on the investment income.

So,
what can you do or not do with the tax efficient funds (formerly your
taxable profit) sitting in the captive insurance company?   While you
are not allowed to invest in or loan back to your operating business,
there are a variety of investment strategies for the captive that should
be customized to the business owner’s needs and goals.

Investment opportunities include:
?    Income producing real estate or loans. 
?    Income producing loans to customers and ancillary companies of the operating business. 
?    Stock market, mutual funds, and other traditional investments.
?    Life Insurance

Of
these strategies—life insurance— is one that can work particularly
well.   Unlike other investments, the cash build up or cash value
crediting rate inside a life insurance policy is tax free.    The
proceeds can be borrowed from without being taxed, and, of course, the
death benefit is tax free.  Life insurance can be a double tax-free
benefit for the owners of the captive.  Next month, we will provide a
life insurance example showing significant tax savings. In addition, we
will discuss ownership options that are estate tax efficient and tax
preferred exit strategies for the captive.

___________________________________________________________________________________________

IRS Circular 230 Disclosure:
To
ensure compliance with requirements imposed by the IRS, we inform you
that any U.S. tax advice contained in this communication (including any
attachments) is not intended or written to be used, and cannot be used
for the purpose of (i) avoiding penalties under the Internal Revenue
Code, or (ii) promoting, marketing or recommending to another party any
matters addressed herein.

Previously, we discussed a unique tool to reduce current taxation –
the Captive Insurance Company – specifically, Internal Revenue Code
Section 831(b) small insurance company captives.  In summary, you can
self-insure company risks and pay premiums to your own wholly owned
insurance captive.  Instead of paying tax on profits, you receive a
deduction for premiums.  Your Section 831(b) small insurance company is
allowed to earn up to $1.2mm per year in premiu

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