Small Captives
Section 831(b) of the Internal Revenue Service tax code permits micro captives to receive up to $1.2 million per year in insurance premiums - completely tax free.
This means that firms paying the premiums will deduct up to $1.2 million per year for insurance costs, but that amount is not taxable to the firm’s captive. All investment income in the 831(b) captive is taxed at normal corporate rates. When a captive is sold or liquidated, its owners will pay on the gain at favorable long-term capital gains rates.
This form of captive is an extremely powerful estate planning vehicle. Premiums from the firm paid to the captive are effectively transferred to the next generation, without any gift of estate tax.
Furthermore, the captive can purchase life insurance as a permitted investment. This allows the captive owner to purchase life insurance on a pre-tax basis, effectively reducing the cost of life insurance by 40%.
Few other business strategies can provide these planning benefits.