The myth doesn’t always live up to the reality.
Some advisors say that, given enough time, a dollar deducted is like a dollar saved. But so-called truisms borne of the wealth management industry are often like magic tricks: the audience only sees what the magician fashions. So when the founder of a large surgical center retained us to examine a proposed micro-captive insurance company (MC) and compare it with a pension plan, we were more than happy to examine the magician’s box of tricks in order to divulge his secrets.
Meet Dr. Smith (not our client’s real name). He is a veritable superstar. At only 38 years old he earns about $4 million a year from his medical practice and surgical center. While his medical practice had a large number of self-insured risks, the doctor appeared motivated by what he believed would be the long-term tax savings promised by the captive manager. When all regulatory and IRS standards are met, premiums paid into a captive may be deductible. Underwriting profits inside an MC are tax deferred, but all realized investment gains are taxable. If the MC has reserves that remain after paying claims to the doctor’s business (and claims paid to third parties who would participate with the MC in a compliant risk pool), the captive may be liquidated on a capital-gains basis, where remaining untaxed underwriting profits and previously taxed investment gains will be taxed again.
Read the full story here: https://www.wealthmanagement.com/high-net-worth/tax-deductible-juice-may-not-be-worth-squeeze
