TaxCoach Briefs:    September 10, 2009

Volume 4, Number 38

• Spotlight on Strategy: Closely-Held Insurance Companies
• Member Event: Fall Roundtables Last Call
• Member Resource: Member Call-In With Ed and Keith
• Did You Know?: Customizeable Summary Report

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SPOTLIGHT ON STRATEGY (EAL)
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CLOSELY-HELD INSURANCE COMPANIES

Who likes paying taxes?

Come on, we're all friends. You can admit it.

Don't all raise your hands at once!

Okay, okay, so nobody really likes paying taxes.

People who don't like paying taxes are willing to work to find ways not to pay. It follows, then, that the people who pay the most tax are willing to work even harder to avoid it.

High-income clients have always appreciated high-end strategies for limiting their least-favorite expense. The IRS has done their best to eliminate some of those strategies, like private annuity trusts and 419(e) plans. Fortunately, there's one strategy left that remains safe -- and a new generation of consultants have made it even more accessible.

A closely-held insurance company, or “CHIC” (sometimes also called a "captive" insurer) is a bona fide property/casualty insurance company you establish to manage risk for your primary business or professional practice. A CHIC is a risk-management tool, not a tax shelter. However, a CHIC also offers significant tax advantages as part of an overall risk-management strategy. It's a potential grand-slam strategy for clients, though generally best-suited for clients with discretionary income of $100,000 or more.

Establishing a CHIC is analogous to establishing a qualified plan. Generally it works as follows:

1. Determine the specific risks your client wants to insure. These can include traditional risks such as product liability or malpractice claims, or nontraditional risks such as key customer or supplier loss, legal defense expenses, or tax audit defense expenses.

2. Engage a qualified consultant to establish the CHIC, qualify it to do business, and make appropriate tax elections. Your client's CHIC must meet specific technical requirements regarding risk-sharing to qualify as a bona fide insurer.

3. CHICs are usually formed outside the United States to take advantage of easier regulatory and reserve requirement rules. However, as CHIC owner, your client will still manage and control the company’s reserves.

4. Your client's primary business will establish coverage and pay premiums to their CHIC just as they would with a commercial insurer. The CHIC uses premiums to pay operating expenses and deposits the remainder into legally-separated reserves to pay claims.

5. Typically, the consultant who establishes the CHIC will manage ongoing actuarial certification, regulatory reporting, and tax filings.

Tax law lets CHICs elect to avoid tax on premium income up to $1.2 million annually. Your client's primary business or practice will deduct whatever premium they pay to their CHIC. But their CHIC will pay no tax on that income. Premiums typically start at $60,000, and can run as high as a full $1.2 million. So you can imagine how much actual savings you can create!

CHIC investment income is fully taxable. This generally leads CHIC owners to invest reserves in tax-deferred vehicles such as life insurance or annuities. (This makes the CHIC an especially attractive strategy if you offer insurance to your clients!)

If your client winds up not needing the CHIC's assets to pay claims, they can terminate coverage, liquidate the company, and withdraw any remaining reserves. Any proceeds above their “basis” in the company will be taxed as capital gains.

Risk management will always be the primary purpose for establishing a CHIC. However, many CHIC owners use premiums to supplement their retirement savings. CHICs offer up-front deductions and tax-deferred growth similar to traditional qualified plans. But they avoid several disadvantages that restrict those plans:

• Low annual contribution limits
• Penalties for early withdrawal
• Minimum required distributions
• Antidiscrimination requirements that mandate employee contributions

Finally, a CHIC can be a powerful estate-planning tool. Have your client designate heirs as owners of the company, and they can transfer assets out of their taxable estate in the form of deductible insurance premiums!

For all those benefits, we've just added a new module to TaxCoach on closely-held insurance companies. You'll find it at the end of the "Your Business" section. TaxCoach will select this module for clients who own their own business and indicate $200,000 or more of business net income or client salary from that business of $300,000 or more. Or you can select it manually on the Reports screen to show it to clients who may not qualify yet.

Very few clients will qualify for this strategy. And of those who do, even fewer will actually implement it. But you can still score valuable points and cement valuable relationships by introducing clients to the possibility. They'll appreciate you looking out for them whether the actual strategies you show them are an exact fit or not. And they'll remember you as their incomes rise to the point where they need to defer tax on six or seven figures of income!

Next week we'll talk about CHIC formation and the administration services necessary to actually implement this powerful strategy, as well as some options for outsourcing this work. In the meatime, start thinking about which of your clients can benefit!

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MEMBER EVENT (EAL)
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2009 ROUNDTABLES: LAST CALL

The San Francisco Roundtable is now completely sold out. That leaves just one opportunity left to participate, with just 4 seats available. So if you want to make tax planning a part of your fall business, reserve your place now!

Click here to register. (All-Stars, Press Club, and Hall of Fame members, see the Roundtables link in the blue on the All-Stars page to register for free.) Keith and I look forward to meeting you at a Roundtable this fall!

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MEMBER RESOURCE (KAV)
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MEMBER CALL-IN WITH ED AND KEITH

There won't be a Member Call-In next week, as Ed & I will be travelling for our San Francisco Roundtable. But we're on for the following week — so join us on Wednesday, September 23 at 1pm Eastern. Check the "Contact Us" button within TaxCoach for registration instructions.

Last week I mentioned that on some calls the questions are mostly tax-strategy related. And other times they are predominantly marketing and practice-management related — like last week. This week we returned to a focus on the "floorwax" as Ed would say, covering a wide range of tax strategy issues — but with some "dessert topping" too.

Here are some examples from the log:

• Q: Do you recommend electing out of installment sale taxation yet? Have you heard any other news about capital gains issues?
• Q: I'm looking at buying a tax business that is not an accounting practice. I'm trying to determine what is a fair price.
• Q: How to treat a life estate transfer and sale on a tax return ?
• Q: If a client started a corporation 2 years ago and failed to make any election so they are currently being taxed as a C can they elect to be taxed as an S or do they have to wait another 3 years?
• Q: Tax client left me a voice mail asking "Should I delay paying real estate taxes until next year?" In the past I would gather information and call with the answer and not charge the client for this. How do I turn this into a TaxCoach engagement and have the client see the value in having someone more than just a tax preparer?
• Q: The tax coach material includes lots of general information about strategies. Do you have an suggestions about how to present specific recommendations to our tax coaching clients? For instance, should they be in writing, and if so, in what form? When are tax projections in order?

Sound like a useful discussion? It is! Join us for the next one, on September 23. Check the "Contact Us" button within TaxCoach for registration instructions.

Please note that while our elite members (All-Stars, Press Club, and Hall of Fame) can still schedule time directly with Ed as part of their coaching programs, we simply cannot answer marketing and tax-strategy questions via email or unscheduled calls. We'll make as many call-ins available as we can, and we'll talk to you then.

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DID YOU KNOW . . . (KAV)
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CUSTOMIZABLE SUMMARY REPORT

. . . TaxCoach lets you download the Plan Summary into MS Word or other word processor? This feature lets you add your own formatting, as well as edit the text, prioritize the highlights, add emphasis and other notes, etc..

The summary report is so important as a discussion document, or as a 'teaser,' that tailoring it specifically to a single client can really help your sales and delivery efforts. Turn the advice you've always given away for free into a planning engagement that rewards you for the value you bring to the client! The client will value it, too.

On the Reports screen, under the orange 'Generate Summary' button, just check the box entitled 'Format:DOC' and save the file to your computer when you click on 'Generate.'

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We're happy to answer your questions on TaxCoach content or features. (Save marketing and tax strategy questions for Member Call-Ins.) For best response, email support@taxcoachsoftware.com. If we think the answer will be useful to all of our members, we'll publish it (anonymously) here in the 'Member Q & A' section of TaxCoach Briefs.

Regards,

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