Captive Trusts: Leaving a Legacy

A family-owned manufacturer of electronic components was looking to save on costs while building value into their company as they planned for retirement.

Company leadership had tried a number of tactics, including reductions in insurance premiums. For years, they attempted to reduce premium expenses while pushing for marginally broader coverage. They tried adjusting coverage cap amounts, deductibles, and exclusions at renewal to find additional value, but these strategies weren’t as effective as they were hoping they might be.

Evaluating the company’s options

We worked with the manufacturer to produce a feasibility study. We reviewed their insurance programs to see if a captive insurance company could add the value they were looking for. By creating a captive, the manufacturer would be creating a domestic private insurance company that could sell lines of property, casualty, and liability insurance to the manufacturing company. We found that, in this case, a captive was a very good solution for the company.

We also recommended that the manufacturer make several adjustments to the existing commercial insurance programs they had. This created immediate cash savings for the manufacture by lowing their property and causality premiums. The captive then issued a supplemental commercial insurance policy to the manufacturing company in exchange for a fully tax deductible annual premium of $1,190,000.

Adding value, reducing risk

Once the new strategy was in place the manufacturer saw immediate benefits, and began to see the long-term potential of their new investment. By creating the captive, they were able to:

  • Create a profit center where there once had been only unfunded self-insured risk
  • Reduce the cost of third-party premiums by 8%
  • Reduce the company’s income tax rates and lowered their income tax by nearly $475,000
  • Create the potential for additional wealth for the owners – and their families

Now, the family has a new business that generates a net profit budgeted to exceed $3 million over the next six years. The captive’s profits will be distributed to its owners at more favorable tax rates. If the manufacturer does have a claim they can now receive reinsurance payments on losses that would have previously been self-insured.

All of these results were welcomed by the owners. But there was one additional benefit that meant a lot to them: Captives can also be owned by the next generation as a trust. The owners, looking at the company they’d built with the next generation in mind were very happy to know that their investment could be handed down safely.

At Intuitive we consider our clients our long-term partners. We’re working with clients throughout the life of their company – from first major investments to the creating a legacy for the next generation. If we can help you build your company’s future, please contact us.