Our final look at captive insurance for physicians explores where it should be created and what form is best for you.
Physicians are always being promised the holy grail of asset protection, tax savings, and growth. One vehicle often attributed with all these qualities is the captive insurance company (captive). In our last three discussions we introduced three key issues to consider regarding the creation of your own captive:
• Understanding the basic model of a captive as a risk reduction and cost control tool for your practice;
• Identifying key questions in qualifying your captive advisor to handle this complex and compliance heavy task; and
• How to determine if your practice and revenue model is a good fit for a captive.
This week we will cover two final questions: Where should my captive be created (jurisdiction)? What form of a captive is best for me? For guidance on these issues I turned in part to Jay Adkisson, a Newport Beach, Calif., attorney and expert author on captive insurance companies. Adkisson has a remarkably well-defined view of what kind of companies he feels are qualified for captives and he is the first to say they are not for everyone.
Where Should My Captive Be Created?
Captives can be created in variety of domestic and offshore jurisdictions including Puerto Rico and the usual Caribbean destinations. While some of those jurisdictions may do a fine job if you have proper professional support, some of the strongest and most well defined systems are right here in the U.S.
Adkisson commented, “Vermont is the second-largest captive jurisdiction in the world, and arguably the best, although their primary market is corporate America. For smaller captives, Utah is the leader, followed by Nevada, Kentucky, Delaware, and Nevada, not necessarily in that order. Other states such as Arizona, Hawaii, South Carolina, and Montana also actively seek captive business. Even newer captive states such as New Jersey, Michigan, and Missouri are starting to aggressively market for new business.”
He added that with the passage of Dodd-Frank Act, a good argument can also be made that if your state has captive enabling legislation, you are better to have your captive in the state if feasible for some state tax reasons.
Should I Have a Sole Captive or Shared "Segregated Cell" Captive?
Captives have two essential forms, a "sole" model that you own and control 100 percent that insures only you and a “cell” model where administrative costs and set-up costs are shared between those who want the benefits but can’t reliably make large ($500,000+) and recurring annual contributions. For reasons of control the sole model is preferred by many experts, but there are exceptions based on fit.
“If the client is not going to be able to average at least $500,000 per year in premium payments and the client has very significant insurance problems, then I might suggest that the client talk to somebody about a cell captive,” said Adkisson, but he provided substantial caution about the liability and control in such a set up.
“There are three problems with cell captives: one, they are inherently so complex that they are, effectively, the perfect vehicle for embezzlement on a large scale; two, they are utterly untested, even though the IRS has given some cryptic guidance about how they might operate successfully; and three, if one insured 'blows up' with the IRS - due to poor tax compliance - then probably by default everybody else goes down as well, see, e.g., 419A(f)(6) programs,” again illustrating the need for exceptionally experienced and qualified counsel.
As always, the information provided here is merely a starting point, and your practice must be evaluated as a unique case by an expert. If you have a large volume, high-grossing practice with substantial liability concerns and a desire to more effectively manage high costs, captive insurance companies certainly deserve consideration.
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