The Use of Captives in Wealth Management
January 2012
Captives have been used in estate
planning/wealth management/asset protection for quite some time.
In this article, I will briefly discuss their use.1
by
Michael R. Mead
M.R. Mead
& Company, LLC
Because captives are licensed, regulated legal entities, they
stand apart legally from any other entity. This distinction can
be used, where appropriate, to form captives to assist in executing
a long-term estate plan or to protect certain assets. Separate ownership
is respected to a greater or lesser degree in all jurisdictions.
Typically, tax and estate planners use these wealth management
captives for individuals and families of considerable means, known
as high-net-worth individuals and ultra-high-net-worth individuals.
The amount of time and the knowledge required to put these together
well usually limit the usage of captives to those who can afford
to spend a great deal of money on skilled attorneys, certified public
accountants, and consultants.
That said, today more people are seeking ways to shelter their
assets and to pass those assets along in an advantaged manner. This
is not always tax advantaged but often is so. Other reasons would
be to protect assets in the event of a divorce, ugly disagreement
among heirs, or unfavorable litigation results.
Regulation and Domicile Selection
Most regulators are not opposed to the use of captives in this
manner as long as knowledgeable professionals form them for demonstrably
legitimate purposes.
Domiciles, as usual, will vary widely in the attractive suitability
of their regulations, which means study must be done in advance
to select the most appropriate venue. Often, the domicile selection
will be very different from the usual process in that many requirements,
such as hosting an annual meeting in the domicile, are not necessary.
Many domiciles are offshore in otherwise exotic locales and can
be quite complicated in formation and execution. Many advisers insist
that only offshore structures will stand the tests of litigation.
They are not for the fainthearted.
They can also be relatively straightforward and used domestically
with good results. Clearly the taxing bodies have considerable interest
in these structures and follow their use very closely. But they
are legitimate and used widely.
Possible Uses
An example could be an individual who owns a very successful
privately held company who has heirs seeking a tax-advantaged structure
for passing ownership and/or profits from the founding generation
to the next generation. A trust could be formed for the benefit
of the heirs, and the trust could own the captive. The captive could
also purchase a life insurance policy on the life of the founder.
The life policy could own the captive. The variations depend on
the goals of the founder and the skills of the consultant.
The trust could even have third-generation individuals as beneficiaries.
Many trust forms can be used, but the choice is critical and not
to be made lightly. There are always trade-offs.
The
founder could place assets such as property, art, collectibles,
or such into the captive and transfer the ownership to the captive.
Upon his or her death, these would not be a part of his or her estate.
Again, such use requires very professional counseling. There are
many roadblocks and requirements.
An individual with
considerable assets could put such items as a car, a vacation home,
a plane, a boat, or any other valuable property into separate captives
with separate ownership to prevent them from being seized in litigation.
This structure could also limit the liability arising out of the
insured asset from all other assets.
Caveat
The elements of these structures as used by many sophisticated
practitioners can be truly amazing. However, often, a key requirement
to gain acceptability is that the founder must give up considerable,
if not total, control of the assets. This does not always please
every potential client, but it is an important fact.
Conclusion
As a guide to your thinking if you are considering pursuing a
captive for wealth management/estate planning/asset protection,
please keep in mind the eternal axiom, "If it sounds too good to
be true, it is." A second axiom is, "You get what you pay for."
These absolutely apply to this situation.
That said, captives work brilliantly to segregate ownership of
assets, fund an estate, protect hard-earned assets from seizure
for whatever reason, and provide a good level of comfort that one's
assets are secure. Just be cautious, and deal only with trusted
advisers who have both good experience and impeccable reputations.
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