Expert Commentary

The Use of Captives in Wealth Management

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


Captives
January 2012

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.


1The following explanation is intended to be brief and touch on the surface of the subject. If you have further interest, you should contact someone with successful credentials in the field. The use of captives in these ways requires extensive knowledge and experience and should require unassailable integrity of the practitioners. There are many tests against these structures, and you need to be able to rely on the skill of your consultant/adviser. As always, be careful.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

Like This Article?

IRMI Update

Dive into thought-provoking industry commentary every other week, including links to free articles from industry experts. Discover practical risk management tips, insight on important case law and be the first to receive important news regarding IRMI products and events.

Learn More



CRC38-Sidebar-Standard-Reg
PLP White Paper sidebar
Featured Video
 

Featured Products

The Wrap Up Guide

The Wrap-Up Guide

This "how-to" guide will walk you through everything you need to know about designing, implementing, and administering a wrap-up or controlled insurance program (CIP) for construction projects.
Learn more.

CLI-Image-100x133

Commercial Liability Insurance

Mistakes made in the design of your liability program can cause serious coverage gaps and significant financial losses. IRMI's best-selling resource can help you quickly identify gaps between your primary commercial general liability and your umbrella/excess policies.  
Learn more.

Navigation

Social Media

User ID: Subscriber Status:Free