Captive Insurance Companies & Life Settlements
Jonathan S. Berck has devoted much of his recent practice to the insurance sector. He is an advisor to clients seeking to establish captive insurance companies to manage exposure to retained risk as well as reap ancillary tax and estate planning benefits. With respect to life settlements, he has servied as a trustee for hedge funds in the industry and has advised numerous clients on the establishment of insurance programs in the secondary and tertiary markets for life insurance.
Jonathan S. Berck uses his experience as a trust and insurance law to help medium and larger-sized small businesses establish captive insurance companies (“Captives”) to manage retain risk and minimize insurance costs. In addition to his activities in his private practice, Mr. Berck recently joined a major captive management firm, Captive Planning Associates, LLC, as in-house counsel to manage their legal activities.
Captives have ceased to be mechanisms only for Fortune 500 companies: now, certain smaller businesses, and their owner/shareholders, can establish such companies and enjoy the premium reductions, capital retention and risk allocation benefits, as well as personal estate planning and wealth transfer advantages, that these structures provide.
The increased availability of the captive insurance company option is a result of several factors: changes in the tax code at the federal level; favorable Internal Revenue Service rulings; aggressive competition among states and foreign countries – notably Delaware and several other business-friendly jurisdictions – to simplify the regulatory regime to attract the establishment of Captives, and the increase in the cost of insurance that reduces the size of companies that can benefit from establishing their own Captives to develop individualized cost-effective risk-management solutions.
As Captives become attractive to smaller, family-owned businesses, an additional benefit appears: in meeting the risk-management needs of the family company, Captives may also be used by the owners themselves as tax-advantaged vehicles to transfer wealth from one generation to another and for other estate planning purposes, for both U.S. and non-U.S. persons in a wide variety of circumstances and situations, including using a variety of trust vehicles and for private placement life insurance and annuities. In addition, Captives may also be used to issue employee stock, hold restricted stock and allow control to remain in senior generations.
To assist clients in implementing these important functions of Captives – cost-efficient risk management, tax-efficient estate planning and tailored control allocation – Mr. Berck works together with specialist colleagues to develop strategies tailored to each client’s unique circumstances to put in place the best Captive structure for the situation in a cost-efficient manner. Among the techniques that could be employed in a given situation: the use of Delaware’s Series LLC law to easily establish multiple special purpose vehicles to segregate different types of risks; the use of Delaware asset protection trusts to put certain assets beyond the reach of creditors; the use of multiple Captives for different asset classes; the use of dynasty trusts; the establishment and later repatriation of offshore entities in light of changes in the tax code, etc.
It is important to note that Mr. Berck focuses not simply on the “front-end” – namely, the initial advice regarding and establishment of the Captive – but also on (i) the operations of the Captive over time, both from an insurance and tax point of view and (ii) the crucial phase in which accumulated capital in the Captive is transmitted to the owners of the Captive, which involves sophisticated planning from a tax and insurance regulatory point of view. From the beginning, in our initial presentations, Mr. Berck and his specialist colleagues focus on these crucial two later steps as well as the issues surrounding the initial formation of the Captive and the suitability of a client’s business for Captive insurance.
Please note that although Mr. Berck is affiliated with Captive Planning Associates, LLC, he is also available to work on projects in which CPA is not engaged.
Jonathan S. Berck is one of the country’s leading life settlement attorneys and is a frequent speaker at life settlement conferences. He has extensive experience assisting investors and individuals in life insurance transactions. These may include individual policy settlements, creating acquisition programs, or using portfolios in securitizations and other complex structures.
Individuals who have outlived their need for their life insurance policies and have already made financial provision for spouses and descendants find themselves faced with three bad choices: (1) continuing to pay ever-higher premiums, (2) letting such policies lapse, or (3) accepting the meager cash value offered by the insurance carrier for the policy’s surrender. A life settlement is a fourth option, namely the sale of the life insurance policy by the policy owner to a third party for a greater cash payout than surrendering the policy. In a life settlement, the purchaser pays the insured cash in exchange for the right to receive the death benefit of the policy in the future; in the meantime, the purchaser assumes all obligations for premium payment.
Hedge funds and other investors in the life settlement industry have frequently been clients of Mr. Berck, who has designed life settlement programs and transaction documents. He reviews the entire transaction chain for his clients, from origination to acquisition and sale in the tertiary market. He works with industry experts, creating uses for warehoused portfolios pending the end of the “credit squeeze.”
Among the services he can provide are:
- Developing documentation suitable for the marketplace
- Proactively reviewing existing trust and transaction documents
- Secure document custodial services
- Trustee services, including administration of sub-trustees
- Robust and auditable banking systems
In his personal capacity, Mr. Berck serves as a trustee in both New York and Delaware, and arranges for trustees in other locations.
Life insurance can be an excellent estate planning tool.
Life insurance policies can not only serve their core purpose of providing for loved ones in the case of your demise, but can also be used as part of a business plan to provide liquidity in the event of the sudden demise of key partner or shareholder. Moreover, life insurance trusts are often used to remove the proceeds of the policy from the estate (thus avoiding any applicable estate taxes), and such trusts can be used to provide tax-free funds with which to pay any estate transfer taxes. Another use is to fund charitable gifts during one’s lifetime and after one is gone.
Where appropriate, it is possible to sell one’s life insurance policy on the secondary market. These transactions are called “Life Settlements,” and are described above.
