Under Internal Revenue Code § 831(b), a Captive insurance company cannot receive more than $1.2 million in annual insurance premiums. Often it is beneficial for multiple §831(b) companies to take advantage of this favorable treatment. In an estate planning context, it might be beneficial to have a separate §831(b) company owned outright by each adult child of the owner(s) (or by a trust for the benefit of each child) of the operating company. Please note that the tax code provides attribution rules to prevent abuse by formation of multiple captives and therefore these rules should be carefully reviewed before implementation.
Under the constructive ownership rules, stock owned by a person under the age of 21 is constructively owned by his or her parent and vice versa. An individual who owns more than 50% of the vote or value of stock shall be considered as owning the stock of his or her parents, grandparents, grandchildren, and children who have attained the age of 21.
Therefore, when reviewing the potential estate planning and wealth transfer planning of a client, a separate IRC § 831(b) company can be owned by parents and each child or grandchild over the age of 21 without having the controlled group rules apply. For example, parent A has three children, B, C, and D, who are all over the age of 21, and A, B, C, and D each own 100% of separate IRC § 831(b) companies. For purposes of the constructive ownership rules, A is not deemed to own the stock owned by B, C, or D, or vice versa, because they are each over the age of 21 and there is no attribution among siblings, so each of B, C, and D are also not attributed the stock ownership of each other. Applying the general rule under IRC § 1563(a), although there are five or fewer persons that own at least 80% of the stock of each company, none of them have identical ownership in more than one company, as they each own 100% of each company.