Economies go up and down. Things are really good, right now. But we all know the bottom will drop out at some point. It always does. Are you prepared to make it through the next recession?
Do you have a “rainy day fund” to deal with the downturn? Risk mitigation is an absolute must for small-to-middle market business owners. Today, Toby Mathis of Anderson Business Advisors talks to Van Carlson of Strategic Risk Alternatives about protecting your business in a downturn economy with captive insurance.
- What happens to businesses when the economy takes a turn? Thrive or don’t survive
- Concept of Captive Insurance: Incentive and tax advantage to own your own insurance company; self-insuring risk is not a deduction
- What are the limitations? Insurance company not defined by Congress; different views from taxpayers and departments, lead to lawsuits and court cases
- Four-part Test: Owning your own insurance company requires risk of transfer, distribution, fortuitous, and acting in principles of insurance
- Recommended Liability Policy Coverage: Brands, supply chain risk, dispute resolution
- Unknown future of dividend capital gains; defer taxes today, mitigate risk, and clients win
- Estimated cost to form own insurance company is $5,000, plus $5,000 to maintain it
- Three Simple Rules: If you have risk, calculate it; if you have tax liability, calculate it; and determine benefits
Full Episode Transcript
Toby: Hey, guys. This is Toby Mathis with the Anderson Business Advisors podcast. Thanks for joining us. Today, I have Van Carlson from Strategic Risk Alternatives, which is basically, creating your own insurance company. It’s actually a really cool concept that I’m excited to be able to share with you guys. I’m going to introduce Van. Hey, Van, thanks for coming and joining us.... Read Full Transcript
Van: It’s always a pleasure to talk to professionals such as yourself. Looking forward to getting our message up.
Toby: Fantastic. Before we do the message, let’s hear about you. Where did you grow up? What brought you into all this whole thing? Give me the story.
Van: I’m from Idaho. Actually, my company is actually headquartered in Boise, Idaho. I’m a farm kid, I grew up in a rural community. Did something here and there, left for a while when I joined the service, and came back […] college degree and was going on a corporate America world of FedEx and UPS at the time. […] this idea that actually becoming an insurance agent. Got into risk management in ‘94 and then shortly, at 2015, whatever it was, 2008 I was introduced to this concept, business owners taking risks everyday to do what they do, I had a lot of clients that were business owners.
Spring of 2008, the Great Recession, kind of led me into this concept, “What do big businesses do when the economy takes a turn?” Some of them, if you watch, they actually thrive in downturn economies. I think it’s the way they position themselves financially, some of the tools that they’re able to utilize, we wanted to bring back those concepts down do the small-to-middle market business owners. That, to me, take up probably more risk than big companies do because when they’re find a downturn in the economy, it’s much harder to survive. That’s really where I saw this concept that we’re going to talk about, of owning your own insurance company.
In a much broader sense, risk mitigation is an absolute paramount to doing it. Unfortunately, our clients take a lot of risks that are insured. It’s one of the reasons why the code was introduced, which we’re going to talk about. I think today though, as your profession evolves, we’ve done well, it’s been a good ride. Things are really good right now, god bless the economy, and everything else but to me, you can’t be doing the same thing over and over again and expecting different results.
We know economies go up and down. Today is the day you should be looking in a concepts like this. If you’re in a position to build a rainy day fund to survive the downturn, you can be like those big companies. You don’t make your money when you’re going down the slope, you make your money coming up the slope. We saw it, we saw people in 2011, 2012, 2013, 2013, 2014, 2015, were actually benefiting from the economy years of ramp up. I just want, on behalf of business owners, get educated and have a better understanding of this, and at the end of the day, it’s a tool. It may work for the client, it may not.
But I think it’s worth noting that we think it’s going to become a normal business practice to own your own insurance company. There are some […] involved that’s why when you go to this concept, obviously, the IRS doesn’t like this concept, but it’s going nowhere. We think it’s going to become a normal business practice and it’s not because of anything else other than the fact, you’re going to have to own these things for your own risk mitigation. Risk is becoming more and more difficult to assess in a lot of ways and so forth. For me, it’s really the education process for business owners. A lot of times they’re getting it for the first time they can own their insurance company. It’s not a new tool by no means, but it’s a new concept for a lot of business owners.
Toby: Let’s talk about the concept because a lot of these folks have never heard of captive insurance and just kind of set the table. What is captive insurance?
Van: Captive insurance has to do with what we utilize at tax we call the 831B and is introduced in the 1986 Tax Reform Act. At that time, farmers are just finding themselves self-insuring crop insurance, private sector is getting out of it, and now it’s become basically […] where the government’s backed crop insurance is no different than they have to back fund insurance because core profit insurance companies, it’s too much of exposure and they’re not going to offer those types of coverages.
However, self-insuring risk is not a deduction. For example, we deal with a lot of clients warranties. Promise a warranty into the future, that’s an exposure. You take a dollar off the sides and say, “Hey, if something happens, I’m going to use this dollar.” That’s self-insuring risk and Uncle Sam does not recognize that as a legitimate deduction. They introduced the 831B tax code to create an incentive to own your own insurance company, and really to be able to recognize self-insuring risk, but you have to make a move into this mechanism and elect under the 831B tax code.
The reason why that’s a huge advantage is the premium you put into the insurance company, when the original code was passed, it was $1.2 million that you can put into per year […] doesn’t pick it up as an income. Now it’s $2.3 million per year, and they just recently changed that law back in the path […] days.
Toby: Did you say $2.3 million?
Van: Per year, you can put into your insurance company. Think about it.
Toby: That’s deductible? That’s the deductible payments of your own insurance company?
Van: It’s deductible at your operating company level, no different than work comp, general liability, […] that’s going on out there. They’re under the 162 line item, necessary and ordinary expenses. […] mechanism and in those reserves, those premiums that go into that 831B insurance company, which is a C-Corp, it does not pick that up as taxable income. Now, the only thing it does pay taxes on is an investment income, and those are pretty substantial advantages in the marketplace. I would tell clients, insurance companies are probably the strongest financial institutions of our country, and a lot of that has to do to waive your tax, and the advantages they have in that realm. This is just your ability to take advantage of those situations. Again, the risk mitigation part can’t go unwarranted, the advantages that go into the taxes are pretty substantial.
Toby: Somebody staying at home or […] in their car or something, listening to this and they say, “Alright, you’re just going to create your own insurance company and now what? Do auto insurance, health insurance, everything else?” Or are there limitations to what it insure?
Van: I mentioned the 86 Reform Act. You know, […] congress passing these bills and there are 1500 pages, there’s still a lot of things they miss. One of the things they missed when they passed the 831B, they said, “Own an insurance company.” Well, they didn’t define what an insurance company was in the eyes of Congress. Now, […] might think that’s pretty obvious what insurance company is, but you’ll be surprised what a taxpayer might think it is, and the Treasury Department might think it is. Then we have court cases.
But I want to stay that briefly, there’s a four-part test to owning an insurance company. We, as an insurance manager, we don’t complicate our client’s lives by no means but we are certainly their manager of their insurance company. They adhere to the four-part test and we make sure that they’re also able to be elected under the 831B tax code. We have a lot of rules and regulations put in place. Just recently, there’s been more case law that’d come up, that really kind of paved the way for you to run your insurance company properly.
I would tell you, congress is a big proponent of this program. Lead business owners […] taking care of their own risk because the world’s gotten complicated, this is the age of information. We talk about the brand protection, social media, supply chain risk, third party vendor liability today become a more and more […]. We’re seeing emotional distress lawsuits coming in now which clients have no coverage for that today on liability policy. That’s where I geek out.
Toby: What are the big ones? You just mentioned a few, just arbitrating out…
Van: A great example is dispute resolution. A lot of […] are professional liability insurance doesn’t cover for a lot of things that we, unfortunately, get sued over today. Having a dispute resolution policy in place, and protection, I don’t care what size of business you are in, maybe you don’t have an itemized cost factored both into managing your brand, but in most businesses today brand is everything. I think when I sit down with a business owner, I think the question quickly, I think, is the intangible assets.
Traditional insurance companies do a great job insuring the tangible assets which are your buildings, your vehicles, things that you mentioned. The intangible assets are harder to quantify, harder to identify. Truthfully, it’s getting back to the flood insurance of the crop insurance. When it happens, it can be pretty catastrophic. Insurance companies are interested necessarily in insuring catastrophic type losses. That’s where it gets into. Most of our business owners value the intangible assets of their business a lot of times more than the tangible.
We’ve got to sit down with the client, we do a pretty big, in depth feasibility study to make sure we understand the client, and then talk about some of their needs. Every client, every risk profile, every industry has its own unique situations, but we have a good idea of most of our businesses because we’ve been doing this, now, almost 11 years. I think, for us, the brands, supply chain risk, dispute resolution, we’re seeing more and more coverages come out that we’re identifying. The biggest thing is the intangible assets of businesses.
Toby: Let’s talk about this, let’s just say I’m a doctor and I already have insurance, but it doesn’t cover me for everything. I could have employees suiting me, I could have companies not pay, I could have all sorts of fund stuff that pops up. What you’re saying is, I could literally take money up to $2.3 million a year, pay it to my own insurance company, and write that off so I could get a deduction right now for the $2.3 million? Then that goes into the company. If it makes money on the $2.3 million, I pay tax at the company level on that, but it doesn’t pay any tax on the $2.3 million I paid.
Van: That’s correct. I do want to take in this one thing, everything has to be actually determined. One of the things that we do on the heavy lifting is making sure that we actually determine numbers.
Toby: You have to figure out what the risk actually is.
Van: And we also have to make sure they qualify. It’s got some people in trouble for those premiums. I just throw that out there because unfortunately, I’m the risk mitigator first and foremost. It has to be a justified premium, it has to be appropriate type premiums […] and so forth. Those are the things that goes into the four-part test.
Toby: What is the four-part test?
Van: The four-part test is, first off, you have a transfer risk, you have […] distribution so there has to be a polling, “How are you utilizing the […] numbers?” That answers that question. The third one is a fortuitous risk, which is kind of what we’re talking about right now, it has to happen by accident, business risk. I would say that’s probably where we define ourselves a little bit more than our competitors. We don’t believe an employee leaving a job to go down the road to your competitor, are because of spouse got a promotion and now they got to leave you, is a triggering event for an insurance policy in our opinion. We don’t offer those types of coverages. We take a very conservative approach. Because we’re risk mitigation, we’ve been around the insurance business for, going almost 30 years now, we understand what the policy can and can’t do, and then the fortuitous risk pretty well.
The fourth part test is acting in the principles of insurance. We’ve […] insurance is what got a lot of people in trouble with the program. Unfortunately, I would tell you, it was hijacked for estate tax purposes probably for the last 15 years. There’s been some changes on that, which I’m happy to dive into if we have time, but good to know that the estate tax placement is taken off the shelf, has been taken away from this concept, and we see more and more of an uptake for clients.
Toby: We’re deducting money and then taking it out of their estate, maybe the company wasn’t owned by them, maybe it’s own by their kids or something like that.
Van: Toby, it was fantastic, estate tax planning. It was too good. The biggest fix is this, no lawyer […] beneficiary […], so irrevocable trust, or your grandkids can’t own these vehicles anymore? It owns a piece of the operating company. They cleaned that up and I was glad to see that, but I would also note that that’s when congress upped it up almost another $1 million and the ability to put another $1 million, plus they also put an inflation rider in it. Every year we can expect that number to go up […]. Those are good fixes, and I’m glad they were fixed that way.
Toby: Let’s go over a common example. Do you have a typical client that comes in, maybe he’s a doctor or dentist? Is it property owner? Is it somebody that owns apartment complex or things like that?
Van: A couple things on that. We deal with a lot of medical doctors, unfortunately, they have a ton of risk they can’t run insurance for. Let’s say there’s sub-par coverages that have some of the policies that I think you […] malpractice insurance, or maybe they have high deductibles or that kind of stuff. We see that a lot. Obviously, brand protection is a big one for them and even in the medical communities […] can be pretty significant too. […] they have specific products for dentists. We have a warranty program for them that they can actually develop their own warranty program. For anything that’s a hard appliance, meaning anything from a filling to veneers to braces, we have a great warranty product for them.
Just so everybody knows, auto dealers have been doing this the longest. They’ve always […] insurance companies in the backroom and so instead of warranty or any of those types of things—have you ever wondered why they were pushing you pretty hard to buy one is it’s one of the most profitable businesses they have now, one of the more profitable lines of businesses aside of the dealership is finance and insurance. They’ve been doing it the longest. We’ve taken that program when we really put it into utilizing that for the dentist. I think it’s a fantastic program. We have dentist doing as low as $30,000 a year in the warranty program, the highest $400,000 a year in the warranty program. Again, actual determined numbers, but it’s a great product.
Toby: Let’s walk through that just so somebody understands it because you have some lay people out there that are, “What’s the big deal?” We’ll take the middle of that, let’s say it’s $200,000, the dentist is deducting $200,000, buying a policy for something they may end up covering anyway, but then there’s a percentage that they’re going to be covering or percentage of that money that they’re going to dip into, and then there’s going to be a delta that’s going to stay in the company and continue to not be taxed and continue to grow.
Van: Let’s say they offer a five-year warranty, let’s say they charge $1000 for a crown. […] actual numbers come back based on amount of crowns they did, there’s a whole thing that goes into that. For every crown you do in your practice, you can set aside $50 to honor that warranty. Now, we’re going to expense it, that $50 off that which you would have picked up as a profit, let’s say. […] operating company and now it’s going to go into this mechanism. When that patient comes back 18 months from now because they chewed on a piece of ice, whatever happened, which to your point, most dentists do cover that for no cost whatsoever. Now they’re sitting in that chair and you’re fixing that crown.
Toby: You’re making a claim against your own policy.
Van: Yes. […] dentist, you may not want to get paid, but I’m pretty sure you’re assistant, the power company, your loan, all that stuff that’s out there. It’s just an efficient way to honor first off your promise to your patient. Just like your auto, we have to do a preventive care or contracts that you got to come back every six months to do preventive care in order to maintain the warranty. We’ve actually seen it take up in retention for dentists. You could be a differentiator on a marketplace because a lot of dentist won’t offer those kinds of warranties. I go to a dentist, get a crown done and shakes my hand and say, “Thanks.” I go get a set of tires from a tire company and I get all sorts of warranty documents. You don’t really know what you’re getting with a lot of dentist. We help them define their warranty in that. That’s a great product from that standpoint.
The property management companies, we’re actually going to go to a convention at the end of the month in June […] managers about starting to offer their own accidental damage waiver. […] AirBnB, when you go to rent one of those homes, they have a damage waiver on them, and it could be a couple $100. With property owners […] piece of that. […] read the policy they’re getting so they need $1500 or $2000 of coverage and they’re paying $250,000 for that.
A great revenue source for the property managers. You could see property managers able to, again, differentiate themselves with the competitors, they’re going to take on the first $2500 in damage their tenants do to those buildings, properties, or apartments. It’s a differentiator, and it’s additional revenue for the property manager. Here’s the thing, we’re expensing all those revenues out of their operating company, so they’re able to expense that, transfer the risk to their insurance, and when things come up, they have revenues and money to handle it.
Toby: I’m a tax guy, so I’m going to want to walk through this. Let’s say that you’re putting $100,000 aside to this, you’re going to get a deduction at your highest rate or the operating company is going to get it. With a C-Corp it’s 21%. […] flowing down to you which most people are either S-Corps they’re running this partnerships, but somehow it’s partnerships but somehow it’s ending up on their personal return, that could be upwards of 50% depending on the state they live in. It comes right off the top.
Let’s just say it’s $100,000, I put that into this captive company. It’s my own insurance company, but it’s going to have to do a bunch of stuff. I’m assuming there’s going to be some costs associated with it. Let’s just say I have my own insurance company, and I’m dumping this money in, let’s just say it’s federal tax, it’s highest bracket 37%, I’m going to save $37,000. At the end of the day, I’m going to close that company down at some point, and I recognize that income. How is that taxed when I close the company down?
Van: Assuming all the premiums in their one year one day, it would be considered long term capital gains.
Toby: Alright. That’s the big one. Again, same set of facts and at 37%, when I take it out even if I’m in the highest bracket, that’s 20% long term capital gains and hopefully, I’m taking it at a much lower rate.
Van: Exactly. I tell clients all the time about this. To your point, I think it’s worth noting, Toby. Right now our clients win, we don’t know what the future is going to look like when it comes to dividend capital gains. We’re deferring taxes today, we’re mitigating risk, and I hope our clients win on the back end of these things. I would hope our dividend and our capital gains will always be less than income, but then […] case is our history is proven. Hopefully, that will always be the case, but again, right now our clients win pretty well.
Our fees, they’re still going to come out about 15% to 25% arbitrage. This is where guys like you would come in, coach, and help your clients. It’s like, “Well, there’s got to be a strategy.” Here’s what’s nice about our program, […] build a tax advantage revenue or tax advantage dollars into an account that you have access of risk that you cannot foresee. Also, you have access to those things which means we expect money to make money. Those reserves and surpluses inside the insurance company should be an […].
Toby: They’re protected, they can have claims made against them, but they’re protective from you, from your activity in your company. You’re moving those money aside for the rainy day, but you’re also protecting it by saying, “It’s only certain claims that can be made against it”
Van: Exactly. Let’s say, you sell your business and you don’t have no need for the insurance company. We’ll allow our clients to keep them open up to three years. Three years, that’s where guys like you can come in and strategize with your client. The options that are available to clients in these types of programs, there’s so many more options available to them. Again, this is what big companies do, they’ve been doing this stuff for literally decades. I think our small to middle market business owners need to be aware of these things. Again, like I said earlier, it’s just a tool guys, but I think it’s worth noting that it can be a big game changer in the event something would ever turn against you.
Toby: Putting everything on the table, what would be a typical expense to setup an insurance company if you’re in this on your own?
Van: When I first got introduced into this concept, and I think you’ve looked at other programs like ours, what kills the deals, to your point are the fees. Fees should never kill a deal. Unfortunately, they do. We designed our program with that in mind, a lot of businesses can take advantage of owning their own insurance company. I will just tell you on the forefront, it cost $5000 to form an insurance company with us, and $5000 if you’re going to maintain it. The maintenance goes towards your tax returns and paying on the domicile fees to maintain your insurance company in that domicile.
Toby: [….] usual domicile if I remember it right.
Van: It’s all domestic, it’s only done in the United States. It’s very favorable for a lot of reasons. If anybody’s listening to this, reach out to even myself, we can dive more in it, whatever they want to, and of course, on our website as well.
Toby: What is your website? We’ll post it on this, but what is your website just in case someone is listening?
Toby: It’s strategicriskalternatives.com. I’ve been on your site, it’s pretty straight forward. $5000 gets you company. You do the tax returns, you do the compliance for the company, that’s included in all that.
Van: Yes, and then there’s fees, depending on the types of products and whether or not we have to build pools and everything else. Just know that we do this program with the idea that, first and foremost, the client doing this need to win, they need to be the winner. We expect to make money just like everybody else does, but we make sure our program is designed where the client wins. Our average client per year, they put about $240,000 away into program. Our competitors? They wouldn’t even talk to you. It’s like going to somebody that doesn’t have enough money […].
Toby: I could actually insert here and say, most captive companies, they start, the minimum I’ve ever heard is about $30,000 a year. A lot of them start at $75,000 to $90,000. You’re not doing this unless you’re doing the $1 million. I always look at this and said, “The minimum you’re ever going to do a captive for is probably half a million dollars.” What you’re doing is you’re taking money out of your tax bracket, the top bracket, you’re putting it in a safe place that nobody can touch in case you have claims so you’re not drained out of your cash.
If you pay tax on that money, let’s just do the math, let’s say I have $100,000 claim, but I paid tax on it, I don’t have $100,000 left. If I made $100,000 and I put it aside in the savings account or whatever and I said, “We’re just going to earmark that in case we have a claim.” And then you have a claim, if you’re in the highest bracket in California, you pay $50 somewhat thousand on that $100,000, you only have $47,000 left to pay $100,000 claim. If you do this, you have the $100,000 minus the cost of it. You might have $90,000, let’s be real, there’s other fees. Let’s just say it’s $90,000 left, you deducted it so you actually got a tax benefit and the money is sitting over there. Is that a fair assessment?
Van: It is. Not only that, but the way we do our pooling, our clients will actually have a lot more coverage than they actually put aside dollars for. We have a due diligence package that dives deep into things. We’re able to utilize the safe harbor ruling that very little professionals know about called the 2009-26. It was the last safe harbor ruling written for the 831B tax code. We’re uniquely positioned for our clients to take advantage of this safe harbor ruling, and it goes into our due diligence back to, which we’re happy to provide anybody. It was designed for CPAs and tax attorneys and so forth.
If you go to our website and want to request it, we’re happy to send that. No NDAs required. We’re happy to send that to anybody. For us though it’s understanding the mechanism. I think you bring up a great point. I hope the economy stays good forever. One thing I always tell clients about is like, “If you have any good year, just take a little bit off the top and put it off aside.” That’s risk mitigation 101. If anybody has survived, when they survive 2008, 2009, and all those several years, they had to do a lot to overcome the situation they’re in. This is a game changer for them in the event those days ever happened, I hope they never do. The good thing about that is they sell their company, they shut the insurance company down, and they paid a lot of capital gains which hopefully, is less that what they’re able to pay anywhere else.
Toby: Van, what’s the sweet spot? Let’s just say, “If you’re making X, you need to actually see what this could do for you. If I’m making $10,000 a year, this is not something I’m going to look at. If I’m $100,000, maybe. If I’m making more…” What’s the sweet spot?
Van: For example, I’m always amazed how people make money in this country. It’s one of the more exciting parts that we have in business, when we have a client come to us and we’re like, “You’re doing what?” Only in America. I would tell you, gross revenue of $1 million in an operating company, I would say it would be a good baseline for us, now, that’s gross revenue. Insurance companies don’t care about your net profit, they care about your credit score as a business, but they don’t care necessarily if you’re profitable or not. If they literally look at the gross revenue, you determine their exposure for risk. I would tell you, $1 million is probably the minimum.
Toby: Gross revenue, not the bottom line number, but the top line.
Van: But then I ran in the medical doctors that have great margins, maybe $500,000 makes them […] taxable brackets and all that good stuff. The fees are the fees. We’ve pushed our fees as best we can at this point. I’m not going to sell something to a client if it doesn’t make sense for the client, from a tax savings standpoint. Again, we’re not the ones that created the tax incentive, the congress put it in the tax code. We’re just going to utilize the tools and learn how to play the game the best and […] program really help clients do that.
To answer your ultimate question of where does it makes sense from a […] standpoint, a dentist doing this for $30,000 a year. I’m going to be honest with you, he hates 401Ks because his staff can’t get the contributions up high enough for him to max his stuff out, and he loves doing our program. He has a warranty, he’s got a five-year warranty, he’s got a book on the books.
Toby: What’s his total cost?
Van: On that, we have a specific program for dentists. It’s going to be comparable to what a 401K would cost with a contribution, so it would land between $8000 to 10,000. For him, it makes a lot of sense. To answer your question, I don’t want to be dodging it. It used to be a lot easier to answer, it’s gotten a lot tougher with recent years because we have some clients doing the max that you can define. We have some clients that do $30,000. The cost of forming the insurance company was insane.
Toby: That’s what’s nuts. In my brain, the cheapest I’d ever run across was $30,000. In my brain, I’m always thinking, “You got to be putting a couple $100,000 a year to make this thing actually look like it’s going to save you some money, and put money back in your pocket.”
Van: That’s a fixed cost. If you didn’t contribute, you’re going to pay that.
Toby: I’ve never known anybody that actually did it. This is the secret sauce. You guys charge something on the managing of the risk pool, there is some complexity here where you have to take your money and it can’t just be, “I’m going to buy a bunch of real estate with it.” You’re running it like an insurance company, which means you have to pool risk.
Van: The pool risk reserves have to be maintained. Insurance companies live and breathe to do surplus. Our clients, we have to educate them on the concept of […]. Every insurance company wants a surplus, to your point, surplus becomes a little bit more liquid, or A liquid type investments potentially, but those are conversations we have with our clients once they […] anywhere from three to five years, we’ll start to talk about that a little bit.
Toby: It’s about 30%. If I’m putting $100,000 in there, I should assume that I’m going to put $30,000 into a lockbox similar.
Van: That’s the minimum. I think it’s also worth noting that our clients maintain 100% of their own reserves, it’s in the name of the insurance company. We get put on as third party corresponds for investment account, for example, but we have no signature authority. Our clients do sign an investment agreement, what they can and can’t do.
Toby: Somebody is still managing it to make money in case […] an option trading with it like, “I’m going to do crazy stuff.” You have to do blue chip portfolio.
Van: There’s an investment agreement the client signs, and to your point, as long as it’s trade plus three, we expect money to make money. Money should never sit idly by. Ironically, though, a lot of our clients are fairly conservative by nature and a lot of times, […] bank accounts somewhere.
Toby: Again, you’re the guy in California who’s getting killed in taxes. For every dollar you put in, you immediately save $0.40 to $0.50, then this is a no brainer. You look at that and say, “If I can put $200,000 in there, I just saved myself 100,000 and it cost me $10,000-$20,000 to do it. Then when I cash it out, that’s when I’m retired in Florida. I’m going to pay zero capital gains on it because I’m not really making any money.” A lot of these guys don’t have their own retirement accounts, this is their retirement account.
Van: You;re absolutely right. The things is, again, if anything happened along the way, to your point earlier, they would just use after tax money to fight the fight. I’ll tell you this, if I can use pretax dollars to fight that fight, I’m at a much better bet position to survive.
Toby: You actually have money put aside to fight the fight. What we saw in 2008, 2009, 2010 in my world was people that could not afford to do battle with the bank, or do battle with their business partner, or do battle with a customer who wasn’t paying because everybody was experiencing all sorts of bizarre effects of the economy. Even if you didn’t foreclose on a house, you were still impacted. You had lines of credit […], you had things that used to have access to that went there, or you had clients that we’re supposed to be paying you go away and go bankrupt, and all of a sudden, you’re writing off debt. This money is put aside, this is the money that is to save you during those times.
Van: You know I talk about at my presentations a lot, I talk about when I was in the insurance business, I love the fourth quarter because I had a bunch of business owners always calling up because they said, “Man, I’m going to buy more equipment, I’m going to […] a whole bunch of money, I’m going to [..] buy more stuff.” That’s what I’m doing, […] advantage 179. Then I watched those same clients go out of business and I thought, “This is a pain.” That’s when it gets back to my original point about, “This is how big businesses operate.”
They have a lot of rainy days funds. Owning their own insurance company has been an accepted principle at Microsoft. […], so they’ve always had their own insurance companies. They may not care about the deductions, they may not have an 831B insurance company, but whatever premium they expense out of their operating company, […] it’s still an expense at the operating company level. It’s been a big business tool for a long time […] cut a lot of people out to be able to […] program.
Here’s the thing, competition now, and just like you know, every time there’s a competition in place, it typically drives down fees. That’s what impresses them. That’s where we’re at today. […] there were eight state promoting you to own an insurance company in your states, there’s […]. As domicile expansion goes up, that’s where the competition comes into. There’s a lot of, again, complexities to it. Just know that the availability to do this is in so many more places than it used to be. Most Fortune 500 companies have all of their insurance companies offshore. It’s in Cayman, in Utah, Cooks.
Toby: That’s major cheddar. You might as well put the red bull’s eye right on your back with the […].
Van: That’s why we do it domestically and we keep it very clean for the clients. Here’s one other thing I would tell you, Toby, I think it’s worth noting, is we have a warranty too. When I tell business owners, “We have rules, we have specific rules, they’re not to be broken.” We don’t break out rules. If your insurance company wants to ever be challenged, if this was not an insurance company, […] 831B, don’t expect that client to bear that burden financially nor would attorneys that may not know about this code. […] we’ll also provide the finances to manage that with our clients.
Again, I would tell you this, our attorneys that we work with, we hire the attorneys and CPAs. We don’t have in-house major CPAs, we hire those guys. We’ve got some of the best and brightest and they’ve all worked at one time for the IRS in the prosecuting RO and the chief two council in simple cases to challenge 831B deductions. Those are our attorneys, have gone on private practice, they write our legal opinions for us. Again, we’re happy to provide those things if you request them. We’re an open book here at Strategic.
Toby: We do the same thing in my world, I’ll just tell you that much. Our two guys, one worked for chief council and one was a lead trial attorney. We always bring in the guys that know everybody because they can get things done with a phone call. Real quick just because I want to leave with a few questions, I know we’ve gone over a little bit, so perhaps you’ll stick with me for a couple more minutes. The first one is best successes you’ve seen, number two is worst disasters you’ve seen, and then last thing to leave us with is just a rule of thumb, anything you could impart on our folks out there after all your experience in this 25 years in this world of insurance and risk.
Van: I would say, some of the best things I’ve seen is planning. Success in planning today is very difficult. I’ve dealt with some clients and built these insurance companies up and now they want to go after the sunset, they might have a son, daughter who might want to take over, a partner wants to be bought out. I’ve sat down in the rooms with the tax attorneys and CPAs to see how that succession is going to work out.
Toby: You’ve got a pot of money of it.
Van: Again, it gave them option. To me, the exciting part is what you can do in the backroom with these things […] professionals to deal with, we’re just going to provide the mechanism on the front and make sure the client is compliant. Those things have been great to see because selling […] is difficult in today’s world. It’s always been difficult just because the way it’s taxed. That’s a sad part of what goes on, but I don’t know what to fix that other than maybe utilizing a tool like we have.
The worst case, this was in our own program. The medical doctor, he was only there for a year with us. He had lost a patient being sued and his malpractice insurance company, it was a young mother of kids, somebody’s going to pay. That’s just the way the world works. I’m not here to say anything about that other than the fact that they made local news. We triggered a brand damage claim for him […] telling me that, “You know man, I got into this for a lot of reasons. Obviously, tax was the motivation like everything else in life is.”
He said, “I never thought I’d be using you guys. Here I am in the first year. I’m thankful,” because he had to hire a publicity […] whitehats in the internet […] blogging and writing different articles to try to push down some of the negative things. Unfortunately, in professional insurance, it’s a math problem […] insurance company, “Is it worth fighting or is it worth writing a check?” That’s where the math comes in. I think he was well within his rights with what went on and all that stuff, but at the end of the day, the client settled and he felt the […] with his brand. He took what he did for a living very seriously. It was interesting to see that.
Our clients, they’re risk takers, I deal with a lot of entrepreneurs and across the gamut of industries I work with. I’m always impressed how some people make money. I’m just like, “He’s already thought of that, I never thought of it, God bless you for doing it.” The risk taking is going on everyday. Fortunately, we’re starting to move into a society that maybe that’s not or maybe it’s never been recognized as much as it should be. Again, this is a good year, which I think it is, for all the businesses, […] and still have it, still have access to it. Risk mitigation, the best way I can handle it. That’s really why the code exist.
To me, we get up everyday to do what we do and it’s sometimes easy, a lot of times it’s a big reward. If we can just take a little bit off the side and put it away for that rainy day and hope the rain never comes, and if it does, by God, you’re going to be able to survive it much more effectively and efficiently than without it. If […], then you’re […]. To me this is just a great business tool that every business should be looking at. For my benefit, it’s just a matter of education and getting the word out to clients. I appreciate opportunities such as yours to speak on your platform, and just to get the concept out and get the idea and see if it works for them. We’re happy to work with any of your clients that might be listening to this or anybody else out there that we can work with and just educate really is where we’re at today.
Toby: I have three simple rules, Van, and that is to calculate, calculate, and calculate. If you have risk, calculate it. If you have tax liability, calculate it and see whether you can actually get a couple different benefits from something that’s logical and makes sense, anyway. If you ever have a claim, you can’t go to the IRS and say, “You know what, I have a loss this year. That money I gave you last year, I’m going to have to ask for some of it back.” They don’t give you the money under those circumstances. You’re always better off to keep the money in your own pocket for as long as seemingly possible.
I appreciate you coming on. I’m still in shock at the cost. Again, I come from a world where I remember distinctly when the cheapest captive insurance was $90,000 if you’re going to make your own company. Then it went down to $75,000, then I remember the first time a CPA said, “It’s only $30,000 a year.” I was like, “Wow, how are they doing that?” Because you actually have to run the insurance company, I know how hard it is. I’m still like, “Wow, this is getting to the point now where it becomes a no brainer for certain people.”
Van: Absolutely. To your point earlier about the IRS, try to run to a bank in those times too. You got to remember who my client was, my client were mom and pops. I may have a handful of clients that we’re paying $1 million for one premium, but most of my clients are paying $30,000, $40,000 in work comp, general liability and all these, but they still were needing these types of tools. It just made it […] wise.
I come from the world […] slaughtered. We’re insurance guys, we’re risk mitigators, and we’re here for the small to middle-sized businesses. […] all these other captive managers are just out there trying to slay dragons and kill elephants. Most of our […] are promoting it, they’re expecting a certain dollar amount for their time. We want to build a business, we want to build long term relationships with our clients, and afford the ability to do long term planning. Unfortunately, most businesses today, they all look at five years. Nobody runs a business for five years and expects to get out. They have grandiose ideas to do that. These are the long term planning strategies that I think every business owner owns it to themselves to look into.
Toby: Absolutely. I really appreciate it. It’s strategicriskalternatives.com, I’ll post some stuff up here so people can find you. I just want to say thank you for spending some time with us and sharing with our clients.
Van: Always my pleasure. Thank you.