Keeping 831(b) Micro-Captives Focused on Risk Management—Not Investment Vehicles

Dustin Carlson, president of the 831(b) Institute, has published a three-part series in Captive Insurance Company Reports (CICR) outlining proposed reforms aimed at strengthening the long-term credibility of Section 831(b) micro-captives. Across the series, Mr. Carlson's central message is that 831(b) captives play an important role in helping businesses finance risk—but that role becomes vulnerable when captives drift toward behavior that resembles wealth-holding, liquidity access, or investment-focused planning rather than insurance operations.

While many 831(b) captives are structured for legitimate risk financing, Mr. Carlson argues that certain high-profile misuse patterns have created persistent reputational and enforcement pressure. In his view, targeted reforms could deter abusive practices without undermining compliant captive insurers—particularly those formed to support real risk management objectives for small and midsized businesses.

Proposal One: Closing Estate and Gift Planning Loopholes

In the first article of the series, Mr. Carlson focuses on captive ownership structures that he believes can turn 831(b) arrangements into tools for indirect intergenerational wealth transfer. Despite changes under the Protecting Americans from Tax Hikes Act, Mr. Carlson argues that loopholes remain when captives are owned through estate and gift planning structures such as irrevocable trusts, family limited partnerships, or certain retirement accounts.

Mr. Carlson contends that these ownership structures can create outcomes inconsistent with the intended policy purpose of 831(b), particularly when the captive's accumulation of assets appears to serve estate planning objectives more than the financing of insured losses. His proposed reforms are designed to narrow those structuring opportunities while leaving insurance-driven captives intact.

Proposal Two: Treating Life Insurance and Annuity Premiums as Deemed Distributions

In part two, Mr. Carlson shifts to a different concern: the use of captive reserves to purchase life insurance or annuity contracts. He argues that when captives allocate reserve funds into these products—particularly when structured to benefit owners or heirs—the captive begins to resemble a long-term wealth accumulation strategy rather than an insurance enterprise focused on paying future claims.

To address this misuse while preserving legitimate captive investment activity, Mr. Carlson proposes that premiums paid by a captive for certain life insurance or annuity products should be treated as deemed distributions to the captive's shareholder(s). He frames this as a targeted approach: discouraging a specific misuse pattern without requiring broad reclassification of captives or sweeping changes to state-based insurance oversight.

Proposal Three: Related-Party Lending and Captive Reserves

In the third installment, Mr. Carlson addresses related-party loans—an area he views as especially damaging to the insurance character of a captive when loans are undocumented, below-market, or nonperforming. Mr. Carlson emphasizes that captive reserves exist to fund future claims and that aggressive related-party lending can undermine the captive's role as an insurer by treating reserve capital as a source of liquidity for owners.

Rather than proposing an outright ban on related-party lending, Mr. Carlson recommends a rule that would treat certain loans as deemed distributions when they fail to meet commercial standards. In his view, this approach would allow legitimate, well-documented lending practices to remain permissible, while creating a clearer and more enforceable deterrent against abusive behavior.

Why the Reforms Matter for Credibility

Across all three proposals, Mr. Carlson's theme is consistency: preserving the role of 831(b) micro-captives as risk management tools while discouraging conduct that draws enforcement attention and undermines confidence in the segment. He frames each proposal as narrow and behavior-based, focused on defined misuse patterns rather than compliant captives operating within accepted insurance and governance norms.

More detail on Mr. Carlson's three proposed reforms—including implementation considerations and guardrails intended to preserve legitimate 831(b) captive structures—is available for CICR subscribers.

Vertafore ReferenceConnect Subscribers

• A Series of Proposed Reforms for Section 831(b) (September 2025)
• A Series of Proposed Reforms for Section 831(b)—Part 2 (November 2025)
• A Series of Proposed Reforms for Section 831(b)—Part 3 (January 2026)

IRMI Online Subscribers

• A Series of Proposed Reforms for Section 831(b) (September 2025)
• A Series of Proposed Reforms for Section 831(b)—Part 2 (November 2025)
• A Series of Proposed Reforms for Section 831(b)—Part 3 (January 2026)