Tax Exempt

August 05, 2014

logo-banner thanks Rick Buggy from Saslow, Lufkin & Buggy for his helpful response to this question. 

Rick may be reached by phone at 860.678.9200 or by e-mail.

"For tax exempt entities, including native American Indian tribes, although taxes aren't an important driving factor, a captive may serve many other non-tax purposes that make it a viable risk management tool. I'm guessing that your client currently uses the commercial insurance markets for some of its risks, and may self-insure other risks. If properly structured, underwritten and managed, a captive may allow for the tribe to centralize its insurance exposures in one entity and (hopefully) realize cash savings on premium payments and/or claims payments, and retain the investment income/appreciation on the insurance reserves.  In a soft market, these savings may not be that substantial, but it would have to be modeled out in order to quantify and determine the overall feasibility. As the commercial insurance markets harden, captive often begin to make more economic sense.

"We represent many captives that are owned and operated by tax-exempt hospital and health care entities, and we also represent several religious organizations which have established captives. Tax doesn't matter to these organizations, but the business advantages as a risk management tool more than make a captive a worthwhile structure.  Also, even if the ownership is tax-exempt, if a captive is properly set up to comply with IRS rules, the captive itself can deduct reserve additions, and timing considerations may help improve the cash flow position of the group.

"There are obviously a lot of moving pieces in determining whether a captive makes sense.  Tax is just one consideration.  Having a discussion with one of the captive management companies would be a good first step to discuss what risks might go into the captive, and whether it makes economic sense to pursue the formality of a captive."