INSURANCE IN THE HOUSE
Financial advisors and their small-business clients don't often look into the wealth-accumulation benefits of incorporating a captive insurance company (CIC) into their businesses, but they should.
A CIC is a virtual (tax deductible, limited purpose, in-house) war chest to protect the business against any disaster and some risks not covered in conventional insurance, such as sexual-harassment lawsuits or information-technology breakdowns. A CIC does not replace a 401(k) for small-business employees, but is a good retirement savings vehicle for owners of the CIC, says Keith Mohn, a longtime financial consultant, lecturer and president of Benefit Solutions Group in Keego Harbor, Mich., a financial consulting and planning firm specializing in high-net-worth clients.
The nice thing about a CIC is that any gains on the assets distributed when the corporation is terminated will be taxed as capital gains, rather than ordinary income as in a pension plan. “This is the best savings, asset-protection, wealth-transfer tool in existence for the high-income self-employed client,” says Mohn. The perfect candidate is a small business with high, stable, predictable income that can contribute a couple hundred thousand dollars a year to the CIC pot, he says. But it's not for everyone. For example, cyclical businesses or any entity making less than a million dollars probably wouldn't benefit.
So why aren't more financial advisors implementing CICs for small-business clients? Mohn says one of the main reasons is a lack of education, as most reps just don't understand CICs, which are complicated to set up and maintain. Mohn said first-timers should work with professionals who have experience with this particular part of the tax code.
According to Lobb Cliff & Lester of Riverside, Calif., a firm specializing in private clients, estate planning, taxation, business counseling and civil litigation, CIC's originated in the 1930's and have grown in popularity over the years, from 1,000 captives in 1980 to approximately 5,000 today, and are currently responsible for 10 percent of the commercial insurance premiums worldwide.
Top Small Business Concerns
42 percent
over unease about the economy's future
39 percent
over the cost of health insurance
31 percent
over the lack of capital
Source: NSBA
Local Is Global … When you think global marketplace, you don't think small enterprises, but maybe you should, as they made up 97 percent of all identified exporters and produced 28.6 percent of the known export value in fiscal year 2004, according to the latest data from the Small Business & Entrepreneurship Council.
….AND SMALL IS BIG
You've heard that line, big things come in small packages. Well, it works for small businesses, which are big contributors to the nation's economy, generating 50 percent of the private, non-farm gross domestic product (GDP), according to a study released by the Office of the Advocacy of the U.S. Small Business Administration, covering the period from 1998 - 2004
SMALL BUSINESS NEEDS YOUR HELP
Some of small-business owners' biggest concerns are things that savvy financial advisors can help them with: getting financing for growth and setting up health insurance for employees. While only 24 percent said they could not obtain adequate funding when surveyed a decade ago and again in 2000, that figure jumped to 33 percent in 2007, according to a national survey released by the National Small Business Association (NSBA).
In addition, while 58 percent of small-business owners offered health insurance to their employees 10 years ago, the NSBA found that number declined to 51 percent in 2000 and reached a low of 41 percent in 2007. What's more troubling, when asked which benefit they'd most like to offer their employees, 77 percent chose health insurance.
