Captive Insurance for asset protection.

A captive is an insurance company owned by the parties it insures. A parent business pays premiums into the captive, which can then be used to cover risks that threaten the company. Captives have been used for decades to help businesses manage risk and, as part of a broader plan, support asset protection. The benefits depend entirely on the captive being designed and operated correctly.

Commercial policies do not always cover everything a business faces. A captive can provide coverage for self-insured or hard-to-insure risks and lets the owner exercise more control over how predictable, manageable risks are handled, while leaving larger or catastrophic exposures to conventional carriers. The structure only works when it is built around genuine insurance risk.

It starts with a feasibility study that can fail. An actuary maps the parent's uninsured and underinsured exposures, models expected losses and prices the premium to them, and if the premium that results is a fraction of what the owner hoped to deduct, that is the answer. The captive is then licensed in a domicile whose statute fits the risk, capitalized to that domicile's minimum, and governed by a board that actually meets and approves claims. Risk distribution is engineered deliberately, through unrelated risk or enough sibling insureds, and the policies are signed before the period they cover begins. Every one of those steps leaves paper, and the paper is the structure.

With suspicion, and with a rulebook. Since 2016 the IRS has treated certain small captives as transactions requiring disclosure, and Treasury regulations issued in January 2025 now designate a micro-captive as a listed transaction or a transaction of interest where its loss ratio stays low across a ten-year computation period or where it finances its owners, by loan or otherwise. Participants must file Form 8886 and material advisers Form 8918, and failure to file carries a penalty under section 6707A whether or not the deductions survive. The examination itself asks the same questions the regulations do: how premiums were set, what claims were paid, and where the money went. We have represented clients in matters before the IRS on those questions.

As a regulated pool of capital the operating business does not own. Premiums paid for real coverage leave the parent's balance sheet and become the captive's reserves and surplus, which the domicile regulator supervises and the parent's creditors cannot reach except through the parent's equity in the captive. That is the protection, and it has limits: the shares themselves are an asset of whoever holds them, distributions out are taxable, and a court can disregard a captive run as a checking account. Where the shares are held by an irrevocable trust for the next generation, the captive also becomes an estate-planning vehicle, which is exactly the pattern the 831(b) diversification rules were written to police, so that layer is designed with the election in view.

The obligations of an insurance company, scaled down but not waived. Annually, an actuarial review re-prices premiums as the business changes and a report goes to the domicile regulator, in most states with audited financial statements. The IRS receives a Form 1120-PC with the 831(b) election statement and, for each year the arrangement is a reportable transaction, a Form 8886. Continuously: a board that meets and minutes its decisions, claims that are submitted and paid through a written procedure, and reserves invested under a policy the regulator has seen. The captive is judged on this record, and a year with no claims, no meeting and no re-underwriting is the year an examiner will ask about.