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Wind-Up Tax Impacts

Eventually every captive insurance company will be involved in either winding itself down, being sold, or otherwise no longer desiring to be in the insurance business.

A real possibility exists that some captives were created by captive managers who really were not sophisticated enough to properly design, form and operate captives correctly. We have had a few opportunities to take over management of captives where owners were not happy once advisers brought issues of concern to their attention (this is what our captive strategic review services are all about - which incidentally captive managers have shown more interest in than captive owners, which greatly surprises us).

We often conclude taking over management of someone else's captive design is not desirable when a new better captive program can just as quickly be built. We often explain to a captive owner or their advisers that this situation can be understood best by this comparison - why would a competitive best of class race car driver jump into a defective car designed and built by someone else, in a very competitive and important race, when he can create a high performance superior vehicle to drive quickly?

Defective captives are best addressed by creating a new captive, and winding down the old captive. Tax implications of this need to be considered, and can be effectively addressed.

The owners of these captives would be well advised to proceed with captive rescue projects, essentially entailing creating a new captive that does meet or exceed industry and IRS practice standards and winding down the old captive program  (although this can never be guaranteed as the IRS has not always been reasonable when it comes to captive evaluation and treatment as they generally do not like captive period), 

There are US tax law based rules and guidance for structuring captive wind-up, sale or rescue transactions in such a manner so as to continue deferring tax recognition events that would otherwise occur if a captive is liquidated and its assets distributed to shareholders.

Click here to read a decent tax discussion memo written on the IRC 368 tax free reorganization rules and IRC 351 code provisions, both of which could be utilized and applied to achieve tax deferral benefits depending on project objectives and circumstances.
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