Manage Risk and Reduce Taxes Using Captive Insurance Companies w Keith Langlands

Mark Perlberg (00:00):

All right, guys. So, I want to tell you about the interview that I just did and you’re about to listen to with Keith Langlands on captive insurance companies. It is a very advanced tax and risk mitigation strategy. It’s primarily for risk mitigation. There are tons of tax opportunities as well. Very few people understand and know about this.

So, we have a great conversation on this and talk about what type of businesses qualify for a captive insurance company, and we also discussed the tax advantages, and how to set it up, and how does it function. There’re just so many cool things out there, and this is one of my favorite topics to discuss, and it’s a great way to, again, to mitigate risk, reduce your taxes, and build wealth in a unique manner.

And if you have a fantastic advisor, they’ll be aware of these and many other strategies to really help you out with reaching your goals, reducing your taxes, and finding success. So, stay tuned, it’s going to be a fantastic episode. If you have any interest in our services, you can email, and also send us referrals. We’re always, always, always hiring. All right, enjoy. Have a good one.

All right, welcome everybody. I’m here joined by Keith Langlands, CPA, and we are here to talk about captive insurance companies. Now, captive insurance companies are a lesser-known opportunity to reduce your risk and basically, you’re going to be performing a separate entity that ensures against your activities. With this, offers lots of opportunities and flexibility in how you ensure your risks.

And it also creates lots of tax opportunities based on the way that you structure that entity. And so, today, we’re dive into the numbers, and the details, and how this all comes together. And then, we’re going to talk about who this works for, who this may apply to, and how we can go about exploring this. And you want to maybe explore this with your tax advisor or if you are a tax advisor.

I am feeling a lot of the people listening to this are maybe CPAs and EAs go to a guy like Keith, and you can start strategizing, and seeing how this could maybe fit into the picture of your entity structure, risk mitigation, and tax strategy. So, Keith, let’s start off in 60 seconds or less, give us a quick introduction about who you are and what you do.

Keith Langlands (02:46):

Thank you very much. I appreciate the time. Well, basically, I’m a reformed CPA out of Las Vegas. I have lived here for 40 plus years. I went to UNLV, got my accounting degree, worked for Pricewaterhouse back in the day, had my own CPA firm for a number of years, and then I had a client bring me a captive many, many years ago.

And unfortunately, it was an offshore captive, strictly designed for tax purposes. And it had ended up in front of the IRS. And I got a crash course on how not to do captives. And I think I definitely need to upgrade my web skills because I think I’ve been doing captives now for 18 years now. It’s been a long, long journey. So, we’ve probably done close to 300 captives over the years, and we strictly only do domestic captives, and sold my CPA firm a long time ago.

And needless to say, we’ve been very happy doing captives. So, there’s a right way and a wrong way to do it. I’m sure people will Google this after we’re done today and say, “Oh gosh, I don’t want to do that.” But in the right hands like ours, you’ll be perfectly safe doing a captive insurance company. So, Mark, I thank you again for the time and let’s get into it.

Mark Perlberg (04:20):

Awesome, fantastic. So, let’s go into the basics here. And so, I can explain this to our clients, but because it’s a less common strategy, very few people are aware of it, and you’ve explained this many times. And the people who see this weird thing in the shadow in the background is because I have a light and my cat is grooming herself in front of the light. I’m getting very distracted. Can you stop distracting me? Can you explain in your best words, what is a captive insurance company?

Keith Langlands (04:57):

Yeah. Actually, and first of all, I’ll tell you that every Fortune five… well, every one that I know of, every Fortune 500 company has a captive insurance. Some have many like McDonald’s. They use it for a different purpose, but it’s been out there for a long, long time. Captive insurance in a small- to medium-sized firm is not designed to take away from a client’s commercial insurance.

What it’s there to do is capture the uncovered risk that every client has. It doesn’t matter what business they’re in. So, what we do is we go with the professional, and we sit down with them, and have what keeps you up at night speech. So, every client has deficiencies no matter how great their commercial insurance agent is.

And just about everybody discovered this, unfortunately, during the pandemic. There are exclusions. There are limitations. There are limits to every commercial insurance policy. Some commercial insurance policies aren’t even available or providers just exit out of the market because they just feel like they’re not making any money in certain coverages. That’s what we do.

We go in and form a private insurance company or a business separate than the operating company, but owned identically with the same ownership of the operating company. And we look for those nooks and crannies, and we try to assist with higher deductibles, if possible, to save that client money in their commercial insurance.

And that’s our job, to bring in an outside actuary, we have in-house underwriters that’ll come in and figure out what those policies are. Now granted, it’s going to be different for every business, but that’s basically what we do. The idea being is that whether it’s general liability, whether it’s deductibles on this, whether it’s employee practices liability, public relations risk, what we’re doing is we’re being like the Aflac for businesses, is how I like to put it in a nutshell.

Mark Perlberg (07:24):

Great. So, you have a separate entity that is creating a pool of resources that can ensure against a variety of risks here. And so, what’s the advantage? Can you explain the advantage of doing this as opposed to using a private company, and what kind of risks can we insure against?

Keith Langlands (07:49):

First, let me go from back forward on that. We have a package of about seven marketing documents that we’ve changed them up. Obviously, we update them every year, but it’s been the same seven for at least over a decade. So, what we included in that is a list of policies that come off a national database and it consists of almost 90 policies.

And a lot of those are what we refer to as DIC policies or difference in conditions. And from a layman’s standpoint, think of them as pour-over policies. And a great example would be general liability DIC. So, on nearly every business has a general liability policy. You probably have one for your own practice. I do here. For whatever occurs in your practice, there are going to be exclusions.

There’re going to be a deductible. It’s going to have a limit on that policy. So, whatever happens in your office, if it’s an exclusion, this policy will cover it. Now, you’re going to be assigned a premium by an outside actuary of such and such dollars. Those premiums will go into your captive on an annual basis. Should something happen, you’ll be able to file a claim with our claims department, which we run internally.

And you’ll be able to pull that money back to your operating company for money you put away. So, that’s generally how it works. Now again, we have all kinds of different, it could be subcontractor risk for a construction company, it could be cyber risk for a software company, there’s just all kinds of different companies that we do work for.

And again, we’ll create a laundry list of items that a client might need. And so, what we really try to drill into the CPA or the enrolled agent’s brain is that this is a risk management tool first and foremost. Yes, the client has it in their mind that I’m going to save a lot of taxes, but that has been the problem with people that do captives.

They come to you and they say, “Mark, I’ve got the best idea to come and I’m going to save your client a million dollars a year. Do you want to hear about it?” “Yes, I want to hear about it. How can I do that?” Well, that’s the people that the IRS go after, but that’s why we’re still standing, and they’re out of business right now.

And the reason why we do that is we come in and we pitch it as a risk management device. Now, what I can tell you is with a large company, the limit right now under Code Section 8:31B, now you want to ingrain that in your head, 8:31B. It’s this code section that’s been around since 1986. It was passed during the Reagan administration. Originally, it was at $1.2 million.

Now, this provision is used by a lot of different sectors of business. It’s used by agriculture. It’s used by the auto industry for auto warranties. We use it for a lot of different things. We do new home warranties. We do product warranties. We do pizza warranties for… Domino stole this idea from me years ago with the slip and fall, and the guy gets his pizza reimbursed.

They stole that from me years ago. I should have patented it. So, captives are used all over the place, but again, 2.45 million is the maximum you can do right now under that law. So, you don’t have to be a rocket scientist to figure out that if you just do a risk management presentation, the tax deduction or the tax benefit is going to fall out.

Now, you don’t have to do that much. It’d be nice if we all did, and we can all retire early, but if you want to do a million, if you want to do 500,000, you want to do X, if you’ve got two clients, you’ve got two doctors that want to get together and do one, that’s an economy of scale.

But that’s where the tax benefit comes into play. But again, you don’t want to go to your client and say, “Wow, I’ve got this great… I’m going to send you tax estimates of what this thing will do for you,” because that’s what the IRS is looking for. So, a long-winded example, but again, come up with the risk scenario, premium gets paid into the captive on various policies and claims will be paid. Hopefully, there’s a lot more going in than going out.

Mark Perlberg (13:00):

Yeah. And to talk about the tax advantages, so first it’s primarily a risk management device, but here’s the tax benefits is that when you pay your insurance payments, when you have your insurance premiums, they are a deductible expense.

However, this entity that you own, when they receive those premiums, they are not taxed on that as income because this could be a potential liability that they may owe back to the organization. And so, you’re putting money into this other organization, into that pot, and you’re getting the deduction. And now, it’s placed into a vehicle that you have this untaxed fund, and then it’s going to grow.

You’re going to be taxed on your capital gains and dividend income. They’re going to take the funds and invest in securities, and it’s going to grow, and be taxed on that. However, that initial principle, because it was never taxed as income, you’re going to have a bigger pot, a bigger pool of principle from which you can invest in other securities and grow.

You’re going to see the benefits of building wealth, and the tax advantages, and also consider the fact, especially if you’re a high-income earner and many people using captives are, if you got that flat 21% corporate tax rate, which is probably lower than your marginal tax rate, if you’re in a high-income earner. And the C corps can also deduct, they’re not subject to that salt cap limit on your 1040, you can only deduct $10,000 a year in state taxes.

The captive insurance or the corporation can deduct more than $10,000 of state taxes against its federal taxes. And then, also you could potentially drive yourself into a loan of bracket to get other benefits such as things like qualified business income deduction and other potential opportunities depending on how the numbers play out.

Keith Langlands (15:03):

You just did the rest of my bit. We’re done. Great job. You’ve been reading ahead. Yeah, a couple other things, I’m not an attorney so I don’t profess to be one. It’s one of the best asset protection devices that I’ve ever seen just in the many years that I’ve been doing captives. It’s extremely difficult to penetrate by creditors.

Mark Perlberg (15:29):

Question for you here. So, let’s say I’m in California and I’m paying some crazy state taxes here. If my captive insurance policy, could I place this in somewhere like Texas, where there’s no state taxes? And now, not only am I deducting my insurance premiums on the California side, the entity is domiciled to Texas and would be not paying any state income taxes. Is that a possibility as a potential state tax strategy?

Keith Langlands (16:03):

Well, using your example, here’s the way it works. Most jurisdictions, when exception of California, I think New York has added captive legislation, some of the newer jurisdictions, quite honestly, you really wouldn’t want to put your captive in those jurisdictions because it’s really hard to find regulators. You really want to go where they’re popular, where they know what they’re doing, quite frankly.

The two jurisdictions that we mostly place are in North Carolina and Tennessee. Now, we’re licensed all over the place. We’re licensed here in Nevada. We’re licensed Arizona, Texas, you name it, Utah. We’re licensed everywhere. The key for everybody to understand is you have no nexus in the state that you’re filing it.

So, let’s say we place your captive in North Carolina… and I apologize, I had neck surgery three months ago, that’s why I’m holding my head up. So, when you register a captain in North Carolina, why are we doing that? Well, first of all, you have a flat premium tax there. And we file a return. You have no other nexus in that. You won’t file an individual return. You won’t file a corporate return.

You won’t file anything. The maximum tax rate there is $5,000. So, you can have 2.45 million. You can have all the interest income, dividend income you want, federally, as you stated absolutely correctly, you have to deal with the federal aspect of it because you filed an 1120-PC for property and casualty, which is a C corp return. So, you had it exactly right, but you have no other nexus.

So, when the captive license is over with, when you tell us eight, 10, 20 years down the road that you no longer want to be a captive, we will simply relinquish the license and it rolls to simply being a C corporation. You are no longer obligated. At that point, you need to pick and choose where you want that corporation to be.

My recommendation as a Nevada resident would be incorporate in Nevada and move your assets there. If you’re a California resident at that time, you don’t have to be the Wizard of Oz to figure out that you’d probably best to move to Nevada or Florida or Texas. That’s not me giving tax advice. That’s common sense. And then, like you mentioned, your only tax on exit is to pay 1040-C, schedule C, or take a liquidating dividend.

I don’t even do my own tax return anymore. I haven’t done it in 15 years. So, I’ll leave that up to people like you that are smarter than me. And there are other strategies that I’ve seen people do on exit. I probably wouldn’t recommend it. If you’ve taken one bite of the apple on the captive position, don’t go bananas. That’s how people get in trouble.

But yeah, so a couple other benefits, and again, I harped at the very beginning about making sure that you impress to your clients that it’s a risk management tool. And it really is. We’re covering real risk and I know nobody wants to look back at the pandemic, but a prime example, we handle a lot of chain restaurants, a lot of beers, beers… a lot of taverns and bars, slot bars, especially here in Las Vegas.

And the government shut them down. And I know this was news around the country, but they got shut down for the pandemic and they said, “Oh no problem. I’ve got this business interruption insurance.” No, that’s not going to work because the fine print said, “Well, that’s only good if you have physical damage to your establishment.”

“Oh, what the heck does that mean?” “Well, that means a Mack truck has to drive through your restaurant, or a lightning has to strike the building, or a flood, or something like that.” Well, no tavern owner is going to be able to take on Chubb or Prudential to fight that. You’re out, tough luck.

We have business interruption DIC coverage, where that business would’ve been able to keep its employees, pay its rent, and reopen when the time came. That’s what putting money away for a rainy day will mean. Hopefully, that’ll overcome, but if it does, it’s available when that happens.

Mark Perlberg (21:10):

Okay. So, one of the most important questions here, and I could probably talk for hours on this and ask tons of questions, but I don’t know how… some of our audience may not want to go as far in the weeds as I would like. But one of the most important questions here is can you describe the profile of who this may work for, either to address my audience, that is other CPAs, and EAs, and also my clients who may be interested, how do you assess the type of business owner that may be appropriate to utilize a captive insurance company?

Keith Langlands (21:55):

Yeah. Mark, that’s a great question. And the first thing I will tell people is for the most part, obviously, if a client has overwhelming amounts of commercial insurance, that’s a no-brainer. If they have a lot of workman’s comp insurance, that’s a different subject. They’re probably looking for some type of group captive, which is something we don’t do.

But if they have an overwhelming amount of regular insurance, and we don’t do health insurance either, but in general, that’s a no-brainer. If we’re talking six figures and above, obviously, but the other thing really, it goes by gross revenue. And sometimes, that can be deceiving because we used to say anything above three million and above wasn’t appropriate answer.

But that got blown out of the water during the pandemic because we had a client in Georgia that a CPA sent me that was doing hunting and fishing videos on YouTube and Google… YouTube, I’m sorry. And he would go out, and film it, and his wife would put it on YouTube. He ran up all these subscribers and the CPA runt he didn’t have any expenses.

And we’re like, “Okay, I’ll run it by the actuary.” And he had primary customer liability, he couldn’t get any commercial insurance for it, had a bunch of… he actually went out of the country a couple times. It was the only time we ever used kidnapping ransom insurance. He rang up about 200,000 in premiums and I’m like, “Okay, let’s run it.”

And this year, he grew to, I think, two and a half million in revenue because YouTube actually cut him off. But he ended up establishing his own channel and now, he’s going great guns. I think he did 500,000 this year. So, sometimes you never know, but it varies. But you really never know. If anybody calls and asks, we have one of that seven documents that we use is a one-page questionnaire.

If they just give me the website, fill out a few pieces of information, no charge, we’ll just send them back an analysis and say, “And here’s what we think.” And we’re rarely doing the same type of business twice. It’s always reinventing the wheel, but you never know. But that’s what makes doing this really exciting.

Mark Perlberg (24:36):

Yeah. Okay. So, I guess it’s hard to really clearly define on a revenue basis, but what’s the minimum contribution we would want to make into this thing? I believe you said… what I’ve heard is around a quarter million a year. Can you correct me if I’m wrong?

Keith Langlands (24:49):

Yeah, yeah. About a quarter of a million a year is about it. And just to give you an idea of where we come up with that number, in North Carolina, in every state, there’s a minimum capital requirement. That’s the nondeductible component that a state requires. And I need to brush up on Tennessee, I think they just lowered it down, but most states require $250,000 as a minimal capital.

Well, I’m sure everybody out there are saying, “Well, gosh, man, that’s a big number.” North Carolina only requires 60,000. So, the first-year client has to put in 190,000 in premiums. So, that’s where we get the 250 from. And this is just strictly a ballpark. In today’s numbers 190,000, generally, you can get away with about a million and a half of gross revenue.

This is why I’m not a CPA. I’m still licensed, but I don’t do math very well. So, whatever 20% is to get to 190, you guys out there can do the math. I know it seems like a big number, but whatever gets you to 20% back to that gross revenue. And again, you say, “Well, Keith, that’s nuts because my commercial insurance is only 30,000. How can you get 190,000 of risk in a captive?”

Well, the way I do it, if I’m doing a seminar and we’re back on the live seminar trail now, hopefully, the pandemic is over. But I’ll do a big whiteboard, and I’ll draw this big circle on the whiteboard, and you draw this little piece of pie and maybe it’s 10%, 15%, and you’ll color it in. And you’ll say, “Well, that’s what your commercial insurance covers. All the rest of this stuff, that’s what you’re self-insuring.”

And I don’t remember where I got that stat, it’s probably gotten worse since the pandemic because every year you read insurance calls, the policy, there’s more and more exclusions being added to the policy. And most of the people, they’ll get the policy clients, they won’t even read it. They’ll just stick it in a drawer, wait until something happens.

Mark Perlberg (27:37):

So, basically, there’re tons of additional risks you can ensure against with the captive that aren’t going to be covered in these conventional insurance instruments such as loss of a key employee, some sort of obsoletion of your product. What are some additional common risks that you found that you’re able to insure against that people typically cannot insure against with traditional forms of insurance?

Keith Langlands (28:07):

Well, right off the top of my head, I think social engineering risk, it’s an odd name for something that seems like it’s happening quite a lot. But if your controller, or your bookkeeper gets in, you’re the owner, and you go on vacation, and you’re somewhere where there’s limited cell phone.

And she gets a request from somebody that looks like a real vendor, and they need 10,000 or 20,000 as a sub. And it looks like the real thing, but she doesn’t really check the wiring instructions, and they end up wiring it to the wrong account, turns out to be a fraudulent account. Well, the bank says, “Well, it’s not our fault. Maybe you’re not the best customer in the world.”

Well, they say, “Screw you. Take it to another bank if you don’t like our customer service.” Well, social engineering fraud is a big example. Public relations is a big one that you’re seeing. We have a couple doctors, plastic surgeons such like that that you put something, you’re advertising on billboards, or you’re on Yelp restaurants, or like that in particular, competing restaurants or just, excuse my expression, a complete you know what on this stuff.

And they have to pay PR firms to go in and correct this stuff. It’s very malicious stuff. And when you were talking about Keyman insurance, Keyman is not the old type Keyman insurance where you’ve got the VP gal that was human resources anymore. It’s a guy or a gal that’s the foreman or the track. You got to replace that guy or gal and the whole thing backs up for a couple months.

And now, that’s not as prevalent now because the housing market slowed down a little, but man, when housing was booming, you put a track down for a couple months and everything backs up. Supply chain interruption and that’s a big one. Now, it’s all pricing for oil and it’s all kinds of things. And just about anything that you can think, warranty reimbursement is a big one that we handle.

I had somebody tell me one time that if there… there’s nothing you can’t warranty in a business if you figure it out, or if you think about it hard enough. Anywhere from CPA or enrolled agent work, all the way up and down the line. If you think about it hard enough, you can… or if they’re doing warranty work anyway, bring it in house.

That’s what we did with home warranties. All this stuff is just standard policies that are just coming off the same computer, take it and just rebrand it. You’d be amazed at the profit centers that you can create for your clients.

Mark Perlberg (30:59):

So, what I’m wondering now on the topic of who is maybe a good fit for us? So, the majority of our clients are somewhat involved in real estate and real estate investing. So, for some of our clients, right now, they are using other insurance companies and with all the tax advantages of investing in real estate, they’re probably not even thinking about how else can I reduce my taxes.

However, with bonus appreciation phasing out and all of their depreciation on these properties being front loaded, we’re going to be likely exploring other opportunities to reduce their taxes in the upcoming years as we lose that bonus appreciation. So, I’m thinking to myself some scenarios where it might make sense.

Now, I don’t think you could ensure against a whole building in a captive because… and correct me if I’m wrong, but I would think that if you’re a big time real estate investor, you probably couldn’t put enough in a captive to ensure against a building. But there are still tons and tons of other risks that are present for a real estate investor that you could potentially create a captive for. What are your thoughts on this?

Keith Langlands (32:22):

Yeah, yeah, you’re right. What we refer to as the frontline insurance is something that we cannot do because anytime a bank or a financial company is involved in the financing, they’re looking for what’s referred to as rated paper. And we can do that with a fronting carrier, but a lot of times, it’s more hassle and it’s more costly than it’s worth.

Where we come in handy on the real estate side is when monies are in the captive in a relative percentage of the money. And I’m using a client we have right now, and you got to break it down for your own scenarios. But I think they have around 10 million in their captive. And what you were pointing out before is exactly right.

Most of our clients are standard investment portfolios, but let’s say they need a million of that 10 as a downstroke on a piece of property, and they need to move on it quickly. As long as they’re using market terms on that, and we’ll have them laid it out on a first trustee on a home, or a piece of property or something. And this is same true for every client, so it’s not that the money that’s in the captive can’t be used, but it’s got to be at market terms.

And the same thing would go for a construction company, or manufacturing or anything like that. It’s the people that go bananas and lend 60% of it back to the operating company with no notes and stuff like that. That’s the stuff the IRS goes, or you lend it back to yourself. Just silly things like that. They’re stuff the IRS looks out for, and we won’t do it as a client, we’ll drop you like a hot rock.

But yeah, there’s a lot of flexibility for… and speaking of, just again, to go back to your question, sorry. In real estate in general, we do do things in terms of lease guarantees and things that you can ensure. The only thing you can and you cannot ensure whether it be real estate or anything else for that matter, is you can’t ensure market fluctuations or things like that, things that would happen in the market.

So, you can’t say, “Well, this building is worth five million. I want to ensure against the downturn that it would go to four.” You can’t ensure that. You can’t say if you’re a petroleum company, “Well, we’re worried about the price dropping and gas,” those are things that are out of control things. There’s a difference between business risk and insurable or probability risk. And sometimes, it’s a difficult determination between the two, but we’re always willing to listen.

Mark Perlberg (35:18):

So, you mentioned one, so we can ensure against a tenant not paying their lease on time. What are some other potential risks we can ensure against as real estate investors using a captive?

Keith Langlands (35:30):

Normally, the best way we’re dealing with, and I’ll give you an idea, the same client has a number of apartments. They have a number of apartments in Utah, and Texas, and in particular, in the Houston area. And as you can imagine, the risk in Houston for flood insurance is a whole lot different than it is in Salt Lake. The premiums are about 10 times higher in Houston than they are in Salt Lake.

So, they had to carry a much higher co-insurance position in Houston on a number of buildings than they did. Not only did we assist them with putting them with a different commercial insurance agent that was putting together as a portfolio, but we were able to have a co-insurance position through their captive. So, there’s a lot of structuring that we do.

Now, that one’s not an “831-B” captive. We also do the larger 831-A captives, which still provide a lot of tax positioning. Those are the ones that the Fortune 500 companies get into. Those are a totally different tax structure, but very, very effective nonetheless. Again, you can do security deposit positioning on a captive.

The same company, we started doing lease guarantees because they had investor positions and they still do on a number of different buildings. It was really a way for them to guarantee the ROI on their buildings. Now, we’re starting to see more of that in the apartment buildings. You can’t really call it… what do they call it? I haven’t been involved with them for a number of years.

I’d have to ask my team about it. But it’s basically a damage waiver on apartments and in lieu of their security deposit. So, somebody is coming in and mostly, it’s not in the low… no offense to anybody that owns a lower level apartment, but it’s mostly apartments in the $2,000 a month range. So, it’s higher level, higher credit where they’re waiving the first and last month’s security deposit.

And in lieu of that, they’re selling them a lease, something. They don’t call it a lead. It’s not defined as an insurance policy because then you run into state regulators and all these different jurisdictions. You avoid that. But there’s a lot of different, just kind of hard pressed to think of them right off the top of my head. But I can definitely get you more information on that.

Mark Perlberg (38:20):

Awesome. Another thing I’m wondering, when the captive receives these funds, could they possibly use leverage because they’re going to be investing in securities? Is there ever an opportunity where they can leverage and invest more than the principle of what you’ve put into as a premium if they could also use leverage to put additional funds into securities and have those amounts grow?

Keith Langlands (38:45):

Not really, but there’s… and I don’t want to be wishy-washy on that, but yes and no. The jurisdictions don’t really like leveraging the captive monies. But as an alternative, as an example, if we’re looking to put a million dollars, if we have dedicated funds to go with a captive, there are premium financing companies in a more traditional way that will finance the premium for the captive at a lower rate.

And then, that million dollars is available for other positioning. So, let’s just say for argument’s sake that we’re looking to do a life insurance positioning, as well as doing the captive, as opposed to putting the money in the captive and then trying to do a life insurance positioning with that money or whatever we were going to try to do with the positioning of the money with the captive, let’s have the finance company do the financing on the captive at 4.5% interest only for a year.

And then, let’s use the million dollars for whatever the financial planner has planned for. The regulators love that idea much better than trying to go back and do something else with it. At least that’s how it’s been in North Carolina for us.

Mark Perlberg (40:09):

Okay. So, you can use leverage to put the contributions in your captive right off the full amount that you put into the captive. And now, the leverage funds, now they’ve been shifted into the captive, and then they’re going to grow in tax advantage matter because you have a higher principle and you’re going to give that dividend in capital gains income.

Keith Langlands (40:33):

Right, exactly. And please know, whatever topic I’m talking about, whether its brokerage, financing, whatever, and that’s probably one of your questions coming up, we only charge to set it up, set up the captive and to run it. And we also pay a referral fee on the management, that’s all. We don’t take any fees from anybody that you guys do your job, you gals, you guys do your job, and we do our job and that’s fine with us.

Mark Perlberg (41:11):

So, in determining who is may be a good fit for, obviously, you need a way to come up with the funds put into it, but it sounds like there’s more than you would expect. There are just tons and tons of businesses who aren’t aware of this and likely aren’t aware of the potential risk they could ensure against using a captive insurance companies.

And perhaps you could sit with your advisor or eventually get someone such as yourself, start thinking about the risks in your business and which ones are potentially insurable through a captive.

Keith Langlands (41:46):

Yeah. You’re absolutely right. I think quite frankly that the IRS has done an incredible PR job trying to shoot down captives for a legitimate reason in the way that there’s been a lot of… I hate the word actors, I don’t know who came up with that word a long time ago. But a bad actor, I’ve heard that so many times throughout my career.

There’re a lot of bad captive managers out there. But quite frankly, as a CPA, and I think you’d agree with me, but there’s a lot of bad everything out there. There’re a lot of bad CPAs. Sometimes I wonder of like how’d you get your license? They’re bad real estate agents. There’re bad people everywhere. There’re a lot of money loans.

Let’s be honest, there’s a lot of money in this because there is. You’re going to get a lot of bad people that some of these… I have one person tell me there’s no offense to anybody that lives on an island, but it’s said, never do a captain in a jurisdiction that you can’t see when the tide goes out or in, whatever, whatever the saying.

But there’re places where you go, you pay off the insurance commissioner and that’s how you get the captives license. There’s no actuarial. There’re no policies. There’s no nothing. If you want hurricane insurance in Nebraska, I’ve had people tell me, “Oh, I did it with this Native-American tribe and gosh knows where.” Well, God bless you. It cost you $5,000 a year. Well, good luck when the IRS starts coming to you because that’s what’s going to happen.

Mark Perlberg (43:25):

Can you tell me what a micro captive is?

Keith Langlands (43:27):

Well, micro captive is just that’s what we do. It’s just another terminology for small captors. I think it’s some terminology that the IRS came up with. Somebody brought that up today or last week that the micro captors are on the dirty dozen list this year. Well, you’ve got to read the fine print, it’s the foreign captives, particularly in Puerto Rico. Okay.

If you want to go down that rabbit hole, best of luck. And then, somebody else asked me today, just didn’t keep up with the news that they’re still transaction of intra, they’re not. They’re not transactions of interest anymore. The Supreme Court overruled that. You don’t have to file 88, 86s any longer. The District Court in East Tennessee upheld that ruling.

So, people, and all the IRS cases that went through the courts were just silly cases to begin with. I’d be glad to talk anybody anytime. The latest case, Caylor, was just beyond a joke. Whoever decided to take that one to court should get their money back, so no.

Mark Perlberg (44:55):

So, in the past, it used to be, I believe it was what we would call listed transaction, correct?

Keith Langlands (45:04):

Yes. It had been for a number of years in the 88, 86s. We’re just away for the IRS to pull information out unconstitutionally. They just didn’t follow the rules. I don’t think they’re going to take another shot at it. I think they moved on.

Mark Perlberg (45:22):

Now, it’s no longer has that status. So, we don’t have-

Keith Langlands (45:24):

That’s correct.

Mark Perlberg (45:25):

The usual paperwork is not going to raise the red flags that you may have thought it would in the past. And also, if you’re working with an advisor such as yourself who understands the law and how to do things compliancely, not just as a tax scam and a tax evasion tactic, then you’ll be all right.

But then again, so that’s why I meet so many people who are doing their own DIY tax plans. They come to me and we only work with clients who are tax billing clients and they say, “Oh, well, we already found a cost like engineer. We don’t need a tax plan.”

And we don’t realize is that there are so many other pieces to this, and there are all sorts of legal implications of the decisions we make, and how we document things. And there’s also so many opportunities that you’re not going to really understand, identify, and evaluate if you’re doing this on your own part-time reading blogs and talking to your friends.

Keith Langlands (46:21):

Right. And to be honest with you, and this came up for appeal and like I said, in the Eastern District Court, Eastern Tennessee, the judge held the ruling. The only thing that he did change was that CIC, which is one of my friendly partners, technically the IRS was supposed to return all of the data that they acquired during the 88, 86 days.

The judge denied that the IRS had to return all those documents, which is a shame. They had to return all of CIC’s documents. Now, we’re having to go to court. There’s a class action suit that’s going for the IRS to return all the documents because we’ve never done anything wrong. So, that’s the way that stands. But now, they’ll know it’s no longer a transaction of interest. It was all BS in the first place.

Mark Perlberg (47:15):

Awesome. Couple of things I’m thinking about is, as we approach towards the end of this, we’ve identified the tax advantages of having these deductions and having a vehicle to invest in securities. We talked about the risk mitigation opportunities here. Now, what I’m also wondering now, I don’t think we have enough time to discuss this because this be really complex.

But as far as when we retire or no longer need the captive for whatever reason, there’s probably a multitude of opportunities and ideas on how are we going to pull the money out of the C corp, this captive insurance company in a tax advantage matter? How are we going to do exit strategies?

But one of the things that I’m thinking about immediately is the benefits of having this captive insurance company is we can do some timing here. We can time on when we’re recognizing this income, when we’re getting the dividends, and based on what is our dividend tax rate. All sorts of considerations here on how we’re going to eventually use these funds for personal spendings or move them for some other purpose. What are some of the things that you’re seeing as far as this goes?

Keith Langlands (48:44):

Well, again, quite honestly, once we’re done we’re done. We are go through the process of winding up the license, we’re pretty much out of the scene and we turn it over to professionals like yourself. It comes up as a C corporation and that’s our rule. What I’ve seen, and I’m providing no advice to anybody, please understand that again, the one thing I will tell you is that while the captive is in motion, your exempt from your accumulated earnings tax as a C corporation.

Because you have all this potential liability as an insurance company because you’re writing all these policies. Theoretically, you have a ton of liability. You’ve got all these policies outstanding that could theoretically hit. So, you have to maintain these retained earnings. Now, the minute you stop being an insurance company, that doesn’t mean instantly you have to liquidate.

Now, I can tell you out of experience that most times CPAs are smart like you, will get to a period of time, usually near the end of the fourth quarter of a particular year and say, “Ah, Keith, we’re getting ready to go, or we plan well ahead of that, say we’ll shut it down. Maybe we’ll terminate the license at the end of the year or next year.”

And they’ll let it run for another year so that even if they go to liquidate, they’re going to get it a good run to barring any tax changes. Let’s assume the cap rate is still the same. We’d do some planning around that, even if they’re planning just to liquidate. But I’ve seen many other strategies where it’s flipped into, just moved into some type of investment position, done other things with it.

Honestly, I’d leave it up to the people out there. You probably have much better advice just thinking what can you do with a C corporation that’s got a lot of assets in it, knowing it may come up, and it won’t be for many years. People out there have probably much more experience. You’ve got a C corporation sitting there with stocks, and bonds, and cash.

Now, it doesn’t have to be liquidated. Assuming whatever ownership you have, those assets can be transferred. They don’t have to be liquidated. You can just transfer the investment account, but it’s just going to be closed out at that point, that time. I’ve seen some really stupid things, quite frankly, because I’ve seen some doctors that have been under litigation, quite frankly, for some malpractice issues.

And as long as you’re a captive, and you’re writing premium policies, as far as I know, you’re still maintaining that asset protection. I think they got some of the dumbest advice possible in closing the captive down. As far as I know, left them open for potential seizure of the assets. What do I know? But another thing I’ll point out that as long as there’s something for the captive to ensure, the captive can stay open.

Now, if you’re writing two million for the premium every year, and then you sell the main entity, and you go to writing insurance for a dry cleaning store or coin out laundry, I don’t think writing $100,000 a year when you got 10 million in reserves is going to make the service very happy though. But again, I’d probably leave it up to the experts on that.

Mark Perlberg (53:06):

Okay. Yeah. There’s one of many areas of complexities in what we do in our tax planning and in the tax code. Okay, fantastic. Well, Keith, thank you so much for your time today. I really appreciate this. I don’t have any additional questions at this time, but I really enjoyed our conversation. Can you tell the audience where they can find you if they want more information?

Keith Langlands (53:34):

Yeah. They can go to or they can call me at (702) 845-7656. The website has my… just add Keith, And you can look us up our new, Mark, Chip Shots, the blanket behind me is my new golf venture. So, I’m pretty much everywhere. So, we’re opening a new golf indoor simulator club here in Vegas.

Mark Perlberg (54:07):

Cool, cool. And that is nice. And anything else that you may ask of our audience listening to the recording?

Keith Langlands (54:19):

Yeah, just check us, check it out. Check out our website. Again, you never know when a client is going to be eligible for a captive and send me the information. There’s no obligation. And trust me, I’m not going to hound you. I’ll send it to you.

You’re not going to get on any mailing list. I’m not going to sell your email address. If you don’t like it you don’t like it, but it’s not for everybody. But you’ll be pleasantly surprised as to the process. So, Mark, really, thank you very much for your time. Appreciate it.

Mark Perlberg (54:56):

Awesome. Keith, thank you so much. This was really educational, and enjoyable, and helpful for me and our audience as well. Appreciate your time, and if you guys like this, subscribe to our podcast and our webinar. And stay tuned. We got more great stuff coming your way.