Practically every successful dealer is involved in a reinsurance structure for finance and insurance products. Many of these entities rely on “small insurance company” regulations that allow them to be taxed on investment income as opposed to insurance underwriting profits.
To qualify as a “small insurance company” the entity’s premium cannot exceed $1.2 million. For years beginning in 2017, that limit is increased to $2.2 million.
In recent years, many of our clients have approached or exceeded the $1.2 million dollar premium threshold. To maintain the tax benefits, it was necessary to create a second reinsurance company. This is not as simple as it may seem, as the second company cannot have the same ownership. In fact, it must have significantly different ownership under the complicated controlled group regulations.
Every now and then we get some positive news from the IRS. Keep in mind, dealers may still contemplate the creation of a second reinsurance company to take advantage of the estate tax benefits. These entities provide a great opportunity to reduce a dealer’s estate by passing assets to second and third generations without losing control in the dealer operating company.
If you have any questions about this article, please contact Paul McGovern at PmGovern@DowneyCoCPA.com or 800-849-6022.
