Stokes: Texas ruling is a cautionary tale


According Thomas Stokes, managing principal and US consulting practice leader at JLT Towner, a recent ruling in Texas is a cautionary tale for 831(b) structures. As a result, he says: “Owners of poorly assembled or pre-packaged IRC Sec. 831(b)s may want to re-examine the way their captives are set up.”

The ruling held that premiums paid into a captive and then used to purchase offshore business protection policies do not have a legitimate business purpose and were instead an estate planning strategy.

Stokes told Captive International: “Small captives are a good tool in principle and create the ability to bring capital into the alternative insurance markets, but there are those who would take advantage.”

“Service providers looking to find ways to assist wealthy individuals in minimizing their tax liabilities may be using these structures as a tool. It becomes a planning opportunity which, if not fully understood, can be taken advantage of. While estate planning is a structuring opportunity, it simply cannot be the driving reason for having a captive.”

Stokes concluded: “Domiciles are cautious—they want to see more information about why captives are being set up in the first place. There’s a healthy caution surrounding these captive structures, it’s just the case that some people take advantage.”

JLT Towner, 831(b) captives, regulation

Captive International