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September 18, 2024 at 09:03 AM
What You Need to Know
- Big companies use 831(b) micro captive arrangements to self-insure many risks.
- UHNW clients can use micro captives, too.
- A client has much more control over a micro captive than over a typical traditional insurance policy.
Experts found there were about 2,756 investment advisors managing $1 billion to $5 billion in assets in 2022. Many of these advisors likely specialized in working with ultra-high net worth clientele.
Even more than other clients, UHNW clients face exposure to market volatility, liquidity management challenges, and potential litigation.
An advisor’s job is to help identify exposure and risk to develop a comprehensive plan to ensure their clients’ assets are protected.
One risk-mitigation tool that is gaining increasing traction is the 831(b) plan, a relatively unknown but impactful part of the U.S. tax code. It was created to help business owners set aside tax-deferred funds for risks that traditional insurance may not cover.
This risk-mitigation strategy is used by nearly every Fortune 500 company and is ideal for mitigating UHNW client business risks as well.
It puts the power of having control of risk-mitigation back in the hands of the insureds, rather than the insurance companies.
Have you noticed that insurance policies are getting thicker? It’s not because insurers are adding coverages, but rather adding exclusions for what they won’t cover all while charging more in premium.
Understanding 831(b) Plans
Also referred to as micro captive insurance, 831(b) plans were first introduced in 1986 under section 831(b) of the Internal Revenue Code.
Much like the 401(k) tax code allows an employer to set aside tax-deferred dollars for retirement, the 831(b) tax code allows a business to set aside tax-deferred dollars to cover under or uninsured risks.
By setting aside these tax-deferred funds, businesses can even out the peaks and valleys of risk more efficiently.
This form of self-insurance and risk management is vital in a world where ample insurance and risk protection seem to be dwindling by the day.
It really puts control back in the hands of small to mid-size business owners and high net worth clients.
Consider the events during and after the COVID-19 pandemic hit its peak.
As a nation, we saw many businesses close their doors.
Of those that stayed open despite a drop in sales, many had a contingency plan. One of the most efficient risk-mitigation solutions was by using the 831(b) tax code.
Businesses that already had an 831(b) plan in place were able to file a claim and draw on their plan reserves quickly to keep going until things returned to normal.
Essentially, they became their own self-reliant Paycheck Protection Program.
One of our clients — let’s call him “Dave” — was a real estate developer who found himself struggling due to the supply chain interruptions as a result of COVID-19.
Van Carlson is the founder and chief executive officer of 