New Year’s Resolution:
Effective Risk Management A
By Scott Jarred CEO Jarred Bunch Consulting
s the medical industry enters some uncertain times, successful physicians can face the pressure of multiple risks in their daily operations, such as adverse financial impact of regulatory or legislative changes, breach of patient confidentiality, and so on. For this reason, physician’s groups and practice owners can benefit from a dynamic risk management tool meant to effectively manage risks for which protection may not be available, control their insurance costs, and provide tax efficiencies, all of which can potentially have positive effects on a personal level. The New Year brings with it a new slate, and often prompts the perfect time to invent the “new you.” While we tend to just think of reinventing ourselves on a personal level, the New Year is the perfect time to explore strategies that can reinvent you on multiple levels; from your personal finances, to those of your business. As we started building our specialization in physicians, we noticed that many of them were part of physician’s groups, or even owned their own practices. Because of this, we found a smooth transition between the consulting services that we could offer them on a personal level, and our consulting services that we could offer on the business side of medicine. One of the most appealing business strategies we are skilled in helping our physician clientele implement lies in captive insurance planning.
WHAT IS A CAPTIVE INSURANCE COMPANY?
A captive insurance company is a property and casualty insurance company, which is best utilized as a supplement to existing coverage, providing a more effective total risk management strategy. Essentially, the captive is formed to cover the risks of its parent company. Many risks that captives can provide protection from are either not available through commercial property and casualty insurance companies, or may be too costly to obtain. And in a field that is not only subject to frivolous lawsuits, but is heavily affected by regulatory and legislative changes, these are the exact risks that can keep physicians up at night. Thus, the captive provides them with a tool to subdue this anxiety, effectively managing several different types of risk they may face by designing an insurance program structured specifically for their unique situation.
HOW DOES IT WORK?
This strategy can be implemented by physician’s groups or practice owners to more effectively manage risk, and can also double as a unique strategy in the area of tax efficiency. Complying with section 831b of the tax code, a captive allows businesses to segregate up to $1.2 million of corporate risk domestically in a given year. The money that you are paying in premiums into the captive qualifies as a tax deductible contribution, simultaneously setting that money aside for future claims. Your money being held in the captive can then be managed through our 8
firm’s direct access to institutional money managers, allowing surplus distributions to be generated, which are then taxed at favorable capital gains rates. In other words, down the road you could essentially declare dividends to the owners of your captive, again with these surplus earnings only being taxed on capital gains rates. Many of our clients who are part of physician’s groups have medical malpractice captives, which every doctor in the group contributes to. While smart, again you are only protecting one area of risk. What about regulatory changes that can affect your paycheck, loss of a professional license, breach of patient data, HIPPA violations, or loss of a partner? A physician’s group can implement a customized captive based on the needs of each of physician, and act as a supplement to protect against a wider range of risks. In addition to this, a captive can present a number of flexible opportunities in multiple areas of your individual financial life, including wealth accumulation and transfer, asset protection, and business succession planning. For example, many of our physician clientele establish trusts with the help of their estate planning attorneys. If that physician wants to implement an irrevocable trust for the benefit of their children or grandchildren, the captive can be coordinated with this. Structuring the trust to own 100 percent of the captive’s surplus distributions provides an effective strategy for the beneficiaries, through increases in the captive’s profitability and investment gains. This structure would also protect the captive’s surplus distributions from creditors.
WHAT’S THE CATCH?
Forming a captive insurance company is a strategy that should have a long-term plan, and involves several initial steps that must be properly negotiated in order to achieve a successful result. Establishing and structuring a captive should only be done with the guidance of appropriately qualified tax and legal advisors. Captives are not a new concept; concepts that echo the very features of today’s captives can be traced back to the 1920s, when several corporations formed wholly owned insurance companies. Stamped into knowledge as a “captive” by Fred Reiss, these insurance companies have stood the test of time since 1957. We work with only the premier providers of captive insurance companies in the industry, and their feasibility specialists work with our clients to design, implement, gain regulatory approval, and manage
Doctor’s Life Tampa Bay
Issue 6, 2014