Why Ultra-High-Net-Worth Clients Should Consider 831(b) Plans

These interruptions looked like factory shutdowns and shipping containers stuck in the harbor, which resulted in him having to source and repurchase materials elsewhere at a higher cost due to increased demand and quick delivery requirements.

However, Dave had already been participating in his 831(b) plan for two years when the pandemic hit, so he was able to use the 831(b) to pay the extra costs of materials and keep the project on track while waiting out the pandemic long before any PPP plan was launched.

Other high-net-worth individuals can employ similar tactics when it comes to wealth management.

These individuals will want to protect their assets through the usage of a legal framework, which is when an 831(b) plan comes into play.

Choices

According to the tax code, the owner of the 831(b) plan is owned by the business owner(s) — this includes everything from underwriting, policy investments, claims decisions, and more — thus allowing for greater control over risk-mitigation and business protection.

After one year of holding a micro captive policy, clients with micro captives have many more options than clients using traditional insurance.

If clients with micro captives have a surplus and the insured’s claims are less than the premium that year, they can choose to keep their money invested as it is currently or can choose to take a more aggressive approach.

They can also take out the money as a qualified dividend at long-term capital gains; or loan themselves a portion of those funds.

Where to Start

First, what are your clients’ risks?

This is a question we have always recommended advisors ask when deciding whether the usage of an 831(b) plan is right for their clients.

Advisors must consider the unfunded liabilities of their clients, such as brand reputation, sub-limits on natural disaster insurance, or exclusions in cybersecurity policies.

These high-severity, low-frequency events could leave a business paying debilitating sums out of pocket.

Second, what do you know, and are you working with experienced, reputable micro captive specialists?

It is imperative advisors with UHNW clients understand the basics of the 831(b) Tax Code before suggesting it as a risk-mitigation tool.

Now more than ever, small to mid-size business owners and high-net-worth clients want more control over mitigating their risks.

Thanks to the increased risk-mitigation safety net created by an 831(b) plan, and the ability to tailor these plans to each individual or business’s needs, advisors should consider this as a solid tool to ensure their clients can weather the storm no matter what risks come their way.

Credit: Allison Bell/ALM

Van Carlson is the founder and chief executive officer of SRA 831(b) Admin, an Eagle, Idaho-based firm that helps high-net-worth clients with risk-mitigation arrangements.