Micro-Captive Insurance

The pitch

Deduct up to the annual Sec. 831(b) ceiling (2,850,000 dollars for 2025) of premiums at the operating company under Sec. 162, receive them tax-free at the captive under Sec. 831(b), and later extract at qualified dividend or capital gain rates. Asset protection and estate freeze thrown in.

Where it breaks

The arrangement must be insurance under Helvering v. Le Gierse, 312 U.S. 531 (1941): risk shifting, risk distribution, insurable risk, and insurance in the commonly accepted sense. Promoter captives fail on actuarially unsupported premiums reverse-engineered to the ceiling, circular flows of funds, sham risk pools, no claims ever paid, the insured simultaneously carrying full commercial coverage, and no genuine underwriting.

What it costs you if it is wrong

Red flags specific to this structure

• The manager also owns the risk pool
• The actuary asks how much you want to deduct
• No claims in five years
• The pitch leads with the deduction rather than the risk

Questions to ask the person selling this

Take these into the next meeting. Someone selling the legitimate version answers them without difficulty.

1. 1Who owns the risk pool, and are you or your firm affiliated with it?
2. 2Show me the actuarial report. What loss data set the premium?
3. 3How many claims has this program paid in the last five years, and what is the loss ratio?
4. 4Which of the Rev. Rul. 2002-89, 2002-90, or 2002-91 safe harbors does this satisfy?
5. 5Will Form 8886 be filed, and who prepares it?
6. 6Who wrote the tax opinion, and are they paid by the captive manager?

Which of the Seven Markers this trips

• The promoter selects the appraiser or the actuary

• The economics do not work without the tax benefit

• 'The IRS has never listed this'

Score your own situation against all seven

The legitimate version

A real captive insuring real, identifiable, otherwise-uninsured or under-insured risk with a genuine business need.

What distinguishes it

• Premiums set by an independent actuary from loss data, not reverse-engineered to the ceiling
• Risk distribution satisfied under the Rev. Rul. 2002-89/90/91 safe harbors
• Claims are actually submitted and paid; the loss ratio behaves like insurance
• Adequate capitalization, real reserves, licensed domicile, arm's-length policies
• No circular loanbacks to the owner
• Commercial coverage is replaced or supplemented rationally, not duplicated
• PATH Act diversification requirement met
• Form 8886 filed for TOI status
• Independent tax opinion from counsel not affiliated with the captive manager

What the courts have done

How this has actually gone for the people who bought one.

Reporting status

Transaction of interest under Reg. 1.6011-11 (loss ratio under 60% OR a financing factor, disjunctive). The listed-transaction reg 1.6011-10 was vacated in April 2026 but the district courts are split and it is on appeal. Both categories use the same Form 8886, so a captive that was listed almost certainly still reports as a TOI. Reporting is not eliminated; only the penalty tier and Sec. 6662A exposure shift.

See the full status board

Typical fees

Formation 50,000 to 75,000 dollars. Annual management, actuarial, and domicile fees commonly 25,000 to 100,000 dollars or more. Fee data is largely promoter-disclosed; treat as directional.