063 | How to Minimize Crisis and Maximize Growth: Van Carlson Explains the 831(b) Solution Every Business Needs

[00:00:00] Patrick: What would you do if an unexpected expense threatened your business tomorrow? Are you prepared? Welcome back to the vital wealth strategies podcast. I’m your host, Patrick Lonergan. And today I’m joined by Van Carlson, CEO of the largest manager of 831B captive insurance plans in the country. Van is a leader in helping businesses lower their tax bill while managing risks in ways that you may not have considered.
[00:00:27] Patrick: In this episode, we’ll explore how to safeguard your business from unlikely but potentially catastrophic events. Van will share insights on building reserves, protecting your brand, and funding risk without tapping into your operating capital, all while debunking the myths surrounding 831B plans. Stay with us until the end to hear real world examples of businesses navigating tough times and how you can take control of your risk management strategy.
[00:00:53] Patrick: Let’s get started. Van, thank you for joining us here today. I’m excited about our conversation. You run SRA 831B, uh, which is the largest 831B plan administrator in the country. Uh, I’m excited to dig into this topic. I think it’s really valuable for our clients. And again, thank you for joining us here today.
[00:01:13] Speaker 2: Oh, Pat, thanks for having me on your podcast. I, uh, I love doing these kinds of formats and, uh, dealing with smart people. So I’m really happy to be on your podcast. So thank, thanks for getting me on here.
[00:01:23] Patrick: Yeah, no, this is great. So I just want to jump in and we look at what we’re trying to accomplish as entrepreneurs in general, we want to minimize the tax bill.
[00:01:32] Patrick: We want to master wealth building. And then at the end of the day, the goal of all of that is just to live a great life. And I think you you’re helping us tackle two of those, uh, First items there, you know, minimizing the tax bill captive, uh, eight 31 B is a great way to do that. And then I think about wealth building a key piece of wealth building that most people don’t think about is just managing risk.
[00:01:52] Patrick: Um, who cares how much I build if, uh, there’s a downside and it, it all goes away. And I think, um, I think the work you guys do is, uh, tremendous for helping protect the businesses that, uh, our, our clients and listeners are building. So thanks for joining us here today. If you can tell us just a little bit about your, your background and what.
[00:02:12] Patrick: 31 B does, that would be, that’d be great.
[00:02:13] Speaker 2: Well, you know, my, my professional life is risk management. So, uh, that’s an exciting part of business. Right. And, uh, and, and I, I do consider myself an entrepreneur, honestly, but, uh, it’s a little bit of an oxymoron when you talk about risk management, because, you know, entrepreneurs, business owners, I mean, let’s, it’s not the sexiest part of their business, right?
[00:02:33] Speaker 2: Cause to your point, you gotta look at the downsides, right? You gotta, the risk management is. Thinking of the worst and hoping for the best. Um, and you know, and how do you mitigate some of that? And so I’ve been doing this for a long time, almost 30 years now, which is crazy to me. But, uh, I got into what I’m doing today back in 08, really do the great recession.
[00:02:52] Speaker 2: And, uh, you know, unfortunately, when I was doing traditional insurance, risk management, In dealing with business owners, um, you know, obviously the 08 Great Recession became pretty glaring, the financial risk business owners took. I had a lot of subcontractors, general contractors, uh, you know, right in that housing boom, uh, and commercial developers.
[00:03:11] Speaker 2: I mean, you had them all in that area, right? Um, and, uh, it’s unfortunate, but, you know, all he knew, all he knew was one tool, really. That was accelerated depreciation through the 172 tax code. And every year they were just betting every year was going to be better than the previous year because they took the deduction, but they just leveraged out on debt.
[00:03:29] Speaker 2: And business is hard enough. I think you’ve said that, you know, you say that quite often, and it’s true. I mean, take an idea, run with it, turn it into a profitable entity. It’s not easy to do. I mean, more likely you’re going to fail. I mean, you know, a lot of business owners have failed. And so, you know, that’s really when you’re like, well, how do you, how do you mitigate?
[00:03:47] Speaker 2: So once you make it, once you get to the other side of it, once you’re, once you are profitable company, and then how do you maximize those things? And I think what you guys do, and what needs to be brought to the business owner, especially the small to middle market business owners, we’re targeting. You know, all these tools we talk about is big companies use them all the time.
[00:04:04] Speaker 2: It’s unfortunate, you know, and, you know, are some of our clients CPAs or most of my clients have outgrown their CPAs, quite honestly, but they’re loyal people and they want to keep that CPAs they got and all those things. So sometimes there’s challenges out there, but what we’re doing now is, is it’s a way to manage risk.
[00:04:20] Speaker 2: Mhm. And it’s simple pad. Uh, you know, it’s called my building is covered fo is covered under work. Com on the job. All those typ normal. However, when we Complexities of risk, you know, brand protection today, supply chain risk, dispute resolution, cyber is substantial amount of risk now that business owners are retaining.
[00:04:47] Speaker 2: Even if you had a standalone policy, there’s a lot of exclusions and policies today. And then we talk about this, the COVID, COVID 19, unfortunately, right? I mean, uh, one of the things that we’ve been able to really get, yeah. Business owners to overcome now is like you are self insuring a lot of risk. I mean, you know, government had to step in our PPP because obviously business interruption wasn’t gonna get triggered on our traditional insurance company.
[00:05:10] Speaker 2: So when you talk about retaining risk right now, I’m retaining risk on my books. It’s unfunded. Now, how do I want to fund it? Do I want to use pre tax dollars or after tax dollars? If you want to use pre tax dollars, you’re going to use our administration under 831b tax code, which we’ll dive into what that is.
[00:05:28] Speaker 2: But just understand it’s a way to create a pre tax bucket of money. to deal with issues you’re self insuring risk for. If you don’t do anything, you’re just using after tax money, which means you’re using operating capital now, which now you’re going into budgets. You’re going into operating capital that you are now spending on that you weren’t planning for.
[00:05:49] Speaker 2: And you’re really putting his business at risk at that point in time. Nobody wants to use operating capital for unexpected expenses.
[00:05:55] Patrick: Yeah.
[00:05:56] Speaker 2: And that’s really how we can fix that with business owners.
[00:05:59] Patrick: I love it. I love it. And one thing that you talk about risk mitigation, not being very sexy. I think it’s terribly sexy.
[00:06:06] Patrick: And here’s what I mean by that. If if I have a limited downside, right? And that can be really hard to do. It could be hard to limit our downside. Um, but if I have it. Maximum upside potential, which most, most businesses do, right? It like, if you can continue to scale, like there’s, there’s tremendous upside.
[00:06:26] Patrick: If I could, let’s just use simple numbers, right? If I have a downside of 10 and an upside of a thousand, like I love those, those potentials. And I think what you’re doing is you’re limiting the downside to 10, right? You’re going, Hey, we’re going to find all of the things in your industry that can cause us problems.
[00:06:43] Patrick: And we’re going to. We’re just going to, for lack of a better term, put a cap on how far down we can go. We’re going to just ensure those pieces. So now if it’s okay, can we dig into, you know, geek out a little bit on 831B? You know, I know there’s 831A, you know, there’s these different options out there in the code.
[00:07:02] Patrick: And I, I think. Let’s understand why it makes sense for an 831B for a small middle market company
[00:07:08] Speaker 2: to Absolutely. Absolutely. No. So they threw it would be tax code, which is where you find it. The tax revenue code to federal. There’s no difference in the 401k, right? Uh, it’s just where you find it in the tax tax revenue bill, uh, law.
[00:07:20] Speaker 2: That being said, it was actually passed in 1986 and of the 86 tax reform act, which was. I was still in high school for everybody’s, you know, that where you’ve been born in 86. I bet I was
[00:07:31] Patrick: born in 80, you know, six years old. Yeah, there you
[00:07:34] Speaker 2: go. Well, yeah, I’m sure you were paying attention to the reform act, right?
[00:07:37] Patrick: Yeah,
[00:07:38] Speaker 2: but it was a large reform act, probably the largest one in our lifetime, obviously. But aside of all that, uh, it was really introduced to what’s really, what’s going on in the marketplace today, where there’s a lot of stress under traditional insurances. Uh, markets are leaving in states, uh, rates are going up, exclusions are coming in, you’re paying, you’re paying more coverage today, you’re paying for more premium, but getting less coverage.
[00:07:59] Speaker 2: Um, which obviously falls as a business owner to retain a lot of risk on their books. And so that’s when it was, what was going on back then was crop insurance, crop insurance, tort claims, liability. Uh, we, now we have some tort reform going on in the state levels, but back then liability lawsuits were flying through.
[00:08:15] Speaker 2: I mean, It was a substantial amount of lawsuits going on, and it was really the first time we became more and more of a litigious society. And of course, that’s stayed true to this day. Um, you know, if you’ve been in business long enough, you’re going to get sued. Just back to wife, um, off the side of all that, you know, um, that’s, that’s when the code was really introduced.
[00:08:35] Speaker 2: And now you fast forward from 86 to now, the world’s gotten much more complicated. Um, you know, nobody thought about brand protection. Nobody thought about why do I gotta worry about my brand? today. But when you look at all the money you pile into your brand, your reputation, your intellectual properties, you know, your consumer confidence of your brand, you dump a lot of money into that.
[00:08:55] Speaker 2: And you kind of pride yourself as a business owner of that.
[00:08:59] Patrick: It’s
[00:08:59] Speaker 2: probably the most thing you really most business owners value that amongst amongst any hard asset of the business. Is what’s their reputation in the community? And yet it takes years to build and takes seconds to destroy. And, you know, I call it the double negative.
[00:09:12] Speaker 2: You know, if I have something going on where I, you know, something happened to an employee, I can go on and believe me, I’ve been doing this long enough now, well since 08, doing these, doing these plans that, you know, unfortunately we’ve had a lot of, you know, You know, not great stories, you know, you know, things that happen to business owners unexpectedly and how do they, you know, how they deal with it.
[00:09:30] Speaker 2: But, you know, when it comes to brand though, I mean, so, so you got a contraction of income coming in, meaning that less people are coming to your restaurant, your, your medical facility. You know, whatever may business you have, you got a brand damage going on. Uh, you got less income coming in, but your expenses are going up.
[00:09:46] Speaker 2: That’s a double negative. And you want to run down on the bank and ask them for a larger line of credit in order to increase your, you know, it’s, it’s a double negative. So this is when you, you know, you build up these dollars on a tax deferred basis over many years to your point. Um, and this happens. You turn to those tax deferred dollars to fight the fight.
[00:10:04] Speaker 2: And, you know, we tell clients it can be a rainy day fund or it can be a war chest, depending on what’s going on in your business and what’s happening to it. Um, both of which, um, can make the difference between keeping your business afloat or not, honestly.
[00:10:18] Patrick: This is, this is great. So you’ve highlighted three things that I’d like to really touch on.
[00:10:23] Patrick: You know, first we had the black Swan event of COVID 19 that nobody really saw coming, right? Like nobody saw this pandemic that was going to shut down the entire world. Right. And, and the impact it was going to have on, on, on business. So can you give us maybe a case study example there of. How an 831B shows up in that situation and helps?
[00:10:44] Patrick: Yeah, absolutely. Uh, we,
[00:10:46] Speaker 2: we triggered coverage faster than anybody else did, uh, faster than the government did. Uh, we had two situations. One was right, almost immediate, was, uh, a denim manufacturer. Uh, a person that procured denim all around the world, um, and supplied them for different jean manufacturers.
[00:11:01] Speaker 2: You get shot down, uh, you know, contracts start to mean a lot of things. Um, and so he still had to deliver on his deliverables. Or he’s going to lose contracts or worse yet, he’s going to get sued. So in order to get everything you needed done over here, uh, he, in increasing his shipping bill by almost 400, 000 and he air freighted it versus put it in a container and brought across the ocean.
[00:11:26] Speaker 2: Um, and so that was a great example of supply chain risk where it got triggered. He was locked into a price already. However, in order to make sure his suppliers were going to be there, you know, contractually obligated to, uh, was met in time. He, he took a, took a hit and he was able to, you know, all those years he was able to put away basically profits that would have been taxed that he would have wrote the silent partner, uncle Sam to.
[00:11:52] Speaker 2: And meanwhile, he had ability to, to rely on those dollars. And of course, there was already a compression going on already in his business. So he was very thankful that those dollars are sitting off to the sidelines and he can put that against any head. And what did he, he was able to survive it. I mean, he was able to, you know, He delivered when other people couldn’t have delivered, or he would have had to come up somewhere to put the money up to do what he did.
[00:12:12] Speaker 2: The second one was a, uh, a, uh, hospitality owner, um, owning multiple, multiple hotels in the Midwest and, uh, very well touristy areas. Um, and got just hammered, uh, obviously hotel, any, any hospitalities has got. That industry just got leveled that no different than restaurants, right? And he had substantial large claims.
[00:12:36] Speaker 2: He had some issues with some refunds. His processing company wasn’t really being really friendly. So he got a lot of negative reviews. Uh, he was getting beat up pretty badly. He went from like a 4. 8 rating
[00:12:48] Patrick: by
[00:12:48] Speaker 2: Google and I think Yelp too. He had to go out and hire some white hats to, you know, overcome those reviews.
[00:12:55] Speaker 2: And honestly, you know, when people have a choice, that’s some of the things they look at, right. Even though a lot of these refunds were out of his control, uh, you know, he was the one to be blamed. And so it was those types of things that went on. You know, the PPP still made a big difference for these guys, but, you know, some, some of these other things that went on, uh, PPP wasn’t part of that, you know,
[00:13:14] Patrick: yeah, yeah, absolutely.
[00:13:16] Patrick: And I know business owners that burn through PPP so quickly, you know, like that money was great. Uh, other business owners didn’t necessarily need it, but they got it. But, uh, those that needed it burned through it and then. Having backup resources, I think, is, yeah,
[00:13:29] Speaker 2: and, you know, honestly, too bad. One of the things we’re telling clients, one of the resonating with them is if you relied on PPP or ERC programs or any of the government program that brought out during COVID to keep your business afloat, what are you doing differently today?
[00:13:42] Speaker 2: Can we rely on that? Should we rely on that? I mean, I don’t know if we still know all the ramifications of what we did, uh, during COVID with the amount of make believe money we printed, you know, so, um, I don’t know, uh, you know, so to me, it’s like, and here’s the thing too about business. If you’re having a good year just to take a little bit off the top park off the side for risk management, risk mitigation, not only good business, not only is it good risk management, it’s just good business, right?
[00:14:08] Speaker 2: I mean, when I was selling traditional insurance, if the insurance carrier knew you were going to have a claim next year, they wouldn’t issue a policy to you, right? So it’s all underwriting. It’s all speculation. We don’t know when you’re, when you’re going to have a claim, when you’re not going to have a claim.
[00:14:20] Speaker 2: We hope you never have a claim. In fact, I can remember when I would sell traditional insurance and the client goes, well, I never have, I premium keeps going up and I never have a claim. So I look at them like. Well, count yourself lucky. I mean, I can’t think of any good situation where insurance reviews that you’re having a good day in business.
[00:14:34] Speaker 2: I can assure you, but side of that, though, down the road, you’re able to build these reserves up. They become surplus. You know, what we do as an administrator of these plans. We’re not, we’re not here to complicate the business owners lives. We do a full underwriting. We full assessment of everything.
[00:14:48] Speaker 2: Retained risk on the books. Pre tax dollars or after tax dollars to handle the risk. How do you always finance it? Um, that’s try to keep it that simple. Um, and then try to build those reserves and surpluses up and then down the road, they have a nice C Corp. We’re managing all that for them during those times.
[00:15:05] Speaker 2: We’re having an end, like right now. You know, towards the end of our year, we’re, we’re very busy. I mean, clients are making a lot of decisions. Uh, we’re trying to settle out ca claims before a year end. I mean, all those things is what we do as an administrator that really keeps their, their lives. Yeah.
[00:15:20] Speaker 2: Well, they’re already busy enough. We’re not, we’re not here to complicate it by no means.
[00:15:24] Patrick: Yeah. I love this. So let’s talk a little bit about how an 831B actually works. So if I’m going to say some things that I know are incorrect and you, you just go ahead and fix it. Okay. So when I think about, uh, an 831B captive insurance, I’m, I’m effectively insuring myself, right?
[00:15:42] Patrick: So I’m, I’m taking my dollars and I’m putting in, in, so are all of my dollars at risk? Like if, if there’s a claim, am I, am I paying it all out of my? Dollars or is there somehow a way to share that?
[00:15:53] Speaker 2: No, it’s a, it’s a, you know, that’s the crux of all this, honestly, is a distribution of risk. So there’s a four part test, there’s a transfer risk, risk distribution, and then there’s a fortuitous risk, meaning that has to have by accident and unplanned.
[00:16:06] Speaker 2: It can’t be a business risk. And that’s, these are conversations we have with business owners, because a lot of times business owners want to cover something that’s really business risk. And it’s not, it’s not fortuitous in nature, fancy IRS word. But, um. And then the other one has to act in principles of insurance.
[00:16:19] Speaker 2: So those are the big four part tests. The transfer of risk we handle pretty easily, and we can dive more than we’ve done if you want. But the risk distribution is a key component of this. And this is really where if you were to Google this code, right, we call it the 10 minute Google expert because unfortunately, if your CPA doesn’t know about this code, I’ll tell you right now, you probably have the wrong CPA.
[00:16:39] Speaker 2: Uh, this thing’s been around for almost 40 years. It’s obviously had some stress with the IRS. And there’s been abuses. And the abuses really came from estate tax planning. More so than, uh, risk mitigation or really tax avoidance. It was really to deal with the, you know, who’s going to own the C Corp. If I can have my kids own it, every local trust own it, I’m devaluing my estate.
[00:16:57] Speaker 2: That’s really good planning. However, back in the PATH Act in 2017, kind of did away with those issues. Uh, that aside of all that, you know, that’s, that’s really where the, the court cases have come from, really since this is going back, 08, 2008. Um, that they’ve done it for estate tax planning and moral risk mitigation.
[00:17:15] Speaker 2: What they, what they missed was risk distribution. And, and what I would say to you on that is, if, if this thing has to look and feel like an insurance company, which is what we’re doing, As an, as an administrator of this plan and it’s a C corp and selecting under the 831B tax code. So the dollars you’re putting into it are staying tax deferred, no different than the 401k.
[00:17:34] Speaker 2: Only thing you’re going to get taxed on is realized investment gains in there. So if you have a money market account, for example, you’re going to realize gains. You’re going to pay corporate taxes on that, but the dollars you’re putting into it, that you expense at your operating company level are going to stay deferred in there.
[00:17:49] Speaker 2: Well, you know, there’s some, uh, there’s some really good advantages there for the taxpayer, right? But then you have to do these four part tests and that’s really where the distribution risks. So to your point, or to your question, there are going to be shared risk here. Um, there has to be this element of shared risk because you can’t own a hundred percent of your own risk and call yourself an insurance company.
[00:18:09] Speaker 2: If you’re an insurance company, how are you leveraging the law of large numbers? That’s one of the basic principles of insurance, right? Is I’m taking everybody’s, you know, everybody’s going to share each other’s risk. You take a homeowner policy, you know, you’re insured with thousands, if not millions of policies shared amongst many different carrier, but much, much, many different insureds.
[00:18:26] Speaker 2: So that, that, that’s how that pooling works. So we do that. Um, if we have a single insured, uh, forgets, you know, medical doctors worried about his malpractice insurance, the exclusions. Or he’s worried about his brand protection or political risk. I mean, political risk is high today and his audits. Uh, we actually have an audit policy for Medicare and Medicaid and all the things that medical doctors go through today on those audits.
[00:18:50] Speaker 2: It can be pretty scary, but, and the cost is substantial, but anyway, talk about risk all day, I can scare the hell out of you if you want to own a business. Right. But no, uh, the risk is always worth it. I tell business owners, I mean, there’s less of us out there. We get it. protect ourselves the best we can.
[00:19:07] Speaker 2: But, but you do create this distribution of risk. Now, what our pools are from, because we are the largest manager of 831B plans in the country, our pools are by far the largest pools in the country. We have anywhere from 400 to 800 participants. Yeah, when there’s a claim happening, there are some dollar amounts that are being allocated that that’s going to be coming from the risk distribution.
[00:19:26] Speaker 2: However, I will just tell you from a mathematical standpoint, it’s super manageable. When you have that many companies in those pools, you become, it’s a pro rata basis per, per risk. Um, and it, and it’s pretty managed pretty well. I can give you an example. Second quarter of this year was our largest pool.
[00:19:43] Speaker 2: We’ve ever hit the largest we’ve ever hit the pools for. It was about, it was a little over a million bucks. I believe, you know, the, the median was about 730 bucks and that covered 13 claims for that quarter. And this, these were by far the largest claims we’ve had. Um, And so when we talk about a million, you know, like 2 million was paid on that quarter, just in claims that were.
[00:20:02] Speaker 2: 13 claims that we had that got settled out. Um, I think the largest participant was 16, 000. Now it was a gentleman that max funded these things. And I say that max funny, I should mention that starting in 25, you can put up to 2. 85 million and weigh in these things every year. When we first started back in 86, it was 1.
[00:20:21] Speaker 2: 2. The path act, there was a, there was a basically a, um, what’s the word? Um, compromise.
[00:20:28] Patrick: I
[00:20:29] Speaker 2: don’t get to say that word enough. I guess we don’t do that anymore around here. Nobody compromised. Uh, compromising though is, is basically, Hey, we’re going to get rid of the lineal descendants, meaning the state tax play on these things.
[00:20:40] Speaker 2: So you can’t, you don’t own the operating company. You can’t own a 31 B plan now. And then the other one is, um, yeah. We increased it from a million with a CPI rider. So they went from 2. 2 back in 2017. Now with a CPI rider, we’re at 2. 85. So that’s per year. You can put in the, see now that’s the max. There’s a lot of rules to get into that too, where there’s a methodology to premium, how do you price the premium?
[00:21:03] Speaker 2: Actually, you know, all that good stuff, but yep. Yep. Again, more rules, uh, regulations, I should say, but the really the distribution of risk works. And now it’s a calculated risk, you know, cause a lot of owners don’t want to cover other people’s claims, but you know, there, there is no risk free adventure here, guys.
[00:21:20] Speaker 2: Right, right. Well,
[00:21:21] Patrick: if I should question it. Totally. And I think we, we have to acknowledge that if we’re not pooling our claims and you, you’ve said this, but I’m just going to like put a, uh, emphasis on it. We’re a hundred percent covering our claims. Like we’re a hundred percent responsible with after tax dollars to take care of the claims, or we can share those claims with other people.
[00:21:44] Patrick: And on a million dollars, I’ll owe 731 or whatever number you just said there. You know, it’s a tiny percentage and that’s, that’s the benefit of a law of large numbers, right? Like, again, I’m, I’m understanding what my risk is, you know, I’m sort of limiting that downside. And I’m, as a business owner, I’m trying to have unlimited upside where if I don’t.
[00:22:03] Patrick: Share in that risk, my downside potential is enormous, right? Like it, it could cost me my entire business. You know,
[00:22:09] Speaker 2: I, you know, I, I, you bring up a great point. I tell business owners that I say, listen, if somebody is using our, somebody is using their policy today, you should feel good about the fact you’re going to help that guy.
[00:22:20] Speaker 2: Now you’re getting the tax advantages and you’re getting the policies and you’re getting your own risk taken care of. But the reality is you may never have your own claim, but you’re going to have to pay a portion of somebody else’s claim on a pro rata basis. Which nobody know. I even if you max fund these things, I, they’re, it’s, they may own 2%.
[00:22:36] Speaker 2: Most of our clients own less than 25 basis points of anyone of, of any one pool. Sure. You know, it gets back to those law of large numbers anyway. You are helping those business owners stay full. So there’s some. There’s some value there, right? I mean, again, getting back to being business owners is what we do is not easy.
[00:22:53] Speaker 2: And again, you know, if I can help somebody, I hope to God, I never have to worry about my brand protection or my, you know, being sued. And I got to now pay a legal bill because my general liability policy is not covering me and blah, blah, blah. And, you know, I hope I never have those things, but,
[00:23:07] Patrick: you know,
[00:23:08] Speaker 2: at the same time, it’s almost like, oh, man, I don’t.
[00:23:10] Speaker 2: Okay. I’ll pay that claim. I’ll pay for that claim because, you know, I don’t have that issue.
[00:23:17] Patrick: So if it’s okay, I want to do a little math exercise, if that’s okay, so if we think about profit, that’s coming through to the business owner, now our clients are all in the top tax bracket, so they’re, they’re paying 37 percent on the federal level, plus state income tax, you know, so depending on which state you’re in, that’s somewhere between 37 and 52%, you know, I think that’s California maybe wins the prize for the top bracket.
[00:23:45] Patrick: So, uh, God bless the communist state of California. Okay. Um, so with that being said, let’s, let’s talk a little bit about, and, and feel free to use general numbers, uh, high level if you want, but what, where would we see pool claims coming in? What, what percentage of like my premium dollars are going to be, you know, attributed to claims?
[00:24:10] Speaker 2: I would tell you, you got 50 percent of it at risk any given year, but you’re going to run loss ratios of under 5 or 6%, um, uh, depending on the pools. So here, here’s the thing that’s unique about us, right? We have siloed risk. So a good example is foodborne illness. If you don’t produce, manufacture food, You know, restaurants, stuff like that, you’re not gonna end participate in that pool, you know, so, so you’re only gonna participate in risk pools that you’re, that your business is associated with.
[00:24:39] Speaker 2: So you’re not gonna, we may have 18 different pools, but you may be only four or five of those, and we’re also spreading your dollar out amongst those. And so the whole mathematical problem, not the problem, but mathematical, uh, issues taking your dollar. We might be paying 20% of that in each one of those pools.
[00:24:55] Speaker 2: Right? Some of those pools may not be touched at all this year. I, I, the way I set this up, pat, was in a way that. If I was a business or looking at this, I would feel comfortable. I calculate risk all the time. We all have to, um, and I kept catch as many variables as you can. Uh, obviously we make some assumptions,
[00:25:11] Patrick: um,
[00:25:12] Speaker 2: but you know, if I can mitigate this along the way, then, then I would do this and that’s literally how we did that.
[00:25:17] Speaker 2: We play, we apply common sense wherever we can. But the numbers work really well. Um, from the standpoint, I think you’re, you’re going to, I would comfortably tell you you’re going to be less than 6 percent loss ratio. It’s because we have so many plans now, handful of years ago, our loss ratios are higher, obviously.
[00:25:31] Patrick: Sure. Sure. Yeah. I’m sure COVID, you know, push that number up. So let’s just, let’s just assume it’s 10%. Okay. Let’s assume 10 percent of my dollars going out are, uh, going to claims. Okay. If I compare 37 percent to 10%. That’s an easy math problem, right? I like 10 percent better than I do 37. Now there’s also, this is an insurance company, right?
[00:25:56] Patrick: It’s going, there’s going to be costs to administer it, to, you know, have your firm do all of the, you know, claims adjudication and, you know, the pricing and all this stuff, so like, let’s, there’s, there’s some costs on top of that, but we’ve done the math and we look at it and we’re like, The costs don’t get to the tax, so not even, um, not even close.
[00:26:15] Patrick: It’s, it’s a fraction of the cost. So, and then I think about, okay, I’m also reducing risk. I’ve also got these dollars invested and I’m building wealth, like so much better to put the dollars into my captive versus putting it into, you know, the government’s hands and having this risk, uh, still out there that can take me out.
[00:26:35] Patrick: So absolutely.
[00:26:36] Speaker 2: I would say also to just, just to make note of this, I mean, right now, capital gains, you know, let’s say you close this thing down. Yeah. You’re going to pay capital gains if you just, you know, that’s really where the arbitrage is. Like, I have clients that will do, do, you know, we, we do a thing called solvency testing by year 3 or 5, you know, if you’re going to keep facts funding and all this stuff and you don’t have your own claims.
[00:26:57] Speaker 2: Um, and the pool claims aren’t as significant. We may require you to do a distribution. Uh, that’s makes us a little unique in this space. However, it just makes sense to us. You can’t just keep piling away money in these things and not expect to play claim or you’re not having claim relative to the risk you have.
[00:27:11] Speaker 2: You’re completely solvent. In fact, you’re over solvent, right? Nobody, nobody like property casualty insurance companies. They may have a, they may have have a trillion dollars. Of exposure, but maybe only several billion dollars on hand, right? So you got to start looking at these solvency issues. So anyway, that’s a whole nother conversation for insurance people But my point about that is is is You know, you just don’t get to keep piling money when you see, but when you take the distribution, you’re taking as long term dividend rate versus ordinary income.
[00:27:40] Speaker 2: And that’s still one. So, you know, those are, you know, there’s, there’s that arbitrage there and, you know, but at the same time, though, again, we hope our clients went on that. We don’t know what those tax things look like in the future. And. You know, that’s one thing gets kicked around, obviously. So,
[00:27:56] Patrick: yeah. So just to, just to clarify, it’s an absolute win from a tax arbitrage perspective.
[00:28:02] Patrick: If I defer it 37 percent and draw it at 20, like I should do that all day long. That’s one of the reasons the Roth IRA works so well, you know, it’s like you defer to higher tax rate and draw it at a lower rate. Um, and, and so, Uh, that’s more IRA, you know, Roth IRA is the opposite, right. If I can defer to lower rate and when I’m in higher rates, I draw a tax free.
[00:28:22] Patrick: But the thing I love about that is, you know, if that’s the only thing that happened was the tax arbitrage, like it’s a win, but I’m also getting the, uh, the, the risk protection there too. So, and I would
[00:28:35] Speaker 2: say, you know, and I believe me, I deal with clients all the time that, you know, their motivation is tax.
[00:28:39] Speaker 2: I get it. Congress passed the code. They understand that. You know, and you can say whatever you want, um, but Congress probably understands the psyche of the American people better than we probably give them credit for because we know what it incentivizes. We will take on more risk if we know the rewards there.
[00:28:54] Speaker 2: I mean, I tell people all the time, the Boston Tea Party was a real thing. Uh, and, you know, and it hasn’t gone away. And at the same time, I’ve had all sorts of people over the band. I’m just. You know, I just sleep better at night knowing I’ve done your done your program. That’s one thing. The other thing is boy I didn’t think I’d ever use this insurance and here I am barely that literally I’ve had the very next year They’ve used
[00:29:14] Patrick: it
[00:29:14] Speaker 2: and so to your point again, it’s like The understand the incentive understand the drive and all that but here’s we we’re the risk managers.
[00:29:22] Speaker 2: We’re not the cpas We’re not the attorneys. We hire those folks. We’re risk managers first and foremost. We’ll underwrite we stay in our lane We don’t manage the money. We don’t you know, the these You You know, we know what we do and we know we’re good at, and I think that’s also to our success, why we’re one of the largest manager of 831B plans in the country.
[00:29:42] Patrick: I love it. So now let’s talk about who this is ideal for. And I think it would be worthwhile to not only talk about, maybe we’ve hit on some examples, which I think is really good, but let’s get into the financial aspect, because I know there’s some metrics that, uh, If we’re not at a certain threshold, it doesn’t make sense to have an 831B captive.
[00:30:01] Patrick: So can we talk through maybe the, uh, minimum threshold and then, then where you see like the sweet spot of this? Uh,
[00:30:09] Speaker 2: yeah. Um, you know, I would tell people if you can’t, this is a long term play strategy, right? Um, the, that’s one thing. The second thing is, is, you know, if you can’t put more than a hundred thousand dollars a year away in this program and, and not eat into your operating capital and all that kind of stuff, then you.
[00:30:25] Speaker 2: probably shouldn’t be doing this just from a fee structure standpoint, but mostly from a cash based needs. I mean, if you’re in a growth company and you’re burning through capital and you’re burning, you know, you’re doing your thing. Um, we’re probably not for you. Honestly, if you are somebody that is, uh, owns a business that’s pretty senior and got good margins, uh, it’s, Uh, now it’s about hedging risk.
[00:30:49] Speaker 2: I mean, it’s a team point. It’s now you’ve taken a lot of risk to get to that point. Right,
[00:30:53] Patrick: right. Now, how
[00:30:54] Speaker 2: do you mitigate it? And we’re a great tool for that. And so I would tell you that that’s kind of the, it’s really the psyche of the owner where they’re at their business cycles. and their cashflow needs and then just for that person in their own lives.
[00:31:07] Speaker 2: I mean, honestly, our, I would tell you, our average client is probably a couple in their fifties, very successful business people, um, trying to figure out what they’re going to do with their business, quite honestly. Um, you know, and a lot of, This is just one way they can hedge on some of the extra cash down the road.
[00:31:23] Speaker 2: And hey, well, I hope they, it’s like an HSA, right? I hope I never, I fund my HSA, but I hope to God, I don’t have to use my health insurance.
[00:31:30] Patrick: Same thing,
[00:31:30] Speaker 2: right? Down the road, I get to turn it into another investment vehicle for my retirement. And hopefully this is what happens for business owners as well.
[00:31:38] Patrick: I love it.
[00:31:39] Patrick: So one of the things that when we think about how we structure our planning for our clients, we have four real cornerstones. And the first one is cashflow. We, we stop and we understand their, their cashflow and liquidity. And then we forecast out the next 12 months and go, okay. If we put a captive in here, like if we put our tax strategy on the cashflow calendar, What happens to our liquidity?
[00:32:01] Patrick: Can we maintain our minimum threshold of cash on hand? Because the number one reason businesses go out of business is they run out of cash. And the worst thing I can do as an advisor is to say, Hey, John business owner, we’re going to do this cool strategy for you. And now you can’t make payroll, right?
[00:32:17] Patrick: Like that’s, that’s terrible. So we look at the cashflow calendar and we’re like, okay, look, we can put the captive on here. Here’s what it does to the tax bill. Here’s where you’re at from a liquidity perspective. You can afford it. Right. And we give them that confidence to go, okay, I can take a deep breath.
[00:32:34] Patrick: I know I can fund the tax strategy, send less money to the IRS, start mastering my wealth. And, uh, again, at the end of the day, I can, I can have more peace of mind around my, my finances and where everything’s going, so I, I love that assessment, like, let’s, let’s start there, you know, from a cashflow perspective.
[00:32:53] Patrick: And we also look at this is this is not a one, one year trick. We are not funding this one year to fix a big tax bill. This is something that we want to commit ourselves to for as long as we can see into the future, because, uh, we think the strategy aligns with the business goals, with our personal goals, with the tax strategy, you know, all of those things.
[00:33:12] Patrick: So I just wanted to highlight all those. No. And Pat, to add to that,
[00:33:16] Speaker 2: there’ll be times when people can’t fund that. And we don’t have a problem with that. Um, the nice thing is, is most is going to cost a 6, 000 a year to maintain, maintain the plan that year. And it’s going to be paid by the plan and it pays the tax returns.
[00:33:27] Speaker 2: It pays the domicile fees. It pays our admin costs. So that’s a man. So that’s 1 of the things I’ve always when I designed a program is, you know, there’ll be peaks and valleys. It doesn’t matter what business you’re in. You’ve got cycles. I mean, it’s just, yeah. Um, and that being said, it’s like, well, I, when I can’t fund it, I shouldn’t be getting killed on fees because if I did do this for tax advantages, I’m eroding it quicker.
[00:33:49] Speaker 2: I’m eroding it pretty quick when I can’t add more money anyway.
[00:33:52] Patrick: Yeah, that’s
[00:33:53] Speaker 2: when they see that we kind of pride ourselves on as well is, does this make sense when I can’t fund again, there’ll be times when you can’t cope. It’s a great example of that. I mean, it’s just a ton of business owners couldn’t fund it without the PPP.
[00:34:05] Speaker 2: They’d be out of business. But anyway, so yeah. That’s what also makes it manageable. I mean, from our standpoint is, um, I think those are key components that everybody, you know, when you start to look at these types of plans, you need to look at all those things, right? What is the hearing cost? What is my fixed cost?
[00:34:21] Speaker 2: What, you know, and you guys do a great job with all those evaluations. You know, to me, fee shouldn’t kill a deal with a business owner. We are, uh, well on our way to making this a normal business practice. A lot of your listeners might be hearing about this for the first time, yeah. Um, Disappointed by that, but not surprised, uh, you know, and so I, again, it’s, uh, you know, like anything else, you got to do your due diligence and you got to rely on guys like you to really, you know, understand this code.
[00:34:48] Speaker 2: They got a business to run and they got to have trusted advisors around them to bring these types of tools to the table to them, quite honestly.
[00:34:55] Patrick: I love it. So one of the things that I think is also worth discussing is, uh, oftentimes we bring up captive to a client. They get on and do, you know, their Google search and they, they see some of these things pop up like, Oh, it’s on the IRS 30 dozen lists.
[00:35:11] Patrick: And we think this, we think administration is the key piece of this whole thing. Right? Like we’ve seen captives administered that were a complete disaster. Uh, claims took. Six, nine, 12 months to get paid. Uh, pricing was done after premiums were paid. Like it was like, how is that possible? Right? Like, this is why the IRS is beating these things up.
[00:35:33] Patrick: And again, those are no captives that we’ve set up. We had clients come to us that were involved in these captives. And we’re like, we see them every year. We deal with them every year, so yeah. So can you just talk a little bit about, you know, why Captive has got a little bit of a black eye? You touched on it earlier and then give us some of the reasons why, you know, SRA 831B is like a solid administrator and some of your background there.
[00:35:56] Speaker 2: Yeah, so I want to say we’ve gone through a 6700 promoter audit, which, you know, it’s a fancy word saying that the IRS is coming to Give you full examination
[00:36:10] Speaker 2: We got our letter in 22 and we Got our letter in july of this year saying they’ve dropped our audit and um, you know Obviously they’re saying don’t read anything into that but I want to tell you from what my attorneys have told me that we’re one of the few in the country if If ever got the letter from the irs and they’ve dropped the promoter audit on you.
[00:36:29] Speaker 2: So that’s one thing I think we can You know do Brings a lot of credibility to what we’re doing. I feel whether or not they want us to look at it that way or not. Um, because they’ve gone after other promoters to your point. I mean, we’ve got, we’ve had some bad actors. We’ll continue to have bad actors.
[00:36:43] Speaker 2: Like, quite honestly, it’s cowboy land right now. Um, you know, if you’re, if you have an attorney or CPA promoting this to you, I would pause and say, are they selling the code or are they selling risk management? Uh, or is this what the lane they’re going to stay in? Or they just got tired of billing by the hour and now they, now they become an attorney and they just want to do it this way.
[00:37:04] Speaker 2: You know what I mean? So, um, that’s one thing I, and these guys don’t know risk management if they, if I stared them in the face, obviously. So I would tell you that that’s one thing. So yeah, and there’s a lot of money to be made. We have some egregious fees out there that we see. Visa don’t make absolutely no financial sense.
[00:37:21] Speaker 2: From a taxpayer standpoint, but, uh, they were told somehow along the way they’re going to save money on this. When I looked at the fees, it’s, they’re not saving anything. Um, then that’s cut, that’s troublesome. And quite honestly, that upsets the IRS. I’ve talked to enough people that work for the IRS at one point and they don’t like promoters out here taking advantage of taxpayers and I get that.
[00:37:39] Speaker 2: I don’t like it either. I want this to become a normal business practice. So there’s got to be some additional regulations and stuff like that. And I will tell you that we’ve got a great congressional folks that are behind this code that we’ve educated for the last three years to bring them up to speed on this code.
[00:37:55] Speaker 2: This should have been the PPP all along business owners should be allowed to build up rainy day fun on their own and not be reliant on. You know, the government, uh, we can’t do that.
[00:38:05] Patrick: Yep. And I think that’s a great point. And I appreciate that the IRS has come looked very closely at how you operate things and said, okay.
[00:38:13] Patrick: Uh, you’re free continue, uh, doing business as normal. And I want to touch base on the CPA thing too, because I, oftentimes we find our clients are the wealthiest. Uh, client that the CPA has, they’ve just grown to a point. They’ve been with that person for a long time. And, and the problem is, is their complexity surpasses the, the abilities of the CPA, and unfortunately we see CPAs when they are unsure, the answer becomes no.
[00:38:39] Patrick: I’m not familiar. So no. And so we’ll show up and be like, Hey, here’s where it says this in the code. And, uh, we’re not making anything up here. And if there’s still like, no, okay, that’s fine. Uh, we’re happy to Mr. Client either work with his CPA and not take advantage of the tax strategy. You can pay a few extra a hundred thousand dollars this year in income tax, or we’ll introduce you to somebody that’s, you know, uh, familiar with, uh, CPAs.
[00:39:07] Patrick: You know, these types of strategies and understand them. And I think that’s just an important piece too. It’s like, if you’re listening to this and you’re, you’ve outgrown your CPA, uh, we can get you plugged into somebody that, um, you know, isn’t, isn’t afraid to, uh, utilize these sections of the code that were designed.
[00:39:22] Patrick: Yeah. I,
[00:39:23] Speaker 2: I, yeah. And what I’m seeing too, Pat, is honestly over the last six months, if not more, um, more tax planners like you guys coming out, because honestly, I don’t know what value they’re going to bring to the, Their client down the road. I mean, AI, you know, my, my daughter’s a CPA. She told me she was, she was at the way for a couple of years and now she works for me, but she told me that you’ll probably get the best tax return you ever got.
[00:39:48] Speaker 2: Once AI is a hundred percent doing it because the tax code is so complex. I mean, they don’t know. And, and by the way, if you’re dealing with somebody CPA, 20, 30 years career. Who up
[00:40:06] Speaker 2: with all the changes? don’t want that job. I, g So, so, but at the same t your, you, you do grow yo of your successful enterp a one man, two man show, Group and enroll small part town or when you want to support that person. I get all that. I, I, I respect that, but the reality is, is he doesn’t lose sleep when you’re overpaying in taxes, sleep when you’re not paying enough taxes, that’s when he’ll sleep a
[00:40:34] Patrick: hundred percent.
[00:40:34] Patrick: You know, that’s,
[00:40:35] Speaker 2: I don’t know, I don’t know if you’re aligned in your interests. Unfortunately,
[00:40:39] Patrick: and that’s, that’s a really good point. You know, we think about the CPA business model, like the reality is it’s their job to get the right numbers in the right boxes. It’s not tax strategy. It is not, it is, it is the compliance piece.
[00:40:51] Patrick: And so, uh, their business model isn’t designed to be plugged into you and everything you’ve got going on and understanding in July where your net income is going to be in forecasting through the end of the year. With strategy and cashflow and all those pieces. Like it’s just, it’s not. So, uh, we think it works well to have somebody like us in the mix with the CPA.
[00:41:11] Patrick: Like we’re not trying to get rid of your CPA. We’re not filing your tax return for you, but, uh, A
[00:41:14] Speaker 2: hundred percent. You know, you know what I call it. I call it being an advocate. Who’s your advocate when it comes to your taxes? And I, and I attribute to health care, like who’s your advocate, who is your true advocate when it comes to your own personal health.
[00:41:26] Speaker 2: It’s not your doctor. It’s you know, right? It’s you, you got to be the one to make sure you eat right exercise. The doctor can’t, he could tell you that and he’ll see you once every six months if you’re lucky, you know, do your blood work. But beyond that, I mean, how, how involved is he really? I mean, honestly, right.
[00:41:42] Speaker 2: Well, same thing can be said for the tax account. So you’re, you’re the advocate. You’re the guy bringing the ideas, the strategies. You’re you’re the, you know, I’ll call you the functional medicine guy
[00:41:51] Patrick: for taxes, right? Yeah. I was going to use that same analogy. It’s like, I have a concierge doctor that I do quarterly blood draws and it is.
[00:41:59] Patrick: It is proactive and he’s giving me feedback, right? Where the traditional primary care doctor is a sick care doctor. I only go there when I’m sick. Right. And it’s same thing with my CPA. I’m only going there after the fact. Like there’s nothing I can do about it. What’d you do to
[00:42:14] Speaker 2: prevent the injury?
[00:42:16] Patrick: Right.
[00:42:16] Patrick: Yep. We’re going to just look back, see what happened last year. Get the right numbers in the right box. I call it the wound of the dead, right? They count the wound of the dead.
[00:42:22] Speaker 2: The battle’s been fought. That’s what I’m dealing with right now. I hear these clients say, Oh, I’m doing tax planning. Tax planning is not calling up and telling you what you owe in taxes.
[00:42:30] Speaker 2: That’s not a tax plan.
[00:42:31] Patrick: Yes. If the tax plan starting in December, there’s a problem,
[00:42:34] Speaker 2: right? It’s old. Yeah. But you know what? God bless business owners. They get busy and this is what they’re used to, right? Unless they have to change. So,
[00:42:42] Patrick: yeah. So this is great. So I think if I’m going to summarize the plan for what it looks like to start with a captive in my mind, I go, okay, let’s.
[00:42:53] Patrick: Let’s assess our free cashflow. Let’s start there and see what dollars we’ve got available after our liquidity is protected to put into tax strategy. Then I’m going to take a look at, okay, what risks do I have out there that can take me out? Right. And I think that’s where now it makes sense to get in touch with you, van, and your team and go, all right, let’s, let’s, let’s start
[00:43:12] Speaker 2: assessing
[00:43:13] Patrick: that.
[00:43:13] Patrick: And no cost, by the way, to the, to the business owner,
[00:43:15] Speaker 2: by the way.
[00:43:16] Patrick: Yeah. And then, then from there, it’s like, okay, now, now I have to decide which of those risks I want to, you know, pay the premiums on, which, you know, I, I’m not that concerned about, uh, how much of the tax bill I want to take a bite of. And then, then I, I have to make those fundings and just to be clear.
[00:43:33] Patrick: What you’ll
[00:43:33] Speaker 2: get from us, Pat, just so you know, we’ll give the client the ceiling of what they can contribute based on gross revenues and based on their risk assessment. And then we’ll give them the ceiling anything below that ceiling. We’re perfectly good with. So we’re always going to give them the top tier number.
[00:43:44] Speaker 2: Any below that number we’re good with. And so there is that flexibility as well, and we got to be that flexible today in the world today, the world of business. So
[00:43:52] Patrick: sure. And just to, just to clarify that, that top tier number is some of that’s limited by what the IRS says we can put in. Another is just maybe some rules of thumb around.
[00:44:01] Patrick: Look, it only makes business sense. To write fund a certain percentage of gross revenue into a captive, anything above that the IRS is going to look at and go, this isn’t maybe passing the sniff test. Um, and then the third piece is like, how are the actuaries pricing these, these risks? And, you know, I might be limited there just because there’s, there’s not enough.
[00:44:21] Speaker 2: What you’re describing is everything. That’s exactly what would happen.
[00:44:25] Patrick: Great. All right. So this is, uh, this is fantastic. And then I think about this and, you know, sort of two different potential outcomes. You know, the first outcome, you know, I put a captive into my, my business structure, right? You know, I’ve got the C corp that now is going to help me offset some risk.
[00:44:43] Patrick: I’m paying less tax. Uh, you know, at the end of the day, I’m sleeping well, cause I know that, uh, you know, I’m, I’m not sending huge checks to the IRS, where if I don’t do that, you know, I’m, I’m exposed to more risk, I’m paying more tax, like none of those things sound like they’re, and honestly,
[00:44:59] Speaker 2: you can’t expect the government to bill you out.
[00:45:01] Speaker 2: I mean, even though you paid the big tax bill last year, right? I mean, it’s not gonna, it’s not the way it works. Right.
[00:45:05] Patrick: Right. Yeah,
[00:45:06] Speaker 2: absolutely. And,
[00:45:07] Patrick: and I think you, you, you hit on a really important thing, you know, cause I was. Not terribly excited about, you know, PPP dollars. Now we own a number of businesses.
[00:45:15] Patrick: My wife has a business. She’s in the senior housing side. Like that, that, that industry got destroyed by COVID. Right. Uh, and it was so good to have PPP, but I also think about it from the context of like, You know, it weeds out the weak ones, right? Like if you don’t have your liquidity, you don’t have your captive in place, like maybe those businesses shouldn’t exist.
[00:45:35] Patrick: Uh, and again,
[00:45:37] Speaker 2: crazy is to, to your, what are we seeing now? We’re seeing businesses in the local areas and some national companies going out that probably were not being managed to begin with. And PPP just strung them out a little bit longer. That’s what I see. I’ve been shocked by some of the announcements in this past last six, couple months about bankruptcy.
[00:45:55] Speaker 2: And you’re like, you’re going away. Big lots is a good example. If you’re from a big lots, but
[00:46:01] Patrick: it
[00:46:01] Speaker 2: was like almost 400 stores closed and that was a low budget type furniture type store, which you thought they’ve done okay, but now they’re out of, I just find it interesting. You know, it’s like, did they delay, did we delay all that through these government programs to your
[00:46:13] Patrick: point?
[00:46:13] Patrick: Yeah. Yeah. Yeah. I absolutely, you know, PPP is one. We’ve got, you know, uh, employee retention tax credits, which, you know, was, uh, kind of interesting. And I’m thinking there’s going to be some audit that comes back around there and people are going to have some issues and some of these pop ups. We’re seeing it.
[00:46:31] Speaker 2: We’re seeing it.
[00:46:32] Patrick: Yep.
[00:46:32] Speaker 2: So, yeah.
[00:46:33] Patrick: So I, I think that’s something to be wary of. If you took ERC money is like, you know, You know, pay attention to that, you know, there wasn’t an application process just because you got, it doesn’t mean you won’t get audited and have to pay it back. Um, you know, and then even some of the, um, you know, the EIDL loans, like that was super cheap money and people took it.
[00:46:52] Patrick: And again, those dollars could be propping businesses up. And, uh, you know, again, I don’t know. It almost to your
[00:46:58] Speaker 2: point, it’s like renting or versus owning. Are you, how well are you treating your company when you get this much free money? Are you really managing it? Well, I don’t know.
[00:47:06] Patrick: Yeah. I love it. So van, I think just looking and talking through all of this, you know, on, on one hand, it’s like we, we can take somebody from a struggling entrepreneur.
[00:47:15] Patrick: That’s got risks that are addressed a huge tax bill to, uh, we’ll call it the thriving business owner that it’s like, okay, cool. I’m, uh, paying less tax. I’m building more wealth. And, uh, at the end of the day, I’m, I’m living a great life. So this has been great. Anything else that we haven’t talked about that we should have talked about, uh, you know, the
[00:47:36] Speaker 2: risk, the risk part of and we, we do, we, you know, if you’re a successful business owner, you’ve got employees, you care about them dearly.
[00:47:44] Speaker 2: You’ve, you’ve done everything right. Um, it’s, it’s another tool in the toolbox, Pat. It’s not a silver bullet. By no means. We’ve talked about some of the calculated risk of sharing risk and all those things, but, you know, know, again, it’s, it’s, the due diligence, the dr really hammering down und this may not be the best, be the right time for you long as you’re in business a client of ours.
[00:48:08] Speaker 2: Um, and You won’t start to understand more risk, unfortunately. Um, you know, because as you, uh, once you get there, once you get to the side of the thing, you keep spending more money to grow sometimes doesn’t make sense. So meanwhile, I still got to maximize the profits of my company. And we, we do that for you.
[00:48:26] Speaker 2: And we hedge the downside to your point earlier about, about the downside of this business in general. And so to me, it’s just, you know, and here’s the other thing I would say to you. It’s, it’s the more unique business you have. Probably the more exclusions and less coverage as you think you have on your policy.
[00:48:43] Speaker 2: Cause the insurance company takes one policy, one glove fits all type of mentality. So the more unique business you have probably the more exclusions and more gaps and coverage as you even have, unfortunately yourself. So that’s one good thing about our business is we get to find out how people make money in this country.
[00:48:57] Speaker 2: And I’m sure it’s one of the things you like doing every day. Boy, I wish I would’ve thought of that, right? I mean, I say it all the time. I just love business owners that have come up with really unique ideas and ran with it and turn it into a profitable company. Not easy to do, you know, so, uh, no, I just, again, it’s a tool in a toolbox for the right client.
[00:49:15] Speaker 2: It’s a great tool.
[00:49:17] Patrick: Yep. I agree. And, you know, just a quick review where I think this falls in our tax strategy. The level one strategies are the IRS gives us guidance, but it doesn’t take any investment. Okay. So this is things like Augusta rule, home office, deduction, QBI deduction, some of those Some of those like just good administration tools.
[00:49:36] Patrick: Level two is the IRS gives us guidance, but we have to invest dollars. So 401k, you know, IRA sort of straight down the middle of the fairway level three is the IRS isn’t giving us any guidance, but we’re combining sections of the code to create efficiencies. And this is where we think, uh, 831B falls, uh, captive insurance.
[00:49:54] Patrick: It’s, it’s one of those things that needs to be administered well, right? Like this isn’t something you can go set up on your own. You gotta be working with somebody that understands it, does it well. And then, uh, it’s got tremendous benefits over the longterm. I think the, if I’m looking at the only downsides, right, is.
[00:50:10] Patrick: You know, these have been abused in the past. So the IRS is going to just take a look and make sure that it’s, it’s being done well. And having, uh, SRA 31 involved makes a huge difference. And then, um, there’s also the, the aspect of it costs a little more money to administer these types of plans. But again, compared to the tax we’re paying and the risk we’re taking off the table, uh, worthwhile.
[00:50:32] Patrick: So
[00:50:32] Speaker 2: no, a hundred, a hundred, a hundred percent. And I, and I hope with time we will be at that second tier. And I, and I think. I don’t think it’s, it’s, it’s not years. It’s a couple of years where we’ll be at the second tier. Absolutely. I’m 100 percent convinced of what I’m seeing right now. And really, it’s because of what’s going on in traditional insurance right now.
[00:50:50] Speaker 2: It’s just, it’s make it very, very difficult for, for business owners to, uh, Manage their risk overall. Plus just their traditional insurance. Unfortunately. So
[00:51:01] Patrick: this has been great, Ben. Thank you so much for all of your insight into a 31 B captives and, uh, how they can be such a useful tool for the entrepreneur.
[00:51:09] Patrick: I appreciate it.
[00:51:11] Speaker 2: Yeah. Thank you.
[00:51:11] Patrick: Appreciate your time. Thank you so much for tuning into this episode of the vital wealth strategies podcast. I hope you found today’s conversation with Ben Carlson insightful. This fits nicely into our mission here. On the vital wealth strategies podcast to help you minimize your taxes, master wealth through utilizing eight 31 B captives to not only grow, but protect what you’ve built.
[00:51:34] Patrick: We do all this planning so that at the end of the day, you can live an optimized life. If you enjoyed this episode, please share it with someone who could benefit from learning about 831B plans, risk management, and building long term business resilience. It’s one of the best ways to help others and grow our community of vital entrepreneurs.
[00:51:53] Patrick: And remember, you’re vital because you’re the backbone of our economy, creating opportunities for your employees and driving growth. You’re vital to your family, fostering abundance and security in all aspects of life. And you’re vital to me because you’re committed to building wealth, making an impact and living a truly great life.
[00:52:10] Patrick: Thank you for being a part of our growing community of entrepreneurs. And I’m looking forward to meeting you back here next time on the vital wealth strategies podcast.