The Pitch You May Have Heard

A micro-captive insurance arrangement is a powerful tax-and-risk planning structure where a profitable business creates—or participates in—a small insurance company that elects under Internal Revenue Code §831(b) to be taxed only on its investment income. In concept, the structure allows a business to insure its own risks, deduct the premiums it pays, and accumulate reserves tax-efficiently. In practice, the version most often pitched to mid-market business owners has become one of the most heavily scrutinized arrangements in federal tax law.

If you own a profitable business, chances are someone has already presented this strategy to you. The promise typically sounds compelling:

• A six- or seven-figure annual deduction against operating income
• Tax-advantaged reserve buildup that grows outside the operating business
• Coverage for risks that are difficult to insure commercially—loss of key person, loss of key customers, brand rehabilitation, cyber liability, regulatory actions
• An eventual exit at long-term capital gains rates, or with no federal tax at all if the rights are placed inside a trust, retirement plan, or private placement life insurance policy

The pitches are sophisticated and often delivered by polished promoters with persuasive case studies. They deserve a careful, fact-based response. At Cestia Wealth Management, we believe wealth is a verb, not a noun—and that distinction matters most in moments like these. A real wealth-building tool earns its place by what it does in real life, not by what it promises on a slide deck. The honest answer is that captive insurance can be a legitimate planning strategy, but the version most commonly marketed to mid-market business owners deserves the same rigor you would bring to any consequential financial decision.

How Captive Insurance Actually Works

A captive is an insurance company owned by, or affiliated with, the business it insures. Large corporations have used captives for decades to manage genuine risks the commercial market either will not cover or prices punitively. Under §831(b), a small captive earning $2.85 million or less in annual premiums (the 2025 threshold) can elect to pay tax only on investment income.

The statute was enacted to give legitimate small captives a workable tax framework—not to create a tax-deferral vehicle for operating income. When structured thoughtfully, a captive can replace or supplement commercial coverage with policies tailored to your business’s actual exposures, build a reserve that supports a true claims function, and provide leverage in negotiations with commercial insurers. These are real, meaningful benefits. The challenge is that they are often not the benefits being sold in promoter pitches.

What the IRS Has Said—Repeatedly

Since 2015, the IRS has included micro-captive arrangements on its annual “Dirty Dozen” list of abusive tax schemes nearly every year. Puerto Rico–domiciled and other foreign captive arrangements have been called out specifically.

The pattern the IRS has challenged repeatedly tends to follow a recognizable shape:

1. An operating business deducts large premiums paid to a related captive insurer
2. The insured risks are exotic, remote, duplicative of existing coverage, or otherwise unlikely to produce claims
3. Premiums are not actuarially determined — they are sized to a desired tax outcome
4. The captive pays few or no claims, year after year
5. Reserves accumulate inside the captive, taxed favorably
6. Funds eventually return to the owner through dividends, loans, transfers, or structured “exit” mechanisms at preferential rates

In the IRS’s view, this is not insurance. It is a tax shelter wearing an insurance costume. The Service has had remarkable success defending that view in court.

The Track Record in Court

The IRS has prevailed in nearly every contested micro-captive case to reach the Tax Court since 2017. The leading decisions include:

• Avrahami v. Commissioner, 149 T.C. 144 (2017) — the first major taxpayer loss. The court found the arrangement lacked genuine risk distribution and did not constitute insurance in the commonly accepted sense.
• Reserve Mechanical Corp. v. Commissioner, T.C. Memo. 2018-86, affirmed 34 F.4th 881 (10th Cir. 2022) — similar findings against an offshore captive in Anguilla.
• Syzygy Insurance Co. v. Commissioner, T.C. Memo. 2019-34 — premiums far in excess of actuarial support; coverages that duplicated existing commercial policies.
• Caylor Land & Development, Inc. v. Commissioner, T.C. Memo. 2021-30 — circular flow of funds; the captive was not operated as a bona fide insurer. Notably, this was the first micro-captive case in which the Tax Court sustained accuracy-related penalties.

Across these cases, courts have applied a consistent four-part framework derived from the Supreme Court’s decision in Helvering v. Le Gierse, 312 U.S. 531 (1941). A true insurance arrangement must involve (1) insurance risk, (2) risk shifting, (3) risk distribution, and (4) the commonly accepted meaning of insurance. Promotional structures repeatedly fail one or more of these tests.

The January 2025 Final Regulations

On January 14, 2025, the Treasury Department and IRS finalized regulations (T.D. 10029, 90 Fed. Reg. 3534), codified at Treasury Regulations §§1.6011-10 and 1.6011-11, classifying certain micro-captive arrangements as listed transactions—the most serious category of reportable transaction—and others as transactions of interest. For business owners participating in these arrangements, the implications are significant.

Both classifications carry meaningful consequences:

• Participants must file Form 8886 (Reportable Transaction Disclosure Statement); material advisors must file Form 8918
• Penalties for failure to disclose are separate from any tax adjustment. Listed-transaction non-disclosure penalties under §6707A can run as high as $200,000 per failure for entities
• Accuracy-related penalties can range from 20% to 40%, with up to 75% available for gross valuation misstatements, plus interest
• Disclosure obligations reach back to any tax year still open under the statute of limitations
• The IRS concurrently issued Revenue Procedure 2025-13, providing a streamlined method to revoke a §831(b) election for taxpayers who wish to exit

A first wave of disclosures was due in April 2025, with relief extended through July 31, 2025 under Notice 2025-24. The regulations are facing legal challenges from industry participants, and those cases may eventually modify the regulations’ reach. They will not, however, retroactively protect taxpayers whose underlying arrangements fail the four-part insurance test the courts have already articulated.

Red Flags in the Pitch

If you have been pitched a captive insurance proposal—or you are an advisor whose client has been—the following signals warrant serious scrutiny. Each represents a pattern the IRS and the Tax Court have specifically identified in arrangements they have rejected.

1. Tax benefits are the headline.

Real insurance is purchased for risk management; favorable tax treatment is a secondary effect. When a presentation devotes more time to “income tax arbitrage,” “exit at long-term capital gains,” or “assets manufactured with pre-tax dollars” than to claims handling and underwriting, the priority is being made explicit.

2. The coverages duplicate existing policies or insure improbable risks.

Loss of key person, loss of key supplier, and brand rehabilitation are real exposures. In many marketed structures, however, they overlap with coverage the business already carries, or are written so narrowly that claims are unlikely to occur.

3. Premiums are not based on an independent actuarial study.

Legitimate captives engage qualified actuaries to price coverage based on the insured’s loss experience and exposure. Reverse-engineering premiums from a desired deduction is a hallmark of the structures the IRS has challenged successfully.

4. The captive pays few or no claims.

A loss ratio under 30% over time is, by the IRS’s own threshold, a signal of a listed transaction. A captive that “never has claims” is not functioning as insurance.

5. The exit strategy is more developed than the risk-management strategy.

Promotional materials that detail PPLI wrappers, IRA placements, dynasty trust structures, and option-based cash settlements before they describe the underwriting process are telling on themselves.

6. The captive is offshore without a business reason.

Puerto Rico, Bermuda, the Cayman Islands, and similar jurisdictions can host legitimate captives. The choice of jurisdiction should be driven by regulatory and economic factors, not solely by tax. The IRS has specifically flagged Puerto Rican captive arrangements in its Dirty Dozen guidance and has an active compliance campaign on Puerto Rico Act 22/60 investor structures.

7. The promoter discourages independent legal review.

No legitimate planner should object to independent counsel — chosen by the client, not by the promoter — reviewing the structure before implementation.

What a Legitimate Captive Looks Like

This is not an argument that every captive is abusive. Captive insurance is a real and useful risk-management tool when the structure is built around the four pillars of insurance:

• Real risks your business actually faces and that are not already adequately addressed
• Premiums supported by independent actuarial analysis tied to those risks
• Genuine claims activity processed through documented procedures
• Operation as a real insurer—adequate capitalization, regulatory compliance in the domicile, true underwriting discipline

When those conditions hold, a captive can both manage risk efficiently and produce tax-favorable outcomes that are a legitimate consequence of insurance economics—not the primary purpose of the structure.

Michael Kitces, Head of Planning Strategy at Focus Partners Wealth and publisher of the Nerd’s Eye View blog, has written thoughtfully about §831(b) captives from a planner’s perspective. While acknowledging the concept as a legitimate strategy historically used by larger businesses, he observes that the tax savings are ultimately a form of tax deferral with some rate arbitrage, and that the setup and ongoing administrative costs of operating a real insurance company rarely justify the structure unless the business is already paying substantial commercial premiums and has many millions in revenue. His broader caution—echoed across the planning profession—is that most arrangements pitched primarily on tax savings “don’t hold up at all once the math is really scrutinized.”

Key Considerations Before You Sign On

If a captive arrangement is on your desk, a measured due-diligence path looks like this:

1. Identify the real risk-management problem the captive is meant to solve, documented independently of the promoter’s framing.
2. Engage independent tax counsel—not selected or paid by the promoter—with specific litigation experience in micro-captive cases.
3. Obtain an independent actuarial study sized to your actual exposures.
4. Review the four-pillar insurance tests against the proposed structure with the CPA who will sign the return that takes the deduction.
5. Understand the disclosure obligations under T.D. 10029 in advance. Determine whether the arrangement will require Form 8886 reporting.
6. Read the actual policies. Coverages, exclusions, claims procedures, and definitions must be specific and meaningful.
7. Verify the captive’s operations. Capitalization, claims history, underwriting standards, and regulatory standing in the domicile should all withstand scrutiny.

Key Considerations If You Are Already Participating

If you are currently part of a micro-captive arrangement, the appropriate response depends on the structure’s substance—not on the promoter’s reassurances:

• Determine your disclosure obligations under T.D. 10029 immediately. The deadlines are not optional.
• Have the arrangement independently audited for insurance substance—by an advisor who is not the promoter.
• Consider Revenue Procedure 2025-13 for streamlined §831(b) revocation if the captive cannot be made compliant.
• Consult independent tax counsel about amended returns, voluntary disclosure options, and accuracy-related penalty exposure.
• Do not rely on assurances from material advisors who themselves have disclosure and penalty exposure tied to the transaction.

Conclusion

By thoughtfully evaluating these factors with independent counsel and a clear-eyed view of the substance underneath the structure, you can determine whether a captive insurance arrangement genuinely supports your business and your wealth strategy—or simply puts both at risk. The math, the marketing, and the regulatory landscape all deserve the same scrutiny you would bring to any consequential financial decision.

At Cestia Wealth Management, we believe wealth is a verb, not a noun. The decisions you make under pressure—including which strategies you say yes to, and which you decline—are part of the story your wealth tells. Captive insurance, used thoughtfully, can be a meaningful part of that story. Used incautiously, it can become a costly chapter you would rather not write.

This is precisely the kind of decision where Advice Alpha—the excess return generated by thoughtful, independent guidance—is built. When the math is complex, the marketing is polished, and the stakes are high, our role is to bring clarity.

We are not anti-captive. We are pro-substance. A legitimate captive insurance arrangement can be a powerful planning tool for the right business in the right circumstances. The version most frequently marketed to mid-market business owners, however, deserves rigorous review before you participate—and an honest reassessment if you already do.

References

Avrahami v. Commissioner, 149 T.C. 144 (2017).

Bloomberg Tax. (2023, April 14). Microcaptives to find one tax penalty tougher to beat.

Caylor Land & Development, Inc. v. Commissioner, T.C. Memo. 2021-30 (U.S. Tax Court 2021).

Cherry Bekaert. (2025, February 20). Micro-captive insurance: IRS final regulations. 

CIC Services, LLC v. Internal Revenue Service, No. 3:17-cv-110 (E.D. Tenn. Mar. 21, 2022).

Helvering v. Le Gierse, 312 U.S. 531 (1941).

Internal Revenue Code, 26 U.S.C. §§ 162, 831(b), 6662, 6707A (2024).

Internal Revenue Service. (n.d.). Abusive tax shelters and transactions. 

Internal Revenue Service. (n.d.). Dirty Dozen tax scams.

Internal Revenue Service. (2025). About Form 8886, Reportable Transaction Disclosure Statement. 

Internal Revenue Service. (2025). About Form 8918, Material Advisor Disclosure Statement.

IRS Notice 2025-24 (extending initial micro-captive disclosure deadline to July 31, 2025).

Kitces, M. (2019). 831(b) captive insurance companies: A legit tax strategy? Nerd’s Eye View.

KPMG. (2025, January 10). Final regulations: Micro-captive listed transactions and micro-captive transactions of interest. 

Plante Moran. (2025, March 10). Final regulations on micro-captive insurance transactions. 

Reserve Mechanical Corp. v. Commissioner, T.C. Memo. 2018-86 (U.S. Tax Court 2018), aff’d, 34 F.4th 881 (10th Cir. 2022).

Rev. Proc. 2025-13 (streamlined process for revoking a § 831(b) election).

RSM US LLP. (2025, March 24). Final regulations make micro-captive insurance arrangements listed transactions. 

Syzygy Insurance Co. v. Commissioner, T.C. Memo. 2019-34 (U.S. Tax Court 2019).

The Tax Adviser. (2025, June). Microcaptive insurance arrangements subject to new rules. American Institute of Certified Public Accountants. 

Winston & Strawn LLP. (2025, February 4). Micro-captive reportable transactions regulations finalized; challenged. 

Disclosures

1. Cestia Wealth Management is not a legal tax professional. We offer tax gap analysis for clients who desire to have a comprehensive financial plan, which requires in-depth tax strategy and planning as a distinct part of the overall customized solution. Please consult your tax professional on all matters addressed in this report.
2. Wealth Mechanics™ is a registered trademark of Cestia Wealth Management. Unauthorized use of the trademark, including but not limited to commercial use, reproduction, or imitation without explicit written permission from Cestia Wealth Management, is strictly prohibited.
3. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.
4. Citations to Internal Revenue Code sections, Treasury regulations, IRS notices and revenue procedures, and Tax Court decisions reflect guidance and case law in effect as of the date of publication and are subject to change.
5. Advisory services offered through NewEdge Advisors, LLC, a registered investment adviser. Securities offered through NewEdge Securities, LLC. Member FINRA/SIPC. NewEdge Advisors, LLC and NewEdge Securities, LLC are wholly owned subsidiaries of NewEdge Capital Group, LLC.
6. This material was prepared with the assistance of AI.  All content has been reviewed, edited, and approved by Cestia Wealth Management prior to use.

The post Evaluating Micro-Captive Insurance: A Mindful Review of a Marketed Tax Strategy appeared first on Cestia Wealth Management.

What Is the Spencer Stuart CEO Survey?

The Spencer Stuart CEO Survey is conducted annually by Spencer Stuart’s Global Board & CEO Practice, gathering input from more than 1,000 CEOs and over 1,000 corporate directors across industries. The survey explores how leaders think about: culture and talent, strategic decision-making, uncertainty and disruption, governance and communication, board or advisory alignment, and succession readiness.

It is one of the few large-scale qualitative studies where leaders openly share what keeps them focused, what challenges them, and where they believe organizations succeed or fall short.

Why This Matters—Even for Small and Mid-Sized Businesses

Although the survey draws heavily from global organizations, its lessons are highly applicable to owner-led and privately held companies. Most leadership challenges are not “Fortune 500 problems”—they are human problems, which show up in companies of every size. Common struggles and growth areas referenced by many executives are:

• How do we communicate clearly?
• How do we attract and retain the right people?
• How do we keep culture healthy as we grow?
• How aligned is our leadership team?
• Are we prepared for succession or unexpected change?

These qualitative leadership tenets—clarity, culture, communication, alignment, and readiness—are the very factors surveyed CEOs cite as central to performance. For smaller companies, these issues are often even more influential because a single leadership gap can have a disproportionate organizational impact. The survey’s greatest value is giving business owners a way to compare their leadership practices to those used by high-performing peers across the country and around the world.

Key Themes Business Owners Should Pay Attention To

Recent survey findings highlight several leadership priorities that translate directly to the small-business environment:

1. Culture and Talent Continue to Take Center Stage: Leaders consistently rank culture and people priorities above technology or economic concerns. For smaller firms—where every person plays an outsized role—culture is often the single greatest determinant of success.
2. Uncertainty Is the New Normal: CEOs report high levels of volatility in markets, regulations, and workforce dynamics. Strong communication, adaptability, and clarity of purpose allow smaller businesses to stay resilient.
3. Leadership Alignment Matters More Than Ever: A common theme in the survey is the gap between how leaders believe they are aligned and how aligned they actually are. In a privately held business, misalignment between owners, managers, or key employees can slow decisions and weaken execution.
4. Succession Planning Is a Persistent Weak Spot: Even large organizations struggle with leadership succession. For owner-led businesses, succession is not only a practical concern—it affects continuity, value, and the long-term stability of the enterprise.

How Business Owners Can Use This Resource

The Spencer Stuart CEO Survey offers an accessible way for owners to:

• Benchmark their leadership focus
• Identify gaps in communication or alignment
• Strengthen decision-making and team clarity
• Improve cultural health
• Prepare for future leadership transitions
• Bring structured leadership conversation into owner, board, or management meetings

You don’t need to be a Fortune 500 CEO to benefit from world-class leadership thinking. These insights help business owners sharpen the qualitative side of management—the side that drives performance but rarely shows up on a balance sheet.

Disclosures

1. Cestia Wealth Management is not a legal tax professional. We offer tax gap analysis for clients who desire to have a comprehensive financial plan, which requires in-depth tax strategy and planning as a distinct part of the overall customized solution. Please consult your tax professional on all matters addressed in this report.
2. Wealth Mechanics™ is a registered trademark of Cestia Wealth Management. Unauthorized use of the trademark, including but not limited to commercial use, reproduction, or imitation without explicit written permission from Cestia Wealth Management, is strictly prohibited.
3. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.
4. Advisory services offered through NewEdge Advisors, LLC, a registered investment adviser. Securities offered through NewEdge Securities, LLC. Member FINRA/SIPC. NewEdge Advisors, LLC and NewEdge Securities, LLC are wholly owned subsidiaries of NewEdge Capital Group, LLC.

The post Managing Human Capital with the Spencer Stuart CEO Survey appeared first on Cestia Wealth Management.

The Connelly decision mandates that life insurance proceeds used to fund the redemption of a deceased business owner’s shares must now be included in the business’s estate valuation for tax purposes. This ruling presents a potential tax trap for many business owners relying on entity purchase or stock redemption agreements, as it could significantly inflate estate values, increasing the overall tax burden at death. With estate taxes potentially reaching 40%, this could drastically reduce the wealth passed on to your heirs or partners.

Why This Matters for Business Owners

Previously, many business owners leveraged life insurance proceeds in these buy-sell agreements to provide liquidity for seamless transitions. For example, when a business partner passed away, the insurance payout funded the repurchase of shares, allowing surviving partners to continue operations smoothly. Now, under Connelly, those proceeds are taxable as part of the estate—meaning business owners might be unintentionally inflating their tax liability.

This shift raises significant concerns for those with entity purchase agreements, as it could result in a higher-than-expected business valuation at the time of an owner’s death. For businesses that have invested in estate planning or those looking to transition ownership efficiently, this can be a costly oversight.

Exploring Alternative Solutions

Given this new legal framework, it’s essential to reevaluate your current buy-sell agreements. One potential strategy is shifting from an entity purchase or stock redemption agreement to a cross-purchase agreement. Unlike entity purchase agreements, in cross-purchase setups, each business partner owns a life insurance policy on the other, and the payout does not affect the business valuation.

This structure can help mitigate the estate tax consequences triggered by Connelly, allowing the surviving partners to purchase the deceased partner’s shares directly. Though cross-purchase agreements tend to work best for smaller businesses with fewer partners, this alternative can prevent the unwanted tax burdens now posed by entity purchase agreements. Additional strategies  for common buy-sell techniques include:

• Entity purchase/Stock redemption
• Cross purchase
• Wait-and-see
• Right of first refusal
• One-way buy-sell
• Trusteed buy-sell
• Cross endorsement buy-sell
• Special purpose LLC buy-sell
• Wealth transfer techniques
• Funded or unfunded

Time to Act

As the tax environment evolves, so must your financial planning strategies. At Cestia Wealth Management, we educate business owners on the changing landscape. It’s important to act now by working with a financial advisor to review your existing agreements and explore more tax-efficient options.

Don’t wait until it’s too late—get in touch with us today to learn how the Connelly ruling affects buy-sell agreements and estate tax implications.

SOURCES

1. Adopted by Securian Financial
2. Connelly v. US, 144 S Ct 1406. (2024)
3. Connelly v. United States, Case No. 4:19-cv-01410-SRC (E.D. Mo. Sep. 21, 2021)
4. Estate of Blount v. Commissioner, 428 F.3d 1338 (11th Cir. 2005)
5. Estate of Cartwright v. Commissioner, 183 F.3d 1034 (9th Cir. 1999)
6. Connelly v. United States, 70 F4th 412 (8th Cir. 2023)
7. Connelly v. United States, 70 F4th 412, (8th Cir. 2023), cert. granted, 2023 WL 8605743, No. 23-146 (S.Ct. Dec. 13, 2023)
8. https://ballotpedia.org/Connelly_v._Internal_Revenue_Service (p. 46) Id.
9. (pp 50-51)
10. Connelly v. US, 144 S Ct 1406. (2024)

Disclosures

1. Cestia Wealth Management is not a legal tax professional. We offer tax gap analysis for clients who desire to have a comprehensive financial plan, which requires in-depth tax strategy and planning as a distinct part of the overall customized solution. Please consult your tax professional on all matters addressed in this report.
2. Wealth Mechanics™ is a registered trademark of Cestia Wealth Management. Unauthorized use of the trademark, including but not limited to commercial use, reproduction, or imitation without explicit written permission from Cestia Wealth Management, is strictly prohibited.
3. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.
4. Advisory services offered through NewEdge Advisors, LLC, a registered investment adviser. Securities offered through NewEdge Securities, LLC. Member FINRA/SIPC. NewEdge Advisors, LLC and NewEdge Securities, LLC are wholly owned subsidiaries of NewEdge Capital Group, LLC.

The post How the Connelly Ruling Affects Buy-Sell Agreements and estate tax implications. appeared first on Cestia Wealth Management.