Other Family Office Concepts:
- To get rich you need to concentrate (business not salary job)- to stay rich you need diversification (accumulation mode)
- I have a blockfi account was trying to get coinbase but I gave up because it took more than a couple hours because my time is better spend on real estate deals. No offense but if you work 40-50 hours a week at a JOB then you likely have some time on your hands and should find a side gig.
- Avoid locker room talk – common guy deals or sucker deals – “we are going to 8-12x in the next few years but you need to get in now” – what would happen in the show SharkTank
- For 100M net-worth families – the goal is to have 8-12 non correlated asset portfolio
- Cash is trash – (inflation is a lot higher) 40 years Bull market in Bonds ended last year. $128T globally is looking for parking 😊 (2021)
- Don’t chase what is running (Crypto, tech)
- If bonds can’t give yield where do we get it? Buy businesses (alts)
- Ajay Gupta (The guy Tony Robbins dumped Peter Mallouk)
- 50% Real Estate (40% cashflowing MFH and Self Storage – 10% land/preserve value)
- 20% Equities (Global with most in USA)
- 20% Private Equity (Trying to shift from LP to GP – 2/20 model to adding in sweat equity for more returns), Asymmetric
- 5% Insurance/Life settlements/Tailrisk/buying puts
- Tailrisk (insurance) – 2-3% of any bet/investment hedges your investment so should your investment go bad that 2-3% greatly increases to offset your loss.
- 2-3% Crypto – If not real estate where you do get storage of wealth, gold/silver
- *Re-shuffle asset allocation – do it when things are good (selling the good ones, increasing the losers)
- Asymmetric risk seems get you wealth but its the same thing to get you to lose it all (See Kyle Bass) – This is the drink your wine if it fails
- What is the downside (if you can live with it then go)
- NFTs – collectables always move in waves (buy two cases of wine and save one drink the other)
- “The difference between someone with a hundred dreams and only one is Health”
Captive Insurance (for high net worth business owners):
Basically you start your own insurance company and self insure.
Basic self-insurance involves business owners (typically sole proprietors) who decided to forego traditional insurance coverage to insure against losses themselves. This usually involves setting aside money in a savings account to pay for future losses.
Self-insurers transfer all risk of loss from the insurance company to themselves but save money in premiums paid to insurers.
Captive insurance is a more formal arrangement than pure self-insurance involving the creation by the business of its own insurance company that is formally regulated by state administrators but that benefits from significant tax incentives not available to self-insurers.
There are two benefits: 1) protect their business against catastrophic losses, create customized coverage to account for unique risks that may not be available through traditional insurance companies, and most importantly, 2) grow the contributed premiums (i.e., war chest) by taking advantage of
pre-tax premium payments that can be invested in your blend of alternative and traditional assets.
Many business owners who are presented with the idea of captive insurance are initially hesitant. Why?
Many reasons have to do with the burden of administration or the potentially not having enough to cover a truly catastrophic loss.
Here are some of the most common myths I’d like to dispel about captive insurance preventing business owners like many physicians from starting their own captive insurance company:
A Catastrophic Loss Can Wipe Out Everything –
Captive insurance companies can protect themselves against catastrophic losses by buying cost-effective reinsurance coverage.
Captives are Expensive to Administer –
For sole proprietors or small businesses, the costs of administration should be nominal when compared to the significant cost savings.
Traditional insurance premiums include a significant markup to pay for the insurer’s expenses, acquisition costs (including marketing and broker commissions), administration, overhead, and, of course, profit.
Captives Don’t Cover All Risks –
The truth is captive insurance can cover risks that traditional insurance companies are unwilling to cover such as cyber liability. Captive insurance can be used broadly. In general, any issue that could be viewed as a risk to a business is on the table for consideration.
Example:
Let’s take a look at a physician who runs her family practice as a sole proprietor. She forms her own captive insurance to self-insure against malpractice, general liability, her own family’s health insurance, etc..
The doctor incorporates the captive insurance company, owns all its shares, and pays an annual premium of $150,000 to her own insurance company. Her medical practice still gets the same Sec. 162 tax deduction that she would have gotten if she had bought a traditional insurance policy.
Here’s the big difference between owning her own insurance company and paying someone else to cover her risks:
During the life of her captive insurance company, the pre-tax funds contributed to it can be invested and grown tax-free to be used for any potential future claims tax-free.
When the doctor retires, she can liquidate the captive insurance company. The investments made over the years can earn substantial returns and once the funds are liquidated there is no penalty and gains are taxed as long-term capital gains.
The benefits of creating your own captive insurance company can be substantial.
Instead of paying premiums to an insurance company that you’re never going to see again, other than when claims need to be paid out, why not grow that money through investments and keep the reserves for yourself when you retire?
It’s like having a 401(k) but where you direct the investments and where you can take money out without penalty regardless of age.
The Essentials:
More Deep Learning:
- 082 – Fundamentals – Paying for College Expenses with Coverdale’s, 529s, and hacking the Financial Aid with Brad Baldridge
- Coffee Farms 2017 Report
- I bought my coffee parcel in my HSA
- Simple Passive Coffee Farms
- Hacking your HSA / FSA / Flex Spending accounts
- You can also create a charity to deduct almost an infinite amount of income in something you support anyway – example
- We rent – Selling Home In Hawaii (Mini-Series Episode 1)
- Captive Insurance (for business owners that do at least $7M in gross revenue and net at least $1.5M) – A captive insurance company is a small property and casualty insurance company that is privately owned. The purpose of the company is to insure risks of an operating company. The captive insurance company is not created to replace the insurance coverage currently being purchased from a commercial insurance company, but to insure “other risks” that might exist in the operating company. A few examples of such risks might include business litigation, data breach, change in operating environment due to a loss of principal customer, principal vendor or key employee, or regulatory risk. Insured risks could also include current deductibles and exclusions on commercial insurance coverage. These “other risks” are determined by a study conducted by an independent actuarial firm.
The process undertaken and important points to understand are:
• Independent actuarial study of the risks and the pricing of such risks and to determine the business purpose of the coverages.
• Formation and licensing of the insurance company.
• The operating company purchases insurance coverage for the risks determined in the underwriting and feasibility study.
• The operating company takes a tax deduction under IRC 162 (a) for the insurance purchased.
• The captive insurance company makes an election under IRC 831 (b), which allows up to$2.3 million in premium to be exempt from current tax, annually. (The minimum premium that is advisable for the captive program is $350,000 annually.)
• Owners of the insurance company maintain control over the money inside the captive.
• When money is distributed out of the captive insurance company to the shareholders, it is taxed at a preferred tax rate:
o Qualified dividend rate of 20% plus 3.8%
o Tax liquidation of the insurance company at long-term capital gain rates.
