Hotel Online
News for the Hospitality Executive


Hotel Lawyer: What you need to know about the "ancillary benefits"
of setting up a captive insurance company

By Jim Butler and the Global Hospitality Group®, 
Author of
June 27, 2011

For the most recent update on this topic, click here

Hotel Lawyer: Why people set up captive insurance companies.

Our recent blog post, Captive Insurance for Hotel Owners , described how hotel owners can protect their business and save money by forming a captive insurance company.

That is enough for many people, but there are additional "ancillary" benefits that can also be very attractive, enabling owners of the captive to achieve certain business and personal objectives.

These ancillary benefits can be quite compelling. They include estate planning, business succession planning and management benefits.

My partner, Gordon Schaller -- one of the top experts in the country advising clients on setting up captive insurance companies -- explores some of those benefits in today's post on the Hotel Law Blog.

Benefits of Owning a Captive Insurance Company


Gordon Schaller | Hotel Lawyer, JMBM Global Hospitality Group®

As explained in an earlier article, a captive insurance company is a subsidiary or affiliate of a closely-held business entity formed to insure or reinsure certain risks of those entities.

The primary reasons hotel owners form a captive insurance company is to effectively manage the uninsured and under-insured risks of their business and to save money on certain types of coverage. But the captive also provides owners a number of ancillary opportunities to achieve business and personal goals.

A hotel owner who has decided to establish a captive insurance company and has qualified as an appropriate candidate, should then ask, "Given my specific circumstances and goals, what is the best way to own the captive"?

Benefits of Ownership by or in Trust for Children and Grandchildren

If the captive is owned directly or indirectly by or in trust for the hotel owner's children or grandchildren, there will be a net wealth transfer without gift, estate, or generation-skipping transfer tax consequences if the captive's reserves are not used to pay claims. Insurance premiums are business expenses, if reasonable -- not gifts. Since the captive's assets would be outside the hotel owner's taxable estate it is an asset that is ideal for a generation-skipping dynasty trust.

Benefits of Ownership by Family Limited Partnerships or LLCs

As with many estate planning structures, the captive insurance company could be owned by a family limited partnership (FLP) or limited liability company (LLC). The FLP or LLC could in turn be owned by various family members or trusts with differing classes of interests and rights. This could provide a continuing ability for the hotel owner to control and invest funds received as distributions from the captive insurance company. Caution must be used in structuring family partnerships and LLCs in light of the IRS' recent aggressive litigation positions in this area.

Benefits of Ownership by Key Management

Another common ownership structure involves creating restricted shares for key management. Since the captive is taxed as a "C corporation" for income tax purposes, it can have multiple classes of stock. The classes could have vesting and transfer restrictions that would provide incentive and retention features for management. This also provides incentives for employees to manage business risk more effectively. Insurance premiums paid to the captive should not be deemed compensation to the employee-owners for income tax purposes.

Benefits for Asset Protection

Generally, the assets of the captive insurance company should not be subject to claims by creditors of the hotel business. This assumes that the insurance premiums are reasonable and justified, the captive is not a sham, and that it was properly formed and operated.

Benefits for Shareholders

To the extent that claims against the captive's reserves are less than projected by actuaries and reflected in premiums, reserves grow and the captive stock becomes more valuable. Dividends can be paid to the shareholders from excess reserves which are subject to capital gain tax rates today. When the captive is liquidated, the proceeds received by shareholders is also treated as capital gain.


Gordon Schaller is a partner in JMBM's Taxation, Trusts & Estates Department, and a senior member of JMBM's Global Hospitality Group®. Gordon helps businesses set up captive insurance companies and advises them in a full range of strategies to achieve tax efficiencies. For more information, please contact Gordon Schaller at 949.623.7222 or [email protected].


This is Jim Butler, author of and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?


Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,300 properties all over the world. For more information, please contact Jim Butler at [email protected] or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

JMBM’s Global Hospitality Group®
The hotel lawyers in the Global Hospitality Group® of Jeffer Mangels Butler & Mitchell (JMBM) comprise the premier hospitality practice in a full-service law firm and are the authors of the Hotel Law Blog. We represent hotel owners, developers, investors and lenders and have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties worldwide. For more information about the Global Hospitality Group®, go to For more information about full range of legal services provided by JMBM, go to

Jim Butler
[email protected]


Receive Your Hospitality Industry Headlines via Email for Free! Subscribe Here  

To Learn More About Your News Being Published on Hotel-Online Inquire Here
Also See: Hotel Lawyer: Are you thinking about setting up a captive insurance company? Maybe you should be. . . / Jim Butler & Gordon Schaller / June 2011

Hotel Lawyer in New York with pre-NYU industry forecast: Sunny with occasional clouds and NO storms on the horizon / Jim Butler / June 2011

Hotel Lawyer with the Executive Roundtable Results; Debt is returning, equity is out looking, and we've passed the bottom of the trough. Why now is the time to purchase a hotel. / Jim Butler / June 2011

ADA Defense Lawyer: How to Quickly Lose Business. (No ADA-Compliant Reservation System) / Jim Butler & David Sudeck / May 2011

Hotel Lawyer with Fresh Perspectives on the Hotel Industry from Smith Travel / Jim Butler / May 2011

Hospitality Lawyers with PKF and Mark Woodworth's Lodging Overview / Jim Butler / May 2011

Hotel Lawyers' Updates on Capital and Debt Markets for Hotels, Transaction Sales Data and Financings / Jim Butler / May 2011

Hotel Lawyer with Updates on Hotel Cap Rates, Values and Transactions / Jim Butler / May 2011

Hotel Lawyer with nuggets from JMBM's Meet the Money® 2011 / Jim Butler / May 2011

Hotel Lawyer: The hotel transaction market is heating up! / Jim Butler / April 2011

Hotel Lawyer with good news! A new federal court decision upholds condo hotel structure. No "securities" involved as structured. Disgruntled condo hotel unit purchaser lawsuit dismissed. / Jim Butler / April 2011

Meet the Money®: Hotel Financing Renaissance is Underway! / Jim Butler / April 2011

JMBM’s Global Hospitality Group® announces publication of The HMA Handbook, a FREE practical guide for negotiating Hotel Management Agreements for Hotel Owners, Developers, Investors and Lenders / March 2011

Buying a Hotel? Don't Buy an ADA Lawsuit or DOJ Investigation / Jim Butler / March 2011

Hotel Lawyer on Hotel Management Agreements: Exculpation Clauses for Protecting the Owner's Assets / Jim Butler / February 2011

ADA Defense Lawyer: How to handle an ADA lawsuit....and How not to do it / Jim Butler / February 2011

Hotel Lawyer: 5 Key Elements for Good Hotel Management Agreement Budget Provisions / Jim Butler / February 2011

How improving fundamentals make 2011 the year of "Great Expectations" for the Hotel Industry / Jim Butler / February 2011

Ask the Hotel Lawyer: 2011 is starting as the year of "Great Expectations" for the hotel industry! / Jim Butler / January 2011

Hotel ADA Defense Lawyer: How a recent ADA case affects all hotels but particularly conference centers and meeting hotels / Jim Butler / January 2011

Hotel Lawyer: So, You Think You Want to Buy a Hotel? For savvy investors, the time could be right / Jim Butler / January 2011

Sheraton Universal Hotel Sale Facilitated by JMBM's Global Hospitality Group® / Jim Butler / January 2011

To search Hotel Online data base of News and Trends Go to Hotel.OnlineSearch

Home | Welcome| Hospitality News
| Industry Resources

Please contact Hotel.Online with your comments and suggestions.