Q. This almost sounds too good to be true. Where is the risk?

A. Candidly, you are the biggest risk when it comes to captive banking. You must be able to overcome ingrained human nature tendencies and previously taught brainwashing. . . be committed to applying long term discipline… have the working knowledge of how to apply this system to your greatest advantage by following the designated guidelines…work with someone who can apply the correct insurance contract along with the prescribed options, riders and ratios…and have the belief and understanding that this program works because of fundamental economic principles, U.S. tax laws and insurance contractual guarantees.

Q. Why haven’t I heard of this before?

A. Neither conservation easements nor banking through a life insurance contract are new. Both have been around since the 80’s (or earlier) but the answer rests in the uniqueness of the combination of these concepts.

The underlying contract of a dividend paying whole life insurance policy has not fundamentally changed in over 100 years. This contract is central to the entire system. The concept of how to convert that contract into a tax-advantaged vehicle with similar transactional mechanics of the banking process is what has been developed but is just not taught through traditional channels such as typical insurance agents or financial planners. The concept has been created around two supporting platforms that set this process apart from anything else in the marketplace. One is that this is completely an educational process, and two: this concept is based on fundamental economic theory. Most agents and financial representatives do not understand it themselves or are not personally motivated enough to learn because the compensation to them is not equivalent.

Q. If I’m the policy owner, how does my farm or ranch benefit from the captive banking concept?

A. You can use your insurance contract to finance any of your farm or ranch needs while accumulating additional cash in the process and do it on a tax-advantaged basis. The key is to create a personal financing pool that you control and then loan money to your business which it then repays back to you with interest. Also, consider that agricultural lenders can and are becoming very “particular and demanding” in this economic climate. It is also a great satisfaction for a farm or ranch owner to know that they have a team of “hired help” at their disposal while utilizing these methods. To reiterate, you as the policy owner have given your business a tax favored and readily available lending source that is completely independent of the traditional sources. And, as time passes, the system gets even better by becoming more and more efficient, representing more control and wealth for you.

Q. What is meant by giving up some control of our property?

A. There are those who believe that federal agencies and environmental organizations entice landowners to give up some or ultimately all of their private property rights as land owners using the standard or model conservation easement contract. Certain restrictive terms may be found but not fully understood within the easement contract language. Be sure to work with those organizations that offer agreement formats where you are conveying your land to the organization in order to create a “conservation interest” without giving up all rights of that affected property.

The two main things to consider and watch out for when considering or entering into a conservation easement is that you find and use a land trust that is a purely voluntary partner as opposed to one who comes seeking you out because they have decided that your land contains wetlands or habitat for a species that is being considered for protection. Find a land trust that will offer to become the trustee of sensitive areas dedicated by the land owner for “conservation purposes” as defined by the IRS, leaving all land use control to the landowner. Secondly, avoid land trusts that propose or even insist that you use their contract documents to avoid legal costs involved with the process. Always seek competent legal advice on your own to compare the terms of what is being proposed to your interests in preserving your private property holdings.

Q. I cannot or will not use a conservation easement to liberate the equity in my land. What other options do I have to start a banking policy?

A. Once you understand that the essential element of captive banking is to “fund” your own bank so you can recover the interest that you have been paying to others, then you have to be willing to find wasted money (unnecessary wealth transfers) that will not disturb your current lifestyle. A couple of places to look are your insurance deductibles on your property & casualty policies and your medical & disability policies. If they are too low, then you should consider raising them to free-up some dollars so you can redirect them to your captive banking policy. Also, where are you currently putting your money away for the future? If you are contributing to an IRA or any other type of qualified plan, then you may want to consider redirecting those dollars to your policy instead. Not only will every dollar you place in the IRA be taxed at a later date but all of the growth will be taxed as well. Why not have those dollars growing tax-free and working for you instead of some financial institution – and ultimately the government, which is just patiently waiting for you to pay them more tax down the road.

But a word on the idea of not removing and using the equity out of your land and home. Remember that the equity that is sitting there has no rate of return and is always at risk because the market determines the amount of equity at any given time regardless of how much or how little you have paid on that property. The worst part is that it’s not at all liquid so it presents an issue for you when you might need it most. It might very well be the most financially sound decision you ever make to free the equity from your farm or ranch and put it in a vehicle that is secure (no risk), grows (guaranteed rate of return) and most importantly is liquid (fully accessible for you to use for both short-term and long-term needs.)

Q. Why wouldn’t I just put the conservation easement money into a bank and save the effort of setting up a “captive bank” through insurance transactions?

A. If you placed the money you received in a bank, many things will happen and none of them are in your best interest when compared to your alternative option. In a commercial bank, your money will be liquid and accessible, but while there it will have minimal growth, you will be taxed on that growth, and once you need to use it it’s gone and no longer in the account earning for you. Most importantly, that money is fully exposed and has no protection against creditors and lawsuits, heaven forbid, anything bad and unexpected were to happen.

Once you placed the money in a banking policy with an insurance company, that money is fully protected from loss, it will grow historically at a much more favorable rate of return and will be liquid and accessible. However, because the money comes to you in the form of a loan and the loan is generated from the life insurance company’s general account, those borrowed dollars do not affect the growth of the cash value in your policy, therefore providing you with a double benefit. This creates exceptional growth potential for you that no commercial bank or other financial vehicle can provide. On top of that, it comes with a deferred bonus (i.e., a death benefit) delivered tax-free to your heirs and if the loan process is handled correctly, it is also possible to minimize taxation for both you and your farm or ranch.