Overview: 

A second-generation farming family contacted 3F Captive Services to explore strategies for mitigating risks and succession planning. 40 years ago, the head of the family moved to California from Europe and began what is now a large, diversified farming operation with just two cows. With approximately 80 employees in multiple locations producing meaningful revenue, they faced a variety of risks – legal, regulatory, and environmental. Traditional insurance left them exposed, and succession planning posed additional challenges. 

The Challenge: 

The family farm faced three pressing issues:

• Insurance Gaps: No traditional coverage available in the market for risks like labor lawsuits, milk production loss (including losses due to bird flu), or economic impacts from regulatory shifts, including economic losses due to any changes in their California dairy quota holdings.
• Legal & Regulatory Exposure: A recent PAGA (employee) lawsuit underscored vulnerability due to no insurance coverage for this available in the traditional market.‍
• Estate Planning: Ownership needed to shift smoothly to the next generation while minimizing tax consequences and operational complications.

In addition to immediate business risks, the family struggled with succession planning. They hoped to optimize the value of each shareholder's percentage of the business while planning a smooth transfer of ownership from one generation to the next. 

The family realized that 3F’s solution could effectively solve these challenges and engaged 3F. 

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Risk Mitigation

The process of structuring a new “captive entity” begins with a feasibility study. The Feasibility Study is an in-depth risk and financial assessment and analysis that involves a deep dive into a client’s business including financial information, current risk controls, key employment metrics, and other drivers of risk. This is also the point where the 3F risk management team determines the cost of risk coverages and policies specifically tailored to the client’s business. 

3F Captive Solutions performed a broad evaluation to understand the client’s business, what risks they faced, and determined if a captive insurance solution might work for them. After positively gauging both the client’s interest and confirming the suitability of a captive insurance solution, 3F and the client agreed to implement the solution with 3F.

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The Solution: 

The family established coverage for many risks including labor related issues, negative impacts to milk production, and changes to state regulations that could impact their CA Dairy Quota holdings or other aspects of their business. 

3F structured a new captive insurance entity that helped the family:

• Secure coverage for previously uninsurable risks.
• Shield against crop loss and milk production reductions.
• Protect the value of California dairy quota assets.
• Create a sibling-owned holding company to handle ownership transition with tax efficiency.

Estate Planning

When 3F started the project, the team understood a goal for the family was to find an optimal solution to reduce the assets from the parent’s trust to the next generation over time, while minimizing any day-to-day impact on the business. 3F structured the ownership and tax election of the captive insurance entity to reach an elegant solution. Now there is a holding company that owns the captive insurance entity. The siblings shared equal ownership of the holding company, independent of the surviving parent. This allowed the siblings to both insure the dairy operations against risks not covered by traditional insurance policies, while allowing the siblings to grow their assets independently of the parent’s trust and providing for the purchase of the assets in the parent’s trust over time.

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The Results: 

By working with 3F, the family was able to get $1 million of coverage for various previously uncovered risks, including each of the following: 

• Labor actions
• Wage and hour claims
• Regulatory changes that could impair their Dairy Quota holdings
• Milk production loss
• Supplemental crop insurance for their almonds and feed crops.

The premiums paid into their captive insurance entity are projected to grow substantially over time, providing the siblings with a 64% greater increase in wealth than they would have realized without the captive in place. 

Why it Worked: 

3F’s approach to solving our client’s needs was successful because it crafted a solution that addressed all of their concerns. First, the risk management solutions provided could not be solved by traditional insurance carriers. Second, the new corporate ownership structure solved estate planning concerns. Finally, the solution provided the family with substantial financial benefits that will result in greater wealth creation over time. 

There is no other financial or risk management product that could provide this level of benefit to small and family owned businesses. 

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