Using ‘ChOLI’ To Spice Up A Planned Giving Program
By James R. Allen
There are many charitable giving techniques that can be incorporated into a financial or estate plan to help your clients meet their financial objectives, while at the same time satisfying their charitable aspirations.
Financial planning objectives aside, charitable giving is also commonly done merely for altruistic purposes without any thought of tax benefits.
Charitable gifts can take many forms, from something as simple as the weekly church offering, to the very complex charitable lead trusts and charitable remainder trusts. For those charities with donors who make regular ongoing charitable donations of cash or property, one possible method of leveraging these charitable gifts is for the charity to use these gifts to purchase charity owned life insurance or “ChOLI” on the lives of its donors.
Using ChOLI creates an opportunity for a charity to substantially increase its overall endowment if it is willing to defer some current benefit in exchange for larger future benefits. The ChOLI program is also beneficial to donors since for a relatively small cost (the life insurance premium), the donor can make a large gift to charity (the death benefit).
ChOLI programs can be an effective strategy for use by the largest charities all the way to small family controlled private foundations.
Designing a ChOLI Program
In the typical ChOLI program, the charity decides to purchase life insurance policies on a group of key donors. The donors agree to make charitable donations of cash so that the charity can pay the insurance premiums. The charity applies for the life insurance and is named the owner, beneficiary, and premium payer of the policy.
For large charities, it may be cost effective to purchase insurance on a substantial number of donors with an expectation that some donors will die each year and the charity will receive a continuous stream of death benefits. This “aggregate funding method” is not unlike those programs used in large executive deferred compensation plans.
It may also be possible for charities to borrow the funds to purchase the life insurance with the donors gifting just the annual interest cost rather than the entire premium. There are certain insurance carriers who market financed insurance programs where lenders will loan funds to purchase life insurance at very favorable interest rates and where the loan can be paid off only at death.
One possible caveat with this leveraged approach is that the charity could run afoul of the “debt financed income” rules and create taxable income for the charity. The possibility of a debt financed income problem should be considered prior to using a leveraged ChOLI program.
It should also be noted that, in a handful of states, charities are not given an insurable interest in their donors and this may preclude the use of ChOLI in those states. Fortunately, the vast majority of states do provide an insurable interest for charities purchasing life insurance on their donors.
In addition to the purchase of new life insurance policies on donors, another approach for charities looking to establish a ChOLI program would be to solicit donor contributions of existing policies.