Tax courts have seen a number of cases over the past year dealing with charitable giving and the uses of life insurance.
Some of the issues discussed here at LIMRAs annual advanced sales conference include certain aspects of charitable split dollar and the structuring of life insurance gifts to charities.
Stephan Leimberg, CEO of Leimberg Information Services Inc., and co-author of The Tools and Techniques of Charitable Planning, published by The National Underwriter Company, detailed the results of several of this years cases.
In the first case he spoke about, Leimberg said a taxpayer had purchased a single premium whole life insurance policy on his life and named a public charity as an irrevocable beneficiary. As this was done, the insured transferred all the rights in the policy to the charity, with the exception of the legal title to the contract.
“The problem here is theres no deduction–and possible estate tax inclusion because hes retained the title,” said Leimberg.
In this instance, as Leimberg explained, the donor was only keeping the title to the contract due to the licensing requirements that would have been imposed on the agent. The agent in this case was not licensed in the state where the charity existed, so the intent was to avoid the licensing requirement and get the policy in force.
“The IRS says technically, if you dont assign everything you dont get a deduction,” he said.
But in this case, the IRS agreed that if the insured transferred every economic right, the IRS would allow the deduction–even though the title was retained. Leimberg emphasized that this was the result in this case and that agents should not take this approach when planning for clients.
Instead, he continued, agents should “play it safe.” He told the advanced marketing attorneys present here to “make sure your agents know their clients must not keep any rights [to the policy], or theres no deduction.”
Another component to this case involved the timing of the deduction. Leimberg explained that since most policies have a free-look period, where the policy might be canceled, the donor may not take the deduction until that period has passed. “The cancellation right delays the date of the deduction,” he said.
Thus, he said, agents should express the importance of not waiting until December to make a charitable gift of life insurance. “The best time to make a contribution to charity is right now, the month of November.”
And while charitable split dollar was also on the docket for the past years tax court cases, one case revealed that payments made by a charitable foundation for the purpose of a split-dollar agreement are considered as “qualifying distributions” from the charity.