Speaking at the LIMRA Advanced Sales Forum here, Stephan Leimberg, CEO of Leimberg Information Services, reviewed some recent rulings and issues that are impacting advanced sales professionals.
In the area of charitable split-dollar planning, Leimberg outlined several items about which agents need to be cautious. Previously, promoters of charitable split dollar would approach insurance planners illustrating this as a way to sell a large amount of life insurance to a charity, he said, while using a portion of the charitable contribution to fund a life insurance policy in a family trust.
Through a split-dollar arrangement, a client would make a charitable contribution, he said, and the charity would then enter into a split-dollar arrangement with a trust benefiting the clients children. The trust would pay the cash value portion of the premium while the charity would pay the term insurance portion, he explained.
“The term insurance portion was defined as the P.S. 58 cost, which is several times what real-term insurance costs,” he said. As a result, one party–the charity–was vastly overpaying for the insurance. What was classified as a term insurance premium was in reality financing the cash value buildup in a policy owned by the childrens trust, he said.
“There are a lot of reasons why this shouldnt have worked,” he said. But in some recent tax court cases, the courts didnt go after all the legal concepts they could have, Leimberg noted.
Rather, “they said the client couldnt take the deduction because when you give a gift to charity, the charity has to send you a letter saying what you got in return,” he explained. Since the client didnt claim anything in return, they had no letter from the charity. Therefore, the IRS disallowed the charitable deduction.
“The point is this, the IRS and the courts will find a way to shut these schemes down,” he said.
Leimberg said agents who are working with clients making charitable contributions should follow a number of guidelines.
“The first question you have to ask is, did the taxpayer receive or expect to receive anything in consideration for his or her charitable contribution?” he said.
If the taxpayer did receive something in return, then ask, was it “incidental to the gift and insubstantial?” he said. Otherwise, there may be problems with taking the deduction.
Some other things to be careful about include inflated valuations–inflating the value of the gift–and private benefits, where the donor gets something of significant economic value in return, and overly aggressive investments. Leimberg added that the president of the charity has a fiduciary responsibility not to get involved in an investment that will jeopardize money in the charity.
Other IRS rulings Leimberg discussed include the issue of transferring a life insurance policy from an old grantor trust to a new grantor trust. “If you transfer a policy from an old trust to a new trust, you dont have a transfer for value problem,” he said.
In this same ruling, there is some useful language that Leimberg recommended planners consider using in life insurance trusts. The language states that the trustee can insure the life of any individual, or joint lives of individuals, in which any beneficiary has an insurable interest. “This makes the trust much more flexible,” he said.
For example, “lets say my father has a partner and I want to buy insurance on his life through the trust, this would enable me to do that. Lacking that language you would have a difficult time buying insurance on someone elses life,” he explained.
A current lawsuit is another area of concern for planners operating in the advanced markets. Recently, Wal-Mart has filed suit alleging that it lost $150 million as a result of a class-action lawsuit. The class-action suit provided for the payment of death benefits to the families of employees with whom Wal-Mart had insured through a COLI plan. These benefits originally were intended to be paid directly to Wal-Mart.
“They said the agent and the company are guilty of negligence, guilty of misrepresentation and guilty of breech of fiduciary duties,” Leimberg explained. “They said it was a failure to disclose the full range and magnitude of tax-related risk.”
In the event the Wal-Mart suit against the insurers and insurance agents is successful, he said, “what we are going to have is a drastic expansion of the limits of legal liability in the very things that your people [insurance agents] do day in and day out.”
Whether or not the Wal-Mart case is successful, it serves as a warning flag to all practitioners. “This will increase the responsibility of marketers in many other areas dealing with life insurance,” he said.
Leimberg suggested that advanced sales advisors and agents in the field follow the following guidelines:
1. Dont hold yourself out as an expert in the tax law if youre not able to back it up.
2. Disclose what needs to be disclosed. “What needs to be disclosed is all the information needed to make an informed decision, including the fact that there are people who say this strategy isnt going to work,” he said.
3. Perform and share your due diligence. “You not only have to do your due diligence, you have to have a letter in your file saying that you have shared that with the prospective client–that they understand it and they had it in their hands before the policy was sold,” he said.
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 25, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.