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.