121 / May a charitable contribution deduction be taken for a gift of an interest in a split-dollar arrangement?

No deduction is allowed for a transfer to a charitable organization made after February 8, 1999, if in connection with the transfer the charitable organization directly or indirectly pays, or has previously paid, any premium on any “personal benefit contract” with respect to the transferor. Further, no deduction is allowed if there is an understanding or expectation that any person will directly or indirectly pay any premium on a personal benefit contract with respect to the transferor.¹ A personal benefit contract is any life insurance, annuity, or endowment contract if a direct or indirect beneficiary under the contract is the transferor, a member of the transferor’s family, or any other person (other than certain charitable organizations) designated by the transferor.²

In a case decided under rules in effect before 1999, a charitable deduction was not allowed where the charity provided a receipt stating that the donors received no benefit from their charitable contribution. The court held that in fact the donors were receiving a benefit under the charitable split-dollar arrangement.³

In a ruling involving a paid-up policy, the IRS took the position that no deduction will be allowed for gifts made after July 31, 1969, involving a split-dollar plan in which the donor gives a charity the cash surrender value and gives a noncharitable beneficiary the balance. A gift of the cash surrender value is considered a gift of less than an entire interest in the property whether the donor retains the right to designate the beneficiary of the risk portion or irrevocably designates the beneficiary prior to making the gift.⁴ Two 1969 revenue rulings, which allow a deduction, apply only to gifts made on or before July 31, 1969.⁵