Sep
03
2010

Charities and Life Insurance – A Growing Trend?

Life insurance has always been an important part of charitable giving.  Although there are legitimate uses, over the years the IRS has identified certain abuses regarding the use of life insurance in charitable planning.  In our practice, we have seen a recent surge in charitable planning techniques involving life insurance.  Before your charity accepts a gift of life insurance, you should consider several issues, including the following:  (1) the application of Section 170(f)(10), the so-called “charitable split-dollar rules” (which, if applicable, impose an excise tax on the charity equal to 100% of the premium payments), (2) applicable state insurable interest laws, (3) private inurement, private benefit, and excess benefit rules, (4) unrelated business income rules (and debt-financed income rules, to the extent the life insurance was acquired with borrowed funds), (5) the partial interest rules (impacting both the income and gift tax deduction of the donor), (6) I.R.C. § 4944, the jeopardizing investment rules, and I.R.C. § 4941, the self-dealing rules, where the policy owner is a private foundation or split interest trust, (7) possible re-enactment or extension of I.R.C. § 6050V (which required a charity to report its interest in certain life insurance policies – the provision expired in 2008), and (8) potential legislation in response to the Treasury’s April 2010 report on abuses involving ”charity owned life insurance” (ChOLI).  Life insurance often represents a very valuable gift to a charity and most transactions involving life insurance satisfy the rules discussed above.  However, it is important to consider these rules with respect to any gift of life insurance, especially when the gift involves more than merely naming a charity as a policy  beneficiary or a donation of an unencumbered policy to the charity.

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