Charitable Life Insurance Redefined

– by DuWayne Kilbo

Of all the progressive things the life industry has done in the past few years to advance underwriting standards and make it easier to do business, one area significantly lagging is charitable life underwriting.

In charitable situations, the maximum amount of coverage available across almost every carrier in the industry is based upon a multiplication factor—typically 10—of one’s past annual giving to a charity. So if an applicant on average has given $10,000 annually to a particular charity and desires to leverage this giving by allowing the charity to own life insurance on his life, he would qualify for a maximum $100,000 of death benefit.


Seriously…. $100,000?!?!

This hardly seems worth the time and effort required for you and your client to complete an application and go through the underwriting process.

In fact, I’m not even sure how the 10 times underwriting parameter was developed.  When quizzed, carriers are unable to articulate a good response other than to say this is the rule their underwriters have always used.

Bottom line, significant charitable life opportunities exist, but the industry is being held back by an underwriting practice that is old, outdated and needs to be revised.

Let’s consider an example of a client age 50 plus who has worked hard during her lifetime to amass a sizeable net worth, but who either doesn’t exceed the threshold for federal estate taxation, or who modestly exceeds the threshold but doesn’t want to spend the time and money required for estate planning.

The client, however, is charitably inclined and sees value in providing money for causes she believes are worthwhile. She would like to give money on a tax-deductible basis to a qualified charity to purchase life insurance on her life. She may have donated to this charity in the past, and perhaps served in some role for the charitable organization.

So why do we need to stick to an outdated 10 times rule and why can’t some portion of an individual’s net worth be used to qualify for charitable coverage—such as 50% of net worth? For example, if a person has a net worth of $10 million and has available insurability, why can’t he do $5 million of charitably owned coverage?

I asked some carriers about this example and these suggestions.

While a few responses came back as expected to the outdated 10 times rule, there were some progressive carriers willing to take into account a person’s net worth and consider a larger amount.

Of course, the devil is always in the details.  Though several carriers agreed that there could be more flexibility in charitable underwriting, they didn’t want to make a blanket statement concerning such situations.  Using a portion of net worth as a guideline would be considered on a case by case basis.  All considered 50% of net worth too high, and flexibility would be easier to come by if the person had at least some past charitable involvement or giving. The key point is that they were open to discussing and creating a workable solution for a particular case at hand.

This was inspiring!  I realized that it is possible to do something more substantial for charitable giving than was previously the case.

A key step is to discuss and work with carriers on a case by case basis as these situations arise—and well before an application is submitted.

I believe we will develop more favorable charitable underwriting standards as we continue to work with carriers and they become comfortable with newer, more thoughtful and creative charitable underwriting concepts.

It’s only a matter of time.

If you have clients who would like to explore the potential for leveraging life insurance in gifts to their favorite charities, give us a call at Windsor.  We’ll be glad to help!



At Halftime, IRS Blanked on the (Tax) Court

– By Marc Schwartz J.D. CLU, and Marty Flaxman J.D.

A recent tax court case ruling in favor of the taxpayer in an intergenerational Split Dollar arrangement has propped open a “discounting” planning door that, up to now, the IRS had tried to slam shut.  In the Estate of Clara M. Morrissette et al v. Commissioner, the tax court ruled that an intergenerational Split Dollar arrangement is covered by Split Dollar Regulations Section 1.61.22.  In plain English, the ruling establishes that single-premium life insurance policies, held in irrevocable trusts, can be taxed under the Split Dollar Economic Benefit regime, and are not required to use the Loan regime, as the IRS had insisted.   For the taxpayer this was very good news.  Here are some of the facts, courtesy of AALU’s Washington Report (WRN 16.05.10_1) from 10 May, 2016.

Gavel With American Banknote And Book

“Three dynasty trusts were established on behalf of the decedent, one for each of her sons. In 2006, six non-equity economic benefit so-called intergenerational split-dollar arrangements were created between Clara Morrissette’s revocable trust and each of the dynasty trusts. Her revocable trust advanced a total of $29.9 million as one-time single premiums to the dynasty trusts to enable them to purchase insurance on the lives of each of her three sons.  Clara died in 2009 with the arrangements still in place.

“The estate valued the amounts receivable by the revocable trusts from the dynasty trusts at $7.497 million. The IRS argued the arrangement was a gift at inception for the full $29.9 million dollar amount of the advances. That determination resulted in a gift tax deficiency of $13.8 million and a penalty of $2.7 million. The estate disputed the deficiency by filing a petition in Tax Court.

“The estate filed a partial summary judgment motion with the Tax Court confirming that the arrangements were in fact economic benefit split-dollar arrangements under Treasury Regulations Section 1.61-22, and the court entered a summary judgment in favor of the estate.

The IRS’s argument was essentially preemptive.  “The IRS has been arguing for most of a decade that single premium split-dollar arrangements could not use the economic benefit regime of the Regulations, but instead had to use the loan regime, because they provided ‘other benefits,’ or alternatively that the single premium payments ‘prepaid’ all future economic benefits provided under the arrangement, or that since future premiums had been prepaid, the arrangements were, in effect, reverse split-dollar arrangements, and under Notice 2002-59, term costs could not be used to measure the benefit to the donee trust.

“If the loan regime applied, since no interest was provided, the arrangement was a gift term loan under the Regulations, with the discounted present value of all of the imputed interest treated as a gift in the first year of the arrangement; if the single premium prepaid future economic benefits, they were all gifts in the first year of the arrangement.”

The tax court disagreed with the Service’s position and ruled in favor of the taxpayer.  But the tax court pointed out very early in its opinion that it was ruling only on the applicability of the Split Dollar regulations to the arrangements, and not on the discounted gift valuation by the taxpayer’s estate.   The appropriateness of that discounted valuation, which is really at the heart of the dispute, has yet to be decided.  If, however, that future decision comes down in favor of the taxpayer, “this technique may become a major means of transferring significant amounts of family wealth at greatly reduced tax costs.” (op. cit. AALU Washington Report)

In the meantime, the Morrisette case, as it stands today, provides an effective way to pay substantial premiums using intergenerational Split Dollar arrangements without incurring large gift tax liabilities and is very likely something of interest you can discuss with your centers of influence.

We’ll keep you apprised of what happens next on the discounted valuation issue.  Stay tuned.