Insurer Makes Recommendations Regarding Qualified Appraisals for Donated Inforce Life Insurance Policies

Insurer Makes Recommendations Regarding Qualified Appraisals for Donated Inforce Life Insurance Policies

News story posted in Compliance on 30 September 2010| comments
audience: National Publication | last updated: 18 May 2011
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Summary

Following a meeting with Treasury officials, representatives of MassMutual Financial Group have requested that Treasury adopt a policy of accepting a "fair market value statement" from the issuing life insurance company as a qualified appraisal from a qualified appraiser for purposes of valuing charitable donations of inforce life insurance policies as a safe harbor for section 170 valuation.

Full Text:

September 20, 2010

Ms. Catherine Hughes
Attorney-Advisor
United States Department of Treasury
Office of Tax Legislative Counsel
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Mr. Mark Smith
Attorney-Advisor
United States Department of Treasury
Office of Tax Legislative Counsel
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Dear Ms. Hughes and Mr. Smith:

    Re: Proposal for Qualified Appraisal of Donated Inforce Life Insurance Policies

Thank you for taking the time to speak with us when we were in Washington. As you recall, we asked you to consider an alternative way to satisfy the qualified appraisal rules under Internal Revenue Code section 170 when an inforce life insurance policy is donated to a charitable organization. We are sending this letter to provide additional information on a number of questions that were raised during our meeting.

For many years, the IRS has published guidance to establish the allowable methods for valuing a life insurance policy for income tax purposes. We propose that these methods be adopted also as a safe harbor for section 170 valuation and, to satisfy the qualified appraisal requirements of section 170, that a valuation statement from the issuing life insurance carrier (similar to the current IRS Form 712 used for gift tax purposes) be accepted as a "qualified appraisal." Section 170 now requires that donors obtain a qualified appraisal if they are to be permitted a deduction for donated property valued at $5000 or more. The objective of this statutory requirement is understandable. But, in practicality, the appraisal is not meaningful when the asset donated is a life insurance policy for two reasons. First, because the IRS itself has established allowable methods for valuing life insurance policies, and those methods can be followed without a "qualified appraisal." Second, and more importantly, the deduction allowed for donation of life insurance is typically limited to the policy's cost basis, not its fair market value, because its gain is taxed as ordinary income.1 The policyholder-donor incurs a cost to obtain a qualified appraisal that does not have any practical impact on the amount of the allowable deduction.2

The administrative burden, along with the cost of a hiring a qualified appraiser, may discourage donations of a valuable asset to worthy charities.

Because there is no generally active market in inforce life insurance policies that appropriately establishes a fair market value for life insurance under all circumstances,3 the IRS and Treasury have published guidance establishing methods for determining the fair market value of inforce life insurance policies. These are found in Treasury Regulation ยงยง 20.2031-8 and 25.2512-6, IRS Notice 89-25, Q&A 10 (1989-1 CB 662) and Revenue Procedure 2005-25 (2005-1 CB 962). In these, the IRS and Treasury aimed to avoid undervaluation for income inclusion or gift or estate tax taxation and, essentially, dictated how to value of a premium-paying life insurance policy that has been in force for some time. Given these authorities, we believe the procurement of a qualified appraisal for this particular type of property is a meaningless burden. For your convenience, we enclose copies of these authorities.

Instead, we propose that it is reasonable -- and logical -- to extend the IRS' most recent valuation approach (Rev. Proc. 2005-25) to establish a safe harbor for the fair market value of a life insurance policy for purposes of the section 170 deduction. Adopting this approach should make enforcement easier because a single approach is used for determining the fair market value of a life insurance policies.

To address the requirement under section 170(f)(11)(C) for a qualified appraisal, we propose that the IRS accept a "fair market value statement" from the issuing life insurance company as a qualified appraisal from a qualified appraiser. This approach is consistent with current procedures for gift taxes, where the donor must attach IRS Form 712 to the donor's federal gift tax return. IRS Form 712 Part II is completed by the life insurer, certifying the fair market value of the policy based on IRS guidelines. It is our understanding that the Form 712 valuation is accepted by the IRS. The Form 712 Part II (or something similar) would be treated as satisfying the "qualified appraisal" requirements, with the issuing life insurer treated as a qualified appraiser of its inforce life insurance policy. This serves the intended purpose of the rule -- obtaining an expert determination of value. Given the IRS rules as to valuation, the life company can provide the very information the IRS has determined is the appropriate fair market value. Since the IRS is already relying on life insurance companies to provide appropriate information regarding the fair market value in other contexts it should be comfortable that this information will be equally reliable when determining the fair market value of the charitable gift of a life insurance policy.

Once again, we appreciate the opportunity to discuss this important issue with you. We would be happy to discuss this information with you further or answer any questions you may have.

                Sincerely

                Susan E. Schechter
                Vice President and
                Associate General Counsel
                MassMutual Financial Group
                Springfield, MA

                Ann B. Cammack
                Vice President and Senior Counsel
                MassMutual Financial Group
                Springfield, MA
FOOTNOTES

1 Section 170(e)(1)(A).

2 If a life insurance policy is in a loss position (its fair market value is less than the owner's basis), fair market value establishes the deductible amount. Valuation thus determines whether to deduct the lesser of cost basis or fair market value. It is our impression that most donated inforce policies are not in a loss position.

3 A secondary market for life insurance contracts emerged in recent years for policies covering terminally ill insureds (viatical market) or elderly insureds (life settlement market). We believe that neither market establishes "fair market value" as that term is used in existing guidance. Not all policies can be sold into these markets, being so dependent on the current health status of the insured. It is not clear whether a consistent way of valuing life insurance policies in this market place will ever emerge.

END OF FOOTNOTES

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Personal property Appraiser

Has anyone noticed that the date of this "constituents" letter is 5/31/2020? I have posted a brief of this on two on-line appraisal forums to which I belong. We have appraiser members from across the country and I hope that a few will respond. I will update this comment when I receive comments from our appraiser members. John C. Carlson CA Certified General Real Estate Appraiser Diamond Bar, CA www.jccrea.com

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