According to the "General Explanations of the Administration's Fiscal 2006 Revenue Proposals" released earlier this week, Treasury has taken aim on certain programs of professional investors that use charities as intermediaries to insure their older, wealthier donors for profit. Our friends Steve Leimberg and Michel Nelson comment.
From Stephen Leimberg and Michel Nelson:
The Blue Book (General Explanations of the Administration's Fiscal Year 2006 Revenue Proposals) has just been released by the Treasury Department. On pages 116 to 117, the Administration proposes a 25% excise tax on: "any person who receives death benefits, dividends, withdrawals, loans, or surrenders under a life insurance contract, if (i) a charity has ever had a direct or indirect ownership interest in the contract, and (ii) a person other than a charity has ever had a direct or indirect interest in the same contract (including an interest in an entity holding an interest in that contract). The excise tax would not be deductible for federal income tax purposes, and the amount of excise tax paid would not be included in the policyholder's investment in the contract."
The concept being targeted by the President's budget proposal was described in "Insurable Interest Under Siege" by Michel Nelson and in "Charities and Insurance: The Next Big Thing?" by Lawrence L. Bell as posted to the PGDC on May 12 and May 20, 2004 respectively, as well as in Steve Leimberg's article, "Stranger-Owned Life Insurance (SOLI): Killing the Goose That Lays Golden Eggs!" published in the January 2005 issue of Estate Planning Journal (and to be published on the PGDC tomorrow).
In brief summary, the plans described involved investor groups using charities as intermediaries to take advantage of the broader insurable interest rules applicable to charities. This permits investor groups to own death benefits of life insurance policies on unrelated third parties that would otherwise be barred by insurable interest rules. The charities are given a nominal portion of the death benefit to induce their participation.
The budget proposal is clearly aimed at the investors obtaining tax-free benefits of life insurance in this investment driven situation. In response to the fundamental question, "Should life insurance death benefits arising from the death of unrelated third parties be tax-free to investor groups," the budget explanation concludes with a resounding NO!
The full text of the Blue Book can be found at http://www.ustreas.gov/offices/tax-policy/library/bluebk05.pdf . See pages 116 and 117.
Comments
Draining the Dead Pool
Janne Gallagher Vice President and General Counsel Council on Foundations 1828 L Street NW Washington, DC 20036 (202) 467-0288 gallj@cof.org
Bush 2006 Budget - 25% Penalty for IOLI
It is also a means in a single life CRUT to increase the remainder to charity, allowing for different investments to increase income for the income beneficiary.
Without getting into the details of the legislation, would ownership of life insurance by a CRUT fall under the guidelines as life insurance owned directly by a charity, and directly or indirectly benefitting a non-charitable individual? I believe that life insurance in this context should be exempted since the life benefit is paid to the tax exempt trust, which has its payout fixed as a percentage of trust vlaue each year. The benefit may be indirect, but not within the context of the Bush proposal. I'd like to hear other opinions.