Using an IRA to Finance Charity-Owned Life Insurance

Using an IRA to Finance Charity-Owned Life Insurance

Article posted in Retirement Plans on 17 October 2007| 20 comments
audience: Leimberg Information Services, National Publication | last updated: 18 May 2011
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Summary

Can an IRA be used to help indirectly finance life insurance owned by a charity? In this article, Steve Leimberg reviews and comments on recently published Ltr. Rul. 200741016 in which the Service concluded the arrangement is not a prohibited investment in insurance within the meaning of section 408(a)(3) of the Code such that the IRA would cease to be an IRA under section 408(a)(3).

By Stephan R. Leimberg

EXECUTIVE SUMMARY:

PLR 200741016 concludes that the IRA-life insurance combination (described below) is not a prohibited transaction that would cause the IRA involved to be disqualified under Code Section 408(e)(2) and that the investment in life insurance by a charity generated through loans from the IRA will not be a prohibited investment in life insurance under Code Section 408(a)(3).

FACTS:

HOW DOES IT WORK?

According to its marketer, the "CHIRA" is a method to use a person's IRA to help a charity purchase needed life insurance on the life of a key supporter/donor without triggering either immediate income taxation on an IRA distribution or forcing the charity to wait until the donor's death to benefit.

Essentially, the technique involves:

  • a roll-over of funds to an approved, self-directed IRA. The donor and the charity initiate the underwriting process.  Then,
  • an arms' length loan is made from the donor's IRA to the selected charity. The loan will be secured by a new life insurance policy purchased by the charity on the life of the donor or some other individual on whose life the charity has sufficient insurable interest and the charity signs a promissory note in favor of the IRA.
  • The charity collaterally assigns that portion of the death benefit equal to the outstanding loan from the IRA to the IRA.
EXAMPLE

The donor's IRA lends the selected charity $100,000. The charity, in turn, allocates a portion of that money, assume $50,000, to pay premiums on a new policy on the donor's life.

The charity owes and must pay interest (only) annually on the $100,000 loan. The charity reserves a certain amount, say $30,000, to pay the interest giving it $20,000 of immediate and unrestricted cash which can be used by the charity. (Should this amount be insufficient, it would be necessary for the charity to request the assistance of its donors to satisfy the need to make required interest payments).

At the donor's death, the charity receives $100,000, which is first used to pay off the principal of the loan with any excess remaining with the charity.

COMMENT

Information from the marketer of this concept stresses that:

(1) the loan from the IRA is an arms' length - interest only - fully secured - loan bearing current fair market rates, i.e., a legitimate investment and should therefore not be considered a taxable distribution from the IRA,

(2) the principal of the loan is due in full upon the insured donor's death,

(3) interest payments made by the charity to the IRA are not taxable to the donor,

(4) there is no intent to resell or settle the policy nor are there outside investors; the intent from inception is for the charity to own and be the beneficiary of the policy and hold the policy and receive the entire policy proceeds at the insured's death,

(5) there is no charitable deduction involved and so there are no age limitations or other Pension Protection act of 2006 (PPA 2006) restrictions,

(6) neither the taxpayer nor the IRA, a fully secured arms' length creditor, is ever entitled to any of the death benefits under the policy, and

(7) neither the taxpayer nor the IRA will own or have any right to any beneficial interest in or any right to surrender, convert, pledge, cancel, or sell the policy - which is to be wholly owned by and payable to the charity.

WHAT THE PLR REQUESTED

The PLR is dated July 12, 2007 and requests a ruling concerning the tax treatment under Code Section 408.

According to the facts in the ruling, the taxpayer created a self-directed rollover IRA with a deposit from an existing IRA. The self-directed IRA made a loan to a church, a tax-exempt qualified charity of which the taxpayer was neither an employee nor board member.

The taxpayer represented that he had not and had no intention of taking a tax deduction in conjunction with the loan.

In exchange for the loan to the church, the IRA will receive a twenty-year promissory note which provides that the church promises to repay to the IRA custodian the principal amount and will pay interest at 5% annually.

A final balloon payment will be made upon the earlier of the end of the twenty years or within one hundred twenty days, or a reasonable period after the date of death of the insured taxpayer.

Prepayments are allowed without penalty.

The church grants the IRA a continuing security interest in the insurance policy that is to be collaterally assigned within a reasonable period of time after the note is signed. The church will have no right to borrow on it or transfer any rights to it without the express written consent of the taxpayer.

At this point, two documents have been used to assure "commercial reasonability", the collateral assignment and the promissory note.

INSURABLE INTEREST - A SMALL ODDITY

Strangely, the taxpayer represented to the IRS that the purpose of the security agreement within the promissory note was to "provide additional certainty for Taxpayer that the ownership of the insurance policy, will, from the date of purchase until the date of death, continue to qualify as an insurable interest under state law."

The PLR stresses "the intent to have two collateral agreements is to provide ample protection, outside of the contractual terms set forth within the insurance company's collateral assignment, that there will be a continuing "insurable interest".   

Insurable interest is a very important consideration in ANY purchase of life insurance, especially those by a third party such as a charity.  But the IRS is certainly not typically the arbiter of the existence or non-existence of insurable interest; that is almost always a state law issue - and the Service was not asked about it here.

Nor is the post-issuance of insurable interest typically a concern; in most cases involving life insurance, either there was - or was not - insurable interest at inception and that is the only time most courts have focused on.

Certainly, the two collateral agreements appear neither to add nor contract from whatever insurable interest may have been present at inception - so the whole thing about insurable interest in the PLR is puzzling.

TO WHOM IT MAY CONCERN:

The ruling, provided by the manager of the Employee Plans Technical Group 2, addresses two points:  (1) whether or not this technique is a "prohibited transaction" under Code Section 4975 such that the IRA would no longer be considered an IRA under Code Section 408(e)(2) and (2) whether the transaction is a "prohibited investment in insurance" under Code Section 408(a)(3).

DOES THIS TRANSACTION CAUSE TERMINATION OF IRA STATUS?

Code Section 408(e)(2) (A) terminates IRA status as of the first day of the individual IRA owner's taxable year if an individual for whose benefit an IRA is created (or his/her beneficiary) engages in a prohibited transaction.  The result of a violation is that the entire account is treated as having distributed all of its assets at that time.

The question is, was there the requisite prohibited transaction, i.e., was there any direct or indirect lending of money or other extension of credit between an IRA plan and a "disqualified person" (including fiduciary, person providing services to the plan, employer, etc.) §

With respect to this issue, the Service concluded that the church was not related to the IRA in a manner that would fall within the disqualified person definition - particularly since the taxpayer involved was not a board member or employee of nor did he own a financial interest in or control the church.

So the IRS ruled that the transaction would not be considered a prohibited transaction that would cause the IRA to be considered to have terminated and distributed its account.

DID THE IRA ENGAGE IN A PROHIBITED TRANSACTION WITH RESPECT TO THE LIFE INSURANCE?

As to the second issue of whether the IRA engaged in a prohibited investment in life insurance, the Service noted that the church, and not the IRA, would own the policy and all incidents of ownership in it as well as pay all premiums and retain all major economic rights including the right to receive all of the policy's proceeds at the insured's death.

The Service therefore concluded on this issue that the transaction would not be a prohibited investment in insurance that would cause the IRA's tax status to terminate.

WHAT QUESTIONS SHOULD HAVE BEEN ASKED THAT WERE NOT?

PLRs protect only the taxpayer who asked the questions and only with respect to the questions asked.

Note that the ruling did not speak to any other aspects or issues of federal or state law.  These, of course, must be considered.

Nor does the ruling address (and few do) the "workability" aspects; i.e. does this technique give the donor, the IRA, the charity, and each of the other parties involved something more than they had before - or could have had using an alternative method.

In other words, a practitioner examining this concept must ask

"What are the pros and cons of alternative methods and courses of action when compared with this approach?"

THE BOTTOM LINE

The Service has provided us with two key answers to yet another way to benefit charities.

For the client willing to let his/her IRA do some of the "heavy lifting" (at the potential expense of giving up possibly higher income and capital gains from some alternative investment) and the charity willing to borrow money on the hopes that the present value of policy proceeds will exceed the present value of the loan capital and interest, the CHIRA appears to be yet another technique planners should consider.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Steve Leimberg

CITE AS:

Steve Leimberg's Charitable Planning Newsletter # 129   (October 16, 2007) at http://www.leimbergservices.com/    

Copyright 2007 Leimberg Information Services, Inc. Used by Permission. Reproduction in Any Form or Forwarding to Any Person Prohibited - without Express Permission.

CITES:

PLR 200741016.

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Comments

It seems that one...

It seems that one of the benefits of the CHIRA concept vs a simple designation of the charity as a beneficiary of an IRA is the revocable nature of a beneficiary designation in an IRA. The CHIRA would appear to be an irrevocable event, subject to fulfillment of the interest payment obligation to keep the loan from default. Revocable vs irrevocable. Uncertainty for the charity vs control for the donor. The availability of current as well as deferred benefits to the charity look appealing.

CHIRA

Mr. Abramson brings up good points in his post, including the fact that this plan involves many moving parts. This planning is not for every charity or donor. It has limited application. We recommend independent counsel for donor and charity as well as ethical and properly vetted insurers, IRA custodians and agents to communicate the plan. While I discussed the statutory UBTI issues in a prior post, I would submit that even the "spirit" of the UBTI legislation is not violated in that third party commercial interests are not being undermined as this plan could only involve donor and charity. The income tax base is not reduced as a result of this plan. The overall tax base is actually increased by allowing these liquid funds to be directed into the community at the grass-roots level in the form of services, inventory, fixed improvements, etc. With regards to the insurable interest issue, I direct interested readers to http://www.ins.state.ny.us/ogco2008/rg080502.htm , wherein the NY DOI provided guidance with respect to a CHIRA

In addition

The debt-financed issues and UBIT issues concern me as well. This is becoming an area that is not only coming under more scrutiny, but many feel is becoming more subject to whim and opinion. Could a UBIT issue be looked at from an intentional or unintentional standpoint? I would want to look very closely and very specifically at how a "loan" (proceeds) tied to an IRA obtains life insurance. By lending money to a charity, from an IRA, is there possible scruinty here? Regardless, an IRA cannot own life insurance. I know several people debate this and promote the end-around ways, however, for the sake of this discussion, let's just agree that an IRA cannot own life insurance. Don't we have an IRA -- or IRA dollars -- acquiring life insurance? Albeit indirectly, or with an interim step -- IRA dollars are indirectly being used to purchase life insurance. WHile this may not be a prohibited transaction -- in a PLR -- that doesn't mean that each and every time this is going to be perfectly OK. We all know this. In addition, the PLR only answered very specific questions. There are others that need to be addressed. This is where Chris Hoyt brought up some excellent points -- or should I say excellent questions. A charity borrowing money, in order to enter into a "here's a way we can make money or raise money" mode, or for financial investment, becomes a slippery slope. So, let's look at something simple, which Chris referred to. Can an IRA owner, during lifetime, loan money to a hospital to build a cancer center? Does the death of the IRA owner come into play? I think it might. If the IRA owner named the hospital as beneficiary of the IRA, in order to forgive the debt, that would make sense and shows the charitable inclination and motivation. If the IRA owner doesn't, and the loan has to be repaid -- well, I'd want to think about that. However, now we have an IRA loan -- as Chris states -- being used as a financing tool, and for the purchase of life insurance. This may add another aspect to the insurable interest question. Thank you to everyone for your comments. Eric L. Abramson

Let's look at this from a slightly different perspective

First, let me say I have the ultimate respect for Steve Leimberg and Chris Hoyt, and I've had the privilege of knowing both of them personally. When gentlemen of this stature, who rank amongst the most respected people in our field, express concerns, I have always been of the belief that anyone should proceed with great caution. Second, I don't want to argue with a promoter, founder of a product/service, someone who has a vested financial interest, etc.; however, let's understand that there are many moving pieces being discussed here. The product/service might have very narrow use or application -- perhaps, only because we are not assured that they completely work. Many of these types of things take on a life of their own. They can ebb and flow from the conservative to the abusive. This is nothing new in the nonprofit world, or the estate planning world. Split dollar is a perfect example. Look at where it started, then look at the mutuations it underwent, and finally look at where it ended up. A lifecycle that went from large, publicly traded corporations, to the smaller closely held business, to the family home, and then to the charitable world. As it entered each new market or marketplace, there were more and more tweakings that were neccessary. Product design reacted, sales process reacted, many aspects had to react to the changes. I've looked very closely at this, and my point is not to debate the substance, the failure, the success, the possibility or probability of success, or anything like that. My perspective is that of -- is this truly good for charity? Does this further a nonprofit's charitable mission? Yes, money allows a charity to further their mission, serve the community, etc. However, that is not something that is done blindly. A charity doesn't raise money blindly. Is this "just" another way -- perhaps a risky one -- to "raise money" for an organization? Is there a cost, a potential cost, or an unknown cost, to the nonprofit? One has to be prudent and has to look at where this could go. How would the donor react and feel about the charity that brought this to the table if this didn't work out as expected? What would the donor's perception be? What motivations would the donor be looking at? These questions should be looked at more often, and should be looked at with everything that a charity could be at the table for, even if it's just an introduction. In today's day and age, there are wonderful planning techniques, ones that can greatly benefit families, charities, and the communities that we all live in. Looking for the "more" or the "better" often has a cost, and sometimes it is an unknown cost. We should fear the unknown, the "Black Swans" so to speak. As we reach for the stars, and climb higher and higher -- let's remember that our feet get further away from the ground. Eric L. Abramson

CHIRA

With charitable gift annuity rates changing in February, there has been a great deal of information published about charitable gift annuities. This viable planning vehicle is similar to CHIRA

CHIRA

Why involve life insurance in this planning at all? Why not "invest" a portion of the self directed IRA with a charity, as a private placement interest only note? At death, the charity could either repay the principle, or the donor could pledge to make a gift (release the obligation) to the charity? 1) this is simpler/ cleaner; 2) the net to everybody (expect the insurance agent) will probably be higher.

CHIRA - UBIT

Prof. Hoyt, thank you for your comments. I discuss the UBIT issue and related tax issues along with the economics of CHIRA. Unrelated Business Income Tax and Related Tax Issues In an effort to prevent an erosion of the tax base and unfair competition with for-profit organizations, the Internal Revenue Code ("IRC") Section 511 imposes a tax on unrelated business income of exempt organizations ("UBIT"). The tax imposed under IRC Section 511 is upon "unrelated business taxable income." Treas. Reg.1.501(c)(3)-1(e)(1). "Taxable income", in all cases, is dependent upon the determination of "gross income" as that term is defined under IRC Section 61, modified by specific exclusions. IRC Section 512 defines the scope of unrelated business taxable income to generally exclude various forms of passive income. IRC Section 514 sets forth special rules that provide that certain passive income will be subject to UBIT where debt-financed. Under IRC Section 101, the term "gross income" expressly excludes insurance proceeds paid upon death. Where there is no gross income, there can be no UBIT. Where the charity holds the policy, even as investment property, until the donor's death, the CHIRAxc2x99 plan would not trigger UBIT, even where the policy is debt-financed. Death benefits enjoy an exclusion from income whether the policy is held by a for-profit, non-profit or individual. In the rare event, however, that the policy was sold (i.e., bankruptcy of the charity), and the sale generated capital gain, the capital gain would be characterized as debt-financed UBTI. Of course, in such an event, the interest payments made on the note would serve to reduce the net taxable income to charity. I apologize in advance for any appearance of self-promotion, but there is a tax issues memorandum on our site that addresses UBIT as well as a discussion regarding jeopardy investments. A firm grasp on the jeopardy investments law will serve charity tremendously and help guide them in determining the most prudent course on a donor basis. Depending upon age, health and charitable inclination, some donors will not qualify for CHIRA. That is, the numbers won't work for charity. Economics of CHIRA -- The New Source of Endowment While the loan contemplated by CHIRA is certainly favorable, I submit that it is only half of the story. The true economic value in the endowment potential created by CHIRA is in the insurance policy. Where the contractually guaranteed death benefit exceeds the cumulative premiums due on the policy, the excess value immediately accrues for the benefit of the charity. This excess is the value of the insurable interest donated by the charitably inclined donor. For those most charitably inclined, who agree to contribute the annual interest if not the IRA itself, there will be new wealth created in the hands of charity. For example, a 79 year old donor who agrees to contribute the annual interest and the IRA, let us assume the cumulative premiums equal $700,000 and the contractually guaranteed death benefit is $1 million. The excess of $300,000 immediately accrues to the benefit of charity. This excess, the value of the insurable interest, crystallizes only in the hands of charity. This excess is completely dependent upon the purchase of an insurance policy and is intrinsic thereto. It is this excess that would enable charity to build a significant, new source of endowment.

CHIRA

Steve: I'm trying to figure out if this would be good for the charity. I suppose it would be helpful to get the small (20%) amount of upfront unrestricted cash, but you also allude to asking "other donors" to help cover interest payments. Donors who might otherwise make outright gifts greater than $20,000. Why wouldn't the charity simply ask the donor to name them as a beneficiary on the entire IRA. That approach seems much simpler, and it takes out the risks involved in this structure (e.g. making interest payments and/or a third party risk involving the stability of the insurance company). I would think the charity would want to also consider the possible gain in the IRA from the time of the gift to the death of the donor. Might that easily exceed the $100,000 death benefit on the insurance policy? If the donor is willing to make a loan from the IRA, wouldn't he also be willing to list the charity as beneficiary? Particularly given the heavy taxes faced by this IRD asset? Kristen Dugdale University of Colorado Foundation

CHIRA-- debt financed UBIT (Part I)

First, my thanks to all who have contributed to this PGDC page. Very educational and informative. Thanks to Douglas Delaney for getting this ruling. GOOD NEWS AND THEN CONCERNS -- The principal tax concern that I have with this arrangement is whether the charity that takes advantage of it will have "debt-financed" unrelated business taxable income when the IRA loan is used to acquire a life insurance contract. Analysis is below. WHAT'S NEW? As a practical matter, the PLR shows two possibilities that could otherwise be thwarted under current tax laws: #1 -- by lending money from an IRA to a charity, a person can allow the lifetime use of her or his IRA assets by the charity. This can be more tax-efficient than receiving a distribution from the IRA and then donating or lending it to the charity. Except for the $100,000 provision for donors over age 70 xc2xbd ("Charitable IRA Rollover"), usually there is taxable income from lifetime IRA withdrawals. Seems to me that a charitably-inclined individual would also want to make a charitable bequest of those IRA assets to the charity at death in order to cancel the debt. #2 -- IRAs are prohibited from owning life insurance. This arrangement permits IRA dollars to indirectly be used for the purchase of insurance. WHAT DID THE IRS CONCLUDE? STEVE LEIMBERG'S GREAT SUMMARY: The IRS ruling addressed two very important legal issues. "(1) whether or not this technique is a "prohibited transaction" under Code Section 4975 such that the IRA would no longer be considered an IRA under Code Section 408(e)(2) and (2) whether the transaction is a "prohibited investment in insurance" under Code Section 408(a)(3)." The IRS said there was no problem with either. As Steve Leimberg pointed out, "PLRs protect only the taxpayer who asked the questions and only with respect to the questions asked. Note that the ruling did not speak to any other aspects or issues of federal or state law. These, of course, must be considered. Nor does the ruling address (and few do) the "workability" aspects; i.e. does this technique give the donor, the IRA, the charity, and each of the other parties involved something more than they had before - or could have had using an alternative method."

CHIRA

Some of us have the job of solving financial and estate planning issues for clients; some must fold into that process, the championing of charitable causes. And others just sell life insurance--any way they can--even if (especially if) it involves a "Rube Goldberg-like" scheme or two. CHIRA is not a gift planning tool; standing alone, there IS NO GIFT. Rather, it is a VERY inflexible (for both the IRA owner and the charity) investment strategy. The IRA owner must leave her money at interest, with a charity, and give up access to that principle till death. The charity (once it's bought a policy) must not only make sure that policy stays alive, it must pay interest on the face amount of the transaction till the insured dies! By the very definition of life insurance, a charity could "win" if the insured dies early. But what are the risks of being "under water" if the insured lives well past life expectancy? It would be interesting to see just how much this could cost a charity if: (1) the life insurance policy performs at guaranteed --oh, let's make it a little easier and go with "midpoint"-- levels, (2) the loan interest accrues at realistic market rates (compensate up for the illiquidity of this transaction), and (3) run this fiasco 5 years beyond life expectancy. A huge bright spot in this PLR development (thank you, dear CHIRA-Proctors), is the possibility of an insurance-less CHIRA. If such a plan was coupled with an enforceable pledge, a capital campaign could actually make use of tax qualified assets before a donor's death, for only the carrying costs of those funds. This could make the extension of PPA moot.

CHIRA -- Debt-finaced UBIT (Part II)

UNANSWERED LEGAL QUESTIONS: Many of you posed great questions about what happens if the IRA owner lives longer than the average life expectancy; if the IRA Owner doesn't make annual cash contributions that equal the interest payment on the loan; etc. Great points. For me, the biggest unanswered tax challenge is whether when the charity borrows money to acquire a life insurance contract, will that transform payments from the life insurance contract into "debt-financed unrelated business taxable income." As a general rule, a tax-exempt charity does not pay income tax on its investment income -- interest, capital gains, etc. However, when a tax-exempt organization borrows money in order to make a financial investment, then the income from the financial investment is generally taxable UBTI. For example, using 5% CDs as collateral for a loan that was used to acquire CDs that paid 8% made the 8% CDs taxable debt-financed UBTI. Kern County Electrical Pension Fund v. Commissioner, 96 TC 845 (1991). Withdrawing the cash value of a life insurance policy to purchase securities created acquisition indebtedness for the income earned by the securities when there was an obligation to repay the cash value. Mose & Garrison Siskind Memorial Foundation Foundation v. United States, 790 F.2d 480 (6th Cir. 1986). THE OPPORTUNITY: What interests me the most is the idea that an IRA Owner can make a loan from the IRA during his or her lifetime to help a charity accomplish a charitable purpose. To construct a dormitory at a university; to pay for a floor of a hospital; to allow a church, temple or mosque to acquire land near the structure. No chance of debt-financed UBIT there. This allows the donor to see good things during his or lifetime from the IRA resources that might otherwise only occur if the IRA was used as a bequest at death. Makes sense that this type of donor would then also want to make the charity the beneficiary of the IRA at death to cancel the indebtedness. I'm nervous about using the IRA loan as a financing tool for making an investment in a life insurance contract in case that contract is viewed as "investment property" under the debt-financed UBIT laws of Sec. 514. The unanswered issue is whether or not a life insurance contract is "investment property." Just my 2 cents. Chris Hoyt Univ. of Missouri (Kansas City) School of Law Disclaimer: Not necessarily the views of UMKC. Circluar 230 blah blah blah ...

IRA?Charitible IRA

Interesting idea. My question might be who would be willing to serve as Custodian for this "Loan IRA"? And, what annual fees might be expected for providing annual valuations/reporting, etc.? Michael J. Lutz

CHIRA and Traditional Financing

As an estate and tax planning attorney, as well as a retired CPA, I, too, have the job of solving financial, estate and charitable planning goals. I have experienced the frustrations of both client and charity alike in the attempt to accelerate the benefits associated with charitable transfers of qualified assets. Because the CHIRA will work to transfer substantial assets from Wall Street to Main Street, I expect no less than caustic objection from investment advisors as it will greatly reduce assets under management and related fees. To properly view the application of this plan, it is important to understand that the relevant donor is very charitably inclined and wants their charity to benefit immediately. It deals with the very real mortality risk associated with the death of a dear donor who may or may not ultimately designate the charity as beneficiary. Financing transactions, as indicated by your hypothetical, do not offer much flexibility. Private placement notes are due upon maturity, principal and interest. The cost of this inflexibility will be determined by the charity's ultimate ability to repay the debt. The flexibility in the donor's ability to change the beneficiary of the qualified asset is a true mortality risk to the charity in a pure financing transaction. In the CHIRA plan, the risk of donor flexibility is covered. The CHIRA plan is intrinsically different from a financing strategy and simply another tool in the hands of the planner. Financing transactions require repayment. The CHIRA plan provides for this in a manner that immediately frees up substantial funds to the charity through use of the guaranteed death benefit. The leveraging benefit associated with insurance is not a pure mortality gamble on a single person. It is spread over a substantial pool of individuals. This risk shifting characteristic of insurance is not present in other investment markets. The investment return that would have to be guaranteed to generate a present surplus of $500,000 (as set forth in the example) would be not be assumed by most prudent investment advisors, especially in light of recent market volatility. Funded through a pre-tax environment, it is the leveraging quality of insurance that makes this plan attractive. There is immediate wealth created for the benefit of charity. Insurance, like any asset, must undergo a cost benefit analysis. This is not a one-size fits all type of strategy. Not all donors are insurable and not all policies are cost-effective. Reasonable minds can differ on strategy and implementation across a broad spectrum of legitimate and feasible plans. As indicated in my example, in the CHIRA plan, the death benefits are contractually guaranteed. There is no need to "up" to estimate to a mid-point return. It is a more conservative approach to deal only with the guaranteed rate. The inherent leveraging qualities of insurance provide ample, immediate return. The donor in the example is charitably inclined and does not require the funds for their consumption needs. The donor agreed to service the loan interest during their life, even if beyond actuarial life expectancy. The loan interest is intentionally structured to be as low (not high) as possible. Contrary to your assertion, there is a gift, albeit non-taxable and not reportable. The gift is of the donor's insurable interest. The charity is in a special position to receive and benefit from this gift. In this case, its value only materializes in the hands of the charity. The immediate value of the guaranteed insurance leverage in the example is $500,000 in the hands of charity. The CHIRA would work incredibly well in conjunction with a PPA gifting strategy. To say that CHIRA would render PPA "moot," misses the point of both. The goals of the CHIRA and PPA gifts are to get immediate equity to charity as soon as possible, not retain it for years until date of death in hopes of a higher return lurking around the corner.

CHIRA vs Private Placement/Traditional Financing

Your insightful comments present the opportunity to highlight the difference between traditional financing or private placement notes versus the long term endowment strategy presented through the CHIRA plan. For ease of discussion and comparability, I assume the following fact pattern: Charity one (C-1) receives a $1M interest only private placement note from the Donor's IRA bearing 5% simple interest. The term of the note is 20 years, accelerated upon the donor's date of death. The donor is charitably inclined and agrees to contribute the annual interest payment. The donor's children have made no agreement to continue servicing the interest or extending the maturity date of the note. The charity utilizes the $1M in newly acquired financing in their capital campaign as opposed to an investment portfolio. C-1's debit (building fund) equals its credit (long term debt) at $1M. Upon the donor's date of death, the principal amount of the debt is $1M. Although revocable at any time, the Donor honored their promise to name the charity as the sole beneficiary of the IRA. During the term of the note, C-1 had a mortality risk of debt repayment upon the donor's death because the donor would not ultimately name the charity as the IRA beneficiary. Due to this mortality risk, any net economic benefit to C-1 could only be determined upon the donor's date of death. C-1's economic benefit results solely from the donor's designation of the charity as the beneficiary, as opposed to a particular endowment strategy. Results: As a result of the IRA beneficiary designation, C-1 receives an economic benefit of $1M upon donor's date of death. No income taxation to donor. Charity two (C-2) implements the CHIRA plan as a long term endowment strategy. C-2 assumes the same facts as above, with the additional fact that C-2 capitalizes on its unique ability to purchase insurance on the life of the donor. C-2 utilizes half of the loan proceeds as a long-term strategy to address the mortality risk associated with repayment of the $1M. As with C-1, the donor is charitably inclined and agrees to contribute an amount to C-2 equal or exceeding the interest payments. The charity utilizes the $500k in net, unrestricted funds to commence with their capital campaign. C-2's debits ($500k building fund, $500k insurance policy) equals its credit (long term debt). Upon the donor's date of death, the principal amount of the debt ($1M) is repaid to the donor's IRA through operation of the guaranteed death benefit under the insurance policy. As with C-1, the donor honored their promise to name the charity as the sole beneficiary of the IRA. C-2 did not have the same mortality risks as C-1. The insurance policy guarantees the repayment of the debt whether the donor dies this year or in the future. Unlike C-1, who takes a greater risk in hopes that the donor honors their commitment to designate the charity as beneficiary of the IRA, C-2 has a strategy to repay the debt. C-2's strategy is arguably a more conservative approach. Results: After execution of the CHIRA plan, during the donor's life, C-2 has unrestricted access to $500,000. As with C-1, the IRA beneficiary designation generates an additional $1M to C-2. No income taxation to donor. As with any charitably inclined donor, there is a risk that the benefactor may die and their financial contributions may cease as well. The CHIRA plan provides a very prudent method of capturing immediate value from a qualified plan that cannot be achieved through a lending arrangement. I would have to respectfully disagree that the net amount to charity will be higher under any traditional financing or private placement note versus the CHIRA. The decision to use commercial or private financing is a different from the endowment strategy presented by CHIRA. Of course, the net funds generated through CHIRA could be utilized as a downpayment on a larger financing transaction.

CHIRA - The New Charitable IRA

As the developer of the CHIRA, I welcome all planners to review our website, www.chirausa.com, for more information on this great new, planned giving method. The spirit of the plan is motivated by charitable intent. It is neither an investment play, an insurance arbitrage nor a method to reduce, defer or minimize tax. The CHIRA enables the charitably inclined donor to substantially benefit their charity now, and later, if desired, through use of their IRA. As indicated by the ruling, the CHIRA does not trigger income tax built within the IRA. While there are planning issues associated with crafting an individual planned giving strategy, the immediate results can be significant. The classic leveraging power of insurance in a pre-tax environment can be combined without the troublesome issues associated with LILAC or CHOLI plans. This is truly a plan that is motivated by charity. Pensco Trust Company has agreed to custody the CHIRA plans.

PGDC Disclaimer

The Planned Giving Design Center ("PGDC") and its hosting organizations encourage the free exchange of ideas and discussion of products and services related to charitable gift planning. The PGDC's Guidelines for Discussion Forums and Comments http://www.pgdc.com/usa/help/forum-guidelines/ includes the following statement regarding advertising: "Discussion forums and comments are intended for the exchange of ideas, not self-promotion and marketing (also known as "spam") of products and services. If, however, you are aware of an independent product or service that would assist another member, it is appropriate to make that product or service known." However, because the subject of the present article is a specific product/service, we believe it only fair to encourage PGDC members to evaluate it for themselves. In that connection, the PGDC has not reviewed nor does it endorse the "CHIRA" product/service and is not associated with its promoters in any way. Organizations should, therefore, perform their own due diligence and seek the advice of their own counsel in determining the efficacy of this concept and its promoters. Best wishes, Marc D. Hoffman Editor-in-Chief Planned Giving Design Center, LLC

Response from Steve Leimberg

Steve asked us to post this on his behalf: In answer to Kristen Dugdale's question as to whether "this would be good for the charity", please keep in mind that my comments went only to the limited extent of the tax implications -- and to the caveat that this technique would have to be compared to alternatives. It is yet another way that someone might want to benefit charity. And Kristen is, of course, correct that some donors might name the charity as beneficiary of the entire IRA. She's also correct in her statement "That approach seems much simpler, and it takes out the risks involved in this structure (e.g. making interest payments and/or a third party risk involving the stability of the insurance company)." I don't think the charity need be concerned with any gain in the IRA -- since it's not really involved with the IRA itself. There should be no IRD taxed to the charity. Would a donor who might make a favorable loan to a charity -- through the IRA -- also be willing to list the charity as sole beneficiary of the IRA? Perhaps. Perhaps not. As is the case with ALL tools and techniques of charitable planning, there are no "free lunches" or perfect solutions -- and certainly this one has not been tested. I caution everyone to reread my comments -- and to remember that PLRs respond ONLY to the questions asked. Were there questions that should have been asked that were not? Even if this device has no "tax flaws", is it economically viable -- particularly when compared to viable alternatives? That's a question that must be answered on an individual basis. I was certainly NOT endorsing the concept; merely introducing it. Whenever faced with a novel idea, I rarely accept it without question -- but neither do I automatically discard it. I'm always reminded of two thoughts: First, pioneers are the people lying on the ground with arrows in their backs. Second, Only the lead dog in a dog sled gets to see new scenery. Don't jump into any new idea as the charitable panacea of the week -- but at the same time -- don't discard an idea merely because it wasn't invented here -- or because it hasn't been thought of before.

CHIRA

I concur with Steve's comments. As planners, you must have many tools in assisting donor. One size does not fit all. While certainly not limited to these facts, the CHIRA is at its best when (1) the donor has already decided to name the charity as beneficiary and (2) the donor is making PPA gifts to charity. The key for the charity is determining a viable interest reserve. Where donors are willing to make gifts equal to the interest, similar to those already present in the burgeoning charitable microfinancing industry, the numbers are truly impressive. With PPA gifts exceeding $100M, the CHIRA can help us become the best stewards of this legislation. The CHIRA plan in the example shows how two $100k PPA gifts are turned into $500k immediately for the benefit of charity. At this ratio, I think charities can turn the value of $100M in current PPA value into $250M. Planners need to be aware of the pros and cons in every plan. Each donor comes to your table with different assets, issues and goals. The CHIRA can certainly be beneficial to charities.

Charity as beneficiary of IRA vs CHIRA

It seems that one of the benefits of the CHIRA concept vs a simple designation of the charity as a beneficiary of an IRA is the revocable nature of a beneficiary designation in an IRA. The CHIRA would appear to be an irrevocable event, subject to fulfillment of the interest payment obligation to keep the loan from default. Revocable vs irrevocable. Uncertainty for the charity vs control for the donor. The availability of current as well as deferred benefits to the charity look appealing.

CHIRA

Donors who have expressed intent to gift their IRA should look into CHIRA

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