June 3, 1999 | Read Time: 2 minutes
The Senate Finance Committee has approved legislation that would effectively abolish a controversial giving technique in which charities and donors divide the proceeds of life-insurance policies purchased with tax-deductible contributions.
The provision is included in the Affordable Education Act, a package of savings incentives and related tax proposals that was put together by Finance Committee Chairman William V. Roth, a Delaware Republican.
The provision would impose a financial penalty on charities that participated in so-called charitable split-dollar plans, making it difficult for them to reap a significant financial gain from the technique.
Key House members have introduced similar legislation to shut down the split-dollar strategy. The I.R.S. is investigating the practice to see if donors improperly benefit and whether charities violate federal law by participating (The Chronicle, August 13, 1998).
In a typical split-dollar arrangement, a donor seeks to minimize federal income and estate taxes by setting up a life-insurance trust, naming a family member as a beneficiary. Separately, the donor makes an annual tax-deductible gift to a charity, and says the charity can use the gift any way it wishes.
The insurance trust buys a cash-value life-insurance policy on the donor, and arranges to pay a small part of the policy’s annual premium. The charity pays most of the premium and the charity’s share of the premium matches — or nearly matches — the amount of the donor’s gift.
The donor or donor’s trust has tax-free access to money in the policy’s cash-value portion, which is a reserve that grows over time. When the donor dies, part of the death benefit goes to the charity. The rest goes to the donor’s heirs, who commonly use the money to pay estate taxes.
The legislation approved by the Senate Finance Committee would deny a charitable-contribution deduction for money given by a donor to a charity after February 8, 1999, in connection with a split-dollar deal. In addition, charities would have to provide the government with details about any split-dollar premiums they paid after that date. The financial penalty would equal the insurance premiums paid by the charity.
The Joint Committee on Taxation estimates that the provision, if enacted into law, would bring the Treasury $70-million over five years and $159-million over a decade.
A description of the proposal is available on the Web site of the Joint Committee on Taxation at http://www.house.gov/jct/pubs99.html.
