December 2, 1999 | Read Time: 2 minutes
The House and Senate have approved legislation that will effectively abolish a controversial giving technique in which charities and donors divide the proceeds of life-insurance policies purchased with tax-deductible contributions. President Clinton was expected to sign the legislation, which was included in the Ticket to Work and Work Incentives Improvement Act, H.R. 1180, a package of tax measures.
The provision will 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. The technique was first exposed as troublesome by The Chronicle last year (August 13, 1998).
In a typical split-dollar deal, a donor seeks to minimize federal income and estate taxes by setting up a life-insurance trust and naming a family member as beneficiary. Separately, the donor makes an annual tax-deductible gift to a charity, stipulating that the charity can use the gift any way it wishes.
The insurance trust buys a cash-value life-insurance policy on the donor, and the trust arranges to pay a small part of the policy’s annual premium. The charity pays most of the premium. The charity’s premium payment 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 Congress will 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 will have to provide the government with details about any split-dollar premiums they paid after that date. The financial penalty will equal the insurance premiums paid by the charity.
Congress encouraged the Treasury Department to write regulations to prevent people from trying to get around the law.
