February 25, 1999 | Read Time: 3 minutes
Key Republican and Democratic leaders on the House Ways and Means Committee have introduced legislation aimed at abolishing a controversial giving technique in which charities and donors divide the proceeds of life-insurance policies purchased with tax-deductible dollars.
The bill, HR 630, was introduced by Ways and Means chairman Bill Archer, a Texas Republican, and the committee’s top-ranking Democrat, Charles Rangel of New York. The measure 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.
A separate, less-detailed bill, HR 572, also aimed at stopping charitable split-dollar plans, has been proposed by Rep. Gerald D. Kleczka, a Wisconsin Democrat who is also a member of the Ways and Means panel.
The split-dollar strategy is under investigation by the Internal Revenue Service (The Chronicle, August 13, 1998). Mr. Archer called it “an abusive scheme” that has “no basis under present law.”
“We are concerned that this type of transaction represents an abuse of the charitable contribution deduction,” Mr. Archer said. “We are also concerned that the charity often gets relatively little benefit from this type of scheme, and serves merely as a conduit or accommodation party, which we do not view as appropriate for an organization with tax-exempt status.”
The proposals in Congress have already had an effect: InsMark, a California company that is among the nation’s most aggressive promoters of charitable split-dollar plans, has told its independent sales force of insurance agents, lawyers, and others who market its Charitable Legacy Plan that its split-dollar business is “in a state of suspension” until the legislative matter is resolved.
In a typical split-dollar deal, a donor seeks to minimize federal income and estate taxes by setting up a life-insurance trust, 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 Archer-Rangel measure 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 I.R.S. with details about any split-dollar premiums they paid after that date. The financial penalty would equal the insurance premiums paid by the charity.
Copies of both legislative proposals are available from the Library of Congress’s Web site at http://thomas.loc.gov.
