Heard on the Web: Charitable Life Insurance Gift Program Blows Up on University, Donors

Heard on the Web: Charitable Life Insurance Gift Program Blows Up on University, Donors

News story posted in Insurance on 1 September 2009| 4 comments
audience: National Publication | last updated: 18 May 2011


According to a report in the Des Moines Sunday Register and as further reported in TaxProf Blog, nearly 1,700 contributors to a University of Northern Iowa athletic scholarship fund lost an estimated $6.8 million in accumulated insurance this year when school officials determined the benefit violated federal tax law. The charitable split-dollar arrangements should have been terminated 10 years ago when Congress eliminated the favorable benefits associated with such arrangements and imposed severe tax penalties on their continued use.

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Click here to go to TaxProf Blog for the full story.

PGDC Editor's Note: In 1999 Congress ended charitable split-dollar arrangements (P.L. 106-170, the Tax Relief Extension Act of 1999) and the IRS handed down severe penalties in Notice 99-36, 1999-1 C.B. 1284. See also IRS Guidance on Split-Dollar Insurance Reporting Requirements.

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Charitable Split Dollar

Without being knowledgeable of the particular facts, I would guess that the department simply failed to do an annual review of their existing insurance policies. Good due diligence would involve determining whether any policy owned by the charity had either any non-charity beneficiary or non-charity access to an insurance policy cash value. Policies with these characteristics would be a good population to sample from and compare to current gifts receive by the same insured to determine if these policies and gift relationships violate the personal benefit contract or charitable split dollar rules under IRC 170(f). I would recommend any charity to do this review on all outstanding insurance policies. Douglas S. Delaney, JD, LLM Managing Director CHIRA USA, LLC (843) 815-9777

Who was the agent?

You don't suppose the insurance agent, who received the commissions, was also a member of the board, do you? That would be interesting....

Who might be liable and to whom?

Who might be liable and to whom? University? Insurance company? Insurance agent/promoter? Taxpayer? Tax preparer?

Who liable to whom?

Pretty clearly, the University owes the tax benefit to the donors in spite of those cya warnings in the gift agreement. If it were the University of Iowa instead of the U of Northern Iowa, I would file the suit gratis, but U of NI never did anything bad to the Gophers.

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