SilverLink - Spring/Summer 2008 - (Page 26)

Life insurance is often used to “endow” a donor’s annual giving by naming the charity as beneﬁciary of insurance on the benefactor’s life. Typically, the charity owns the life insurance policy and the benefactor makes annual gifts to the charity in an amount sufﬁcient to pay the required premium. In return, the benefactor receives a charitable income tax deduction equal to the annual gift—and has the satisfaction of knowing that an endowed fund has been created. There may be a time, however, when the benefactor doesn’t wish to part with out-of-pocket cash to ﬁnance the premium. In this case, taking a loan from an IRA may be the solution. In a recent Private Letter Ruling (PLR 200741016), the IRS indicates that a loan from a benefactor’s IRA to a charity for the purpose of buying life insurance on his/her life is not a Prohibited Transaction under Code Section 408(a)(3). is critical that all parties entering the transaction be aware of potential problems that may arise. Thoughtful planning is necessary to ensure that procedures exist to address the following conditions: 1. If the insured lives longer than expected, the interest owed each year will continue. In the event the $30,000 fund set aside for this purpose is exhausted, the charity may need to ask the benefactor for additional contributions sufﬁcient for the charity to make interest payments to the IRA. The same may be true regarding required payments of life insurance premiums. However, it is possible to structure the policy in such a way that after a certain number of years, no further premium payments are necessary. When designed in this manner, the fact that the insured lives longer than expected may not be an issue as it relates to future premium payments. Strategy for an IRA Loan It is important to plan and implement the charitable donation process carefully to ensure that the transaction results in the intended purpose. The following example presents one strategy that can be used for an IRA loan donation: The benefactor owns an IRA which isn’t needed for current income. The IRA lends $100,000 to the charity. The charity immediately sets aside $50,000 to pay future premiums on a $100,000 life insurance policy on the benefactor. It also sets aside $30,000 to pay future loan interest that will be due annually to the IRA custodian. The balance of $20,000 can be used immediately by the charity for its charitable purpose. Upon the death of the insured, the charity, as beneﬁciary, receives $100,000, which is used to pay off the loan amount owed to the IRA. The results of this type of strategy: The IRA remains “whole,” in that each year it receives market-rate interest from the charity. The interest received can be used to satisfy any Required Minimum Distribution (RMD) in the event the IRA holder is age 70½ or older. Upon death, the IRA is repaid the entire principal amount. The charity receives $20,000 up front, which can be used for its charitable purposes. If the insured unexpectedly passes away in a short period of time, the charity is allowed to keep the balance of the money it had set aside for future premium payments and loan interest. As with any ﬁnancial strategy, however, there are some caveats to be considered. While using an IRA loan to fund a charitable donation may be an attractive alternative for some donors, it 2. The loan must be an arms-length loan at market rates. It is typically set up so that it will be paid at either 20 years or the death of the insured, whichever occurs ﬁrst. 3. Neither the IRA nor the Benefactor may have an actual ownership interest in the life insurance policy. The IRA is entitled only to fully-secured interest in the amount loaned, via a collateral assignment related only to the portion of the life insurance death beneﬁt that is sufﬁcient to satisfy the indebtedness. 4. The IRA custodian must be willing to enter into such a loan arrangement. Variation on the Strategy One variation on the above strategy would be to have the benefactor donate a sufﬁcient amount each year to provide the funds necessary for the charity to satisfy the interest payments due annually to the IRA. By doing so, the charity will only have to hold back $50,000 of the initial $100,000 loan proceeds to be used for future premium payments. The balance of the money can be used by the charity for its charitable purposes. This would appear to be a more conservative approach, since it eliminates the risk that interest owed will exceed the amount initially set aside for such payments. As with any creative strategy, all parties should thoroughly study both the advantages and disadvantages of the plan. A team of advisors, including the charity, the IRA custodian, the benefactor’s counsel and the insurance professional should carefully study the merits of the technique under consideration. Once the analysis is complete, it may be that this strategy nicely accomplishes the benefactor’s long-term personal and charitable objectives. CONTACT JEFF SHARP AT 402.96 4.54 40 OR JSHARP @ SSGI.COM 26

Table of Contents Feed for the Digital Edition of SilverLink - Spring/Summer 2008

SilverLink - Spring/Summer 2008 Contents Risk Management: Mitigate & Educate Disastrous Distractions Accounts Receivable BoomerCare Risk Reduction, What’s Your Function? Time Out! Double Down Employee Benefits: Who’s Paying Whom for What? Time to Reconcile Keep Your Eye on the Pension Prize Show Me the Money Private Client Services: A Generous Strategy Is There Any Good News Left? Special Insurance for Special Times Client Spotlight: Omaha Performing Arts Internal Happenings: SilverStone Group Wellness Activities Group

SilverLink - Spring/Summer 2008

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