• Charitable fundraisers occasionally attempt to raise funds for charity by having individuals purchase life insurance policies on their own lives naming a charity as the beneficiary. Such arrangements can create difficulties, as the IRS observed in a recent ruling. A taxpayer proposed to purchase a life insurance policy on his own life, transfer the policy to a charity, and name the charity as beneficiary. This arrangement was intended to provide the taxpayer with a charitable contribution deduction in the amount of the premiums he would pay on the policy, and in addition provide the charity with substantial insurance proceeds at his death. The IRS ruled that the taxpayer would not be allowed to deduct any portion of the insurance premiums as a charitable contribution. It noted that New York law (the taxpayer was a resident of New York) prohibits anyone without an “insurable interest” from obtaining an insurance policy on the life of another. An “insurable interest” refers to a direct financial interest in the life of the insured. The IRS concluded that since the charity did not have an insurable interest in the taxpayer’s life, the arrangement probably violated New York law. Accordingly, at the taxpayer’s death the insurance company could refuse to pay the policy limits to the charity. Further, the taxpayer’s estate could block any attempt to pay the insurance proceeds to the charity. As a result, there simply was no way to characterize the taxpayer’s payment of the insurance premiums as a charitable contribution, since there was a strong possibility that the charity would never receive any of the insurance proceeds at the taxpayer’s death. Persons considering the purchase of a life insurance policy naming a charity as the beneficiary (and who plan to assign the policy to the charity) should consider the ramifications of this ruling. First, does the charity have an insurable interest in the taxpayer’s life under applicable state law? If not, then the insurance company may never be required to pay the policy amount to the charity in the event of the taxpayer’s death. Second, the taxpayer may not be entitled to any charitable contribution deduction. Private Letter Ruling 9110016.
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