Magazine article The CPA Journal
New York Clarifies Law as to Insurable Interests of Charities
Life insurance can be an interesting tool in charitable gift plans. For instance, a term-life policy might be used to satisfy a significant charitable pledge.
In PLR 3110016, the IRS considered the question of whether a past contributor to a charity could apply for a life insurance policy and have the charity as the sole beneficiary. Upon issuance of the policy, the contributor would irrevocably assign the policy to the charity. The contributor, though not required to, planned to pay future premiums on the policy. The contributor conceded that the charity did not have an insurable interest in his life.
The ruling considered several tax issues relating to the proposed transfer. Did the initial transfer qualify for a charitable deduction for income tax purposes? Did the payment of premiums qualify for a gift tax charitable deduction? If the contributor died within three years of the transfer, were the policy proceeds includable in his estate? Finally, if the contributor survived more than three years, would the proceeds be includable in his estate?
The IRS focused on Sec. 3205(a)(2) of the New York Insurance Law which prohibits anyone without an insurable interest from obtaining an insurance policy on the life of another person unless the benefits are paid to a person with an insurable interest. The IRS viewed the contributor's obtaining the policy and transferring it to charity as an attempt to circumvent the provision of New York State's Insurance Law. The IRS reasoned that such a violation of the law either prevented the insurance company from paying policy proceeds to the charity or if, the carrier did make payment, a cause of action could arise in favor of the contributor's estate.
The possibility of either non-payment by the insurance company or recovery by the contributor's estate ruined the plan. An income tax deduction would not be permitted since the contributor could not transfer all his rights in the policy. …