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Senators Grassley and Baucus Introduce Charity Life Insurance Bill
Senators Charles Grassley (R-IA) and Max Baucus (D-MT) have introduced legislation to place a 100 percent excise tax on the acquisition costs of certain life insurance contracts purchased by charities which primarily benefit unrelated private investors. The Grassley-Baucus bill (S. 993) would also impose reporting requirements on both the charity and the investors, with penalties for failure to file. If passed, the legislation would have an effective date of May 3, 2005. It expands on a proposal in the President’s budget that would impose a 25 percent excise tax on the proceeds of certain life insurance arrangements in which charities purchase policies on their donors.
In brief, the transactions which are the focus of the legislation work as follows: An investment bank sells fixed income securities interests to investors, usually institutional (such as life insurance companies, hedge funds, and private banking clients). The capital raised goes into a trust (established by the participating charity), and is used to purchase “life only” annuities and life insurance policies on the charity’s participating donors. The income from the annuities is then used to pay the premiums on the life insurance policies and to provide a guaranteed fixed return to investors. At the death of the insured donor, the trust first uses the proceeds from the life insurance policy to repay the investors and then any remaining death benefit, perhaps a substantial sum but a small percentage (e.g. 5-7%) of the overall policy proceeds, go to the charity.
In essence, the charity sells its “right” to purchase such insurable interests in donors to investors, who otherwise are mostly barred by state law from purchasing such life insurance contracts, in exchange for a small percentage of the overall scheme. Although these schemes are relatively new making it difficult to assess their real return to the participating charities, a secondary market has already developed, permitting investors to sell their interests.
The Grassley-Baucus bill seeks to stop these transactions through the imposition of an excise tax, equal to 100 percent of the acquisition costs, on the transaction at the time the contract is made. In contrast, the Administration’s proposal, contained in the President’s FY 2006 Budget, would have imposed a 25 percent excise tax on the proceeds from such life insurance contracts.
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