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Learn About The Just Released PLR Dealing With IRAs, Charitable Planning And Premium Financed Insurance

By Roccy M. DeFrancesco, JD, CWPP™, CAPP™ - Email Editor

Date : 20-Nov-2007

Dear Subscriber:

On October 16, 2007, a very interesting Private Letter Ruling (PLR) was released by the IRS that I thought merited discussion in this newsletter.

While many people know what a PLR is, some do not. The following is a typical summary of what a PLR is and does.

If a taxpayer has a tax issue with the IRS, that person, before completing a certain action (i.e., paying the required taxes) can request the IRS to rule on that tax issue. A PLR is the letter the IRS sends back to the taxpayer that explains the rulings and the rational for the decision. A PLR is specific and applicable to that tax situation and that taxpayer only. Moreover, PLRs of other taxpayers cannot be used as precedence by a person requesting a ruling regarding his or her own issue, and in no way binds the IRS to take a similar position when dealing with different taxpayers.

The PLR that recently came out deals with a premium financed life insurance program that has a major twist; the insured’s IRA financed a policy for the benefit of a church.

Seeing that many readers of this newsletter have IRAs and are charitably inclined (or have family members who are) and because everyone seems intrigued with a premium financed life, this PLR is one that you need to become familiar with, if it makes sense to incorporate into your estate plan (or that of a family member).

PLR Facts

- The Taxpayer had a self-directed IRA.

- The IRA loaned money to a church.

- The loan was at 5% annual interest, with the full amount of principal due either at the end of 20 years or after the death of the IRA owner.

- The loan was to be collateralized by an insurance policy owned by the charity, with the IRA owner being the named insured.

Did you catch that last one?

The money that the IRA was loaning to the charity was used to purchase a life insurance policy on the IRA owner. In effect, the IRA owner was creating a premium financing program with the charity using his or her IRA money.

Let’s examine this in detail

First, The IRA owner had a self-directed IRA, which was directed to make a loan to what is presumably his church.

Under the Pension Protection Act, individuals have been able to make a qualified charitable contribution of up to $100,000 of their IRA money; however, they can only do so if they are over 70-and-a-half-years-old, and if code provision sunsets in 2008. The letter ruling doesn’t state unimportant figures such as age or dollar amounts because the IRA owner wasn’t trying to make this a qualified charitable contribution; instead, it was a “loan”.

By using a self-directed loan, charitable-minded IRA owners can effectively move their IRA account over to their favorite charity while living. This PLR, while not binding, is a major factor for the thousands of clients who would like to give their IRA balances to a charity while living, but don’t because of the fact that the IRA will be income taxable to the owner (with the temporary $100k exception listed above).

Second, the loan was interest-only for 20 years. What if the IRA owner was 68-years-old? What is the likelihood that he or she would live for another 20 years? What if he or she named the charity as the beneficiary of the IRA? Once again, he or she was able to achieve the goal of helping the church, instead of having to die to see the church benefit.

A typical situation

As I create C.A.L.M. (comprehensive memos for advisors to help a client with Asset Protection, estate, and tax planning), I often come across a fact pattern where a client has money in an IRA that they will or do not need in retirement and would like to use that money now while they are living to benefit their local church.

Unfortunately, in the memo I have to tell the client that if they gift the IRA to a charity while living it will be income taxable at the time of the gift. (It makes no sense, but that’s the law.)

After the PLR, what can an advisor tell a client?

Keep in mind that a PLR is not binding, but it is still terrific guidance from the IRS to look at when trying to decide to use this strategy to help a charity while living by loaning them money from your IRA.

What will the charity do with the money?

It will fund some or all of the borrowed funds into a cash value life insurance policy to use as collateral on the loan. It also will potentially service the loan from the cash value and may ultimately use the death benefit to pay off the loan at the time of the donor’s death.

Depending on the charity, using a “high cash value” policy may be prudent to make sure the transaction has substance.

Also, depending on the structure, some of the money could be used by the charity to further its charitable purposes.

How should a charity and client/donor like this concept?

They should both love it because it deals with the age-old headache of the tax an IRA owner pays when gifting an IRA to a charity when living.

There are a couple of caveats in regards to this ruling. The service would not provide an opinion that the IRA was a valid self-directed IRA, nor would it provide an opinion that the loan was “bona fide”. Heck, the IRS wouldn’t even express an opinion that it was alright for the IRA to take their required minimal distributions (RMDs) from a different IRA.

Having said all that, this PLR represents a very interesting way of obtaining financing for insurance gifts to a client’s favorite charity.

A friend recently brought up a very interesting point: What if this transaction would have been conducted with a private foundation or supporting organization? This is indeed very interesting and deserves much further thought.

If you have an interest in this topic and would like to discuss it, please email us at and we can schedule a time to discuss it.

Roccy M. DeFrancesco, JD, CWPP™, CAPP™

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