What a Deal
(Added 12/19/2011)
I know: it sounds too good to be true. But, really, even my skeptic's eye is caught on this one. It's about insurance. Our charity has a handful of policies that are in force and nothing is wrong. So the board, in large part because I've championed them over the years, sees insurance gifts as positive additions to our planned giving program's expectancy file. So last week a representative of an insurance firm told me that if we sell policies on the lives of our board members - or if a donor buys or a few donors buy policies on our board members, and the charity would own the policies, of course - then we could get an annual income, which, over time, would be significant. And, he said, the death benefit is just gravy; that the real benefit is the income our organization would receive every year for 20 years. The math is logical and the program makes sense, especially in a shaky economy. But a colleague told me not to touch it. Is there a possible ethical problem here?
You're describing "Charity-Owned Life Insurance," also known as "ChOLI." A few years ago, before the markets turned down so severely, I investigated this type of program on behalf of a firm - perhaps similar to the one represented by the person who visited you and found, basically, that for this type of program to work, the underlying investments need to outperform the markets, or the interest rate on a bond that would collateralize the charity's loan. (Maybe the salesperson forgot to mention that detail.) While this could be accomplished with some alternative investment strategies before the recession, almost all of those strategies, those used to drive the program you describe, have been laid to waste. The complexity of the schematic I needed to develop just to understand which parties were in charge of which transactions, as well as the money flow, was staggering - even with good eyesight. Which makes me wonder if your "skepticxs eye" is in need of an examination.
Don't do it. It's precisely the shaky economy that makes the program an even more probable bust than in a good investment environment. I couldn't possibly condense the idea into a short space and do it justice (although other would no doubt do a better job), so I refer you to the conclusion of an April 2010 report from the Treasury Department ("Report to Congress on Charity-Owned Life Insurance"): "It is apparent that there are a number of respects in which ChOLI arrangements may be viewed as inconsistent with the policies underlying the Federal income tax benefits for charities and life insurance." Even more deflating was this observation: "The magnitude of the investors' interests in the insurance policies, compared with the charities' interests, raises questions . . . that are critical to the charity's exempt status, including potentially significant conflicts with the requirement of organization and operation exclusively for an exempt purpose and with the prohibition on substantial private benefit." So, without even going to the ethics of the matter, the potential legal pitfalls are daunting.
But why go there? Why potentially destroy good will and relations in your community - to say nothing of your place in the charitable world just to make a few bucks? I've not been able to follow programs that were established, but that, I think, is a reflection of their lack of success. (Who wants to open the books on investments that went bad?) I know that many people come through the doors of development offices all around the country every day with products and services that really do have a good chance of helping the charity. But many of those people actually have at least some idea of a charity's purpose. ChOLI schemes are too often marketed by people who have no idea what charities are about and whose main concern is a large payday for themselves. More important, however, is maintaining your institutional integrity by saying no - especially when a transaction is so complicated no one understands how it really works.