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Letters of Explanation: Donating a Policy to Charity

August 16th, 2018 No comments

Good Afternoon:

It is my pleasure to be introduced to you.  Your accountant referred you to me because of the frustrating, yet required process when donating a life insurance policy to a non-profit.  I understand it is not pleasant to hear you won’t be getting the deduction you were expecting for your policy donation to the school but the process I will bring you through will get you everything you are entitled to.

Unfortunately, your cash value is not the number the IRS looks at when taking donations into account.  To think about it in a simplistic way, they aren’t eager to let you take a deduction for something you have never paid tax on.  In other words, the special rules which allow your life insurance cash value to grow tax free is what is preventing you from fully deducting that same cash value.

The tax rules state that the deduction is for the cash value or your basis in the contract, whichever is lower.  Even though your cash value is $100,000, the premiums paid into your policy total $22,000.  The $78,000 of tax free growth is not deductible.  On the other hand, if your cash value was only $10,000 then that would be your limit.

Additionally, the rules say that if your donation exceeds $5,000 you must also have an appraisal.  The purpose of this is to prove that the policy is not worth less than the cash value and the basis, though that is almost never the case.  Life insurance simply got caught up in the appraisal rules for everything else.  Because of the nature of your policy, I already know off the top of my head what the fair market value of your policy is but we still have to go through the formal process.

Fortunately, I have relationships with multiple life insurance appraisers around the country and I know which ones to go to for which purposes.  You don’t want to pay more than you need to but you also definitely don’t want to cheap out when you shouldn’t.  For a case like this, there is a specialist I work with who charges a very modest flat fee.  It is my responsibility to collect all of the forms and paperwork, get them to him, coordinate with the non-profit and bring this all together for you to hand to your CPA.

Again, sorry for the disappointment but probably better to deal with this now than have the IRS come back next year with tax and penalties for an improper deduction.

I look forward to the process and please don’t hesitate to call or email my with any questions.

Sincerely,

Bill

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Letters of Explanation – Trustee Liability

July 31st, 2018 No comments

This letter is to the management of a law firm.  Multiple attorneys act as trustees for clients.  There has been no program of management regarding these policies and I was called in to suggest a plan.  I was also able to look at redacted policy information and could see at a glance that many policies are underperforming and headed towards failure.  A decision was made that the attorneys deal with it on a case by case basis as they see fit.  I see this as a grave mistake.

Dear Firm Management:

It’s been a while since we’ve talked and the last time we did you mentioned the attorneys who are acting as trustees will be deciding independently on how to proceed.

I understand this but as we discussed earlier, if things go wrong (which they have and will) and result in a lawsuit, case law has shown that an independent third party is critical to a successful defense.  I am currently involved in four litigation support and expert witness cases, some going after trustees and some defending trustees. For full post, click here…

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Letters of Explanation: Whole Life Term Blend

July 25th, 2018 No comments

This letter is to a client explaining why the term blended whole life policy on his mother is failing:

Dear Mr. Client:

Unfortunately I still do not have what I requested from XYZ Life but I was able to do some work anyway.  Also, what I requested may end up being sent directly to the policy owner, which is you as trustee, at the address of record.

You had asked about potential income tax consequences regarding this policy and I believe there would be none as it looks like the gross cash value is less than what I calculate the basis to be in the contract.  I am waiting on a formal basis and gain calc from the company. For full post, click here…

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