As is often the case, we learn the most when something goes wrong. Recently, I was working with an advisor who has a client with a foundation, or at least that is what we thought. The foundation is for all of the same purposes as most people who have a foundation; to further the goals of non-profit and charitable interests of the donor(s).
I have worked my entire career with non-profits and foundations. I help with strategies, I analyze and manage portfolios of policies, I obtain policy valuations, etc. My wife and I have our own private foundation which, along with other assets, owns a life insurance policy on our lives. I’ve been involved in this every way you could imagine. However, I have never worked with Fidelity Charitable.
Fidelity Charitable is a big player and many, many people utilize it for a whole lot of good. Though you might now expect a “but”, there isn’t one coming. I have no personal experience and no criticism. However, a recent occurrence left me scratching my head.
The advisor’s client is a recently retired executive/business owner and a sizable term life insurance policy was rolled out of the company to him after he left. He converted a portion of it for his dynasty trust and intended to gift the balance of the policy to his foundation where he was going to convert it.
Transactions like this happen every day all over the place. The agent provided the signed change of owner and beneficiary paperwork as well as the conversion forms. Pretty straight forward. During the process a question came up regarding payments of premiums and the client called Fidelity for their input. Remember, at this point I thought this was a private foundation and had no idea it was actually a donor advised fund through Fidelity. He was told they could only accept policies and not pay premiums for them. I didn’t understand how that made sense so I called myself.
As many of you probably already know, sure, Fidelity will accept a policy but will not pay a premium because upon accepting a policy, their practice is to cancel the policy, hence there is no policy for which to pay a premium. Riddle solved.
Not wanting to take one person’s comments at face value, a week later I called in to their advisor service desk and asked the questions again. The answers were the same. They simply are not in the business of holding assets which are not traditional investment assets. In fact, in regards to their criteria for accepting non-publicly traded assets from a donor, their website states “We must be able to find a purchaser for the asset – someone unrelated to the donor – and must be able to sell the asset for a reasonable price within a reasonable amount of time.”
So I asked a clarifying question. If I have a $1,000,000 life insurance policy with $100,000 of cash value on the life of an individual with a demonstrably short life expectancy, would you hold that? Evidently the answer is no.
None of this is a complaint but is simply interesting to me. I feel it is also very important for more people to understand. If the donor, in my situation, along with a very experienced advisor, agent and myself, had no understanding of this, I’m sure others don’t either. Given how often I work on charitable planning strategies with advisors and clients and how often this planning incorporates life insurance, it certainly seems Fidelity Charitable is missing out on a meaningful piece of potential business but if this simply isn’t their model, we’ll plan accordingly. In my client’s situation, we ended up moving the entire account away from Fidelity to a local donor advised fund who was happy to accept the policy.
Lesson learned.
