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§ 17.6 CHARITABLE SPLIT-DOLLAR INSURANCE PLANS(a) Plans in GeneralThere are several variations of these plans, essentially all of which are now effectivelyoutlawed by the federal tax law, 43 whereby life insurance became the basisfor a form of endowment-building investment vehicle for a charitable organization.Under the typical arrangement, one or more contributions of money weremade to a charity; the organization used some or all of these funds to purchasepremiums in connection with a split-dollar insurance policy. The death benefitswere shared between the family members of the insured and the charitable organization.44 Frequently, this type of arrangement was considered by charities tobe a basis for an endowment-building program.Critics of these plans argued that: (1) there was no true gift (and thus nocharitable contribution deduction) by reason of the step transaction doctrine, 45because the charity was, as a matter of fact, obligated by the donor to purchasethe insurance; and (2) the split-dollar arrangement resulted in an unwarrantedamount of private benefit. 46The IRS described the typical charitable split-dollar insurance transaction 47as follows. There was a transfer of funds by a taxpayer to a charitable organization,with the “understanding” that the charity would use the funds to pay premiumson a cash value life insurance policy that benefited both the charity andthe taxpayer’s family. Generally, the charity or an irrevocable life insurance trustformed by the taxpayer (or a related person) purchased the insurance policy. Thedesignated beneficiaries of the policy included the charity and the trust. Membersof the taxpayer’s family (and, perhaps, the taxpayer) were beneficiaries ofthe trust.In a “related transaction,” the charity entered into a split-dollar agreementwith the trust. The agreement specified what portion of the insurance policy premiumswas to be paid by the trust and what portion was to be paid by the charity.The agreement stated the extent to which each party could exercise standardpolicyholder rights, such as the right to borrow against the cash value of the policy,to partially or completely surrender the policy for cash, and to designatebeneficiaries for specified portions of the death benefit.The agreement also specified the manner in which the arrangement could beterminated and the consequences of the termination. Although the terms ofthese split-dollar agreements varied, a common feature was that, over the life ofthe split-dollar agreement, the trust had access to a “disproportionately highpercentage” of the cash surrender value and death benefit under the policy, comparedto the percentage of premiums paid by the trust.As part of the charitable split-dollar insurance transaction, the taxpayer (or arelated person) transferred funds to the charity. Although there might have beenno legally binding obligation expressly requiring the taxpayer to transfer funds43 See § 17.6(b).44 An illustration of one of these plans (now banned) is in Addis v. Commissioner, 118 T.C. 528 (2002) aff'd,2004-2 U.S.T.C. 50, 291 (9th Cir. 2004). See § 21.1(b), text accompanied by notes 68–75.45 See § 4.8.46 See Tax-Exempt Organizations § 19.10.47 See § 17.6, summarizing Notice 99-36, 1999-1 C.B. 1284. 539