Charitable Insurance Schemes Falling? Surprise, Surprise!

I can't even tell you how many charitable planned giving insurance schemes I have reviewed. In almost every case, I was convinced throughout the presentation. Then after the insurance salesmen leave, doubts start to sink in and finally, I know it is just too good to be true.

Bottom line: charities do not gain by leveraging the insurability of their donors, and/or by borrowing to buy insurance, or any other cockamamie plan (I had to look up the spelling of that one). I don't care who you are and how many tax-planning patents you have (a tell tale sign that the scheme is particularly insidious)or how many non-disclosure agreements you have me sign (another tell tale sign that the plan is bogus) or that you have a prominent law firm's "tax-letter" testifying to your plan (probably the worst of all the signs that you are dealing with crooks - try running your plan by the IRS lawyers and see what they say!).

For the non-planned giving professional, I am referring to "get rich quick" schemes for charities involving insurance - they are all the same in my mind: not worth your time and resources and worse.

Finally, if you have ever heard of Barry Kaye, the real King of Insurance, you shouldn't be surprised that his insurance/charitable empire may be starting to tumble. Here is the story:

http://www.palmbeachpost.com/localnews/content/local_news/epaper/2009/06/12/0612kayepledge.html

I met with Barry a few years ago just after he made his $16 million dollar pledge to FAU. In fact, he seemed to be very proud of his charitable giving but also seemed to be using it as leverage to get his foot in our door (just my sense, of course). He had a new "can't miss" twist on the whole charitable insurance scheme industry. Yes, he wanted to have insurance policies issued on our donors. His new program was that he would put insurable donors (with significant insurability of course) on the board of his own private foundation. The foundation would then borrow money (he was talking about borrowing hundreds of millions of dollars for this new deal) to buy insurance on its "new board members" (a neat way around insurable interest questions). Then, after two years of holding the policy - if the donor survived that period of course - the foundation would sell the policy, pay some taxes, pay itself back for the funds expended on the premiums, and then let the board member direct half of the net profits from the deal to his/her charities of choice. It was a no risk transaction for us - right?

Well, we weren't biting. We had no interest in inviting Barry to meet with our trustees and in fact, the ones that knew him personally absolutely refused to discuss any meetings (we needed to show that we made some effort). If our trustees found him on their own and did it, fine. But, we were not going to be a "party" whatsoever to this new deal.

Also, my general concern at the time was about legislative efforts to put the viatical settlement business out of business. I didn't have the foresight to see an economic collapse.

The main point to understand is that insurance contracts are subject to multitudes of unknown or unexpected factors that makes the iron clad guarantees of the salesmen very flimsy. In Barry's case, he couldn't see (or wouldn't admit) that the market for insurance policies on the lives of strangers might dry up. Apparently it has and it could take down his empire.

Interestingly, only once in my career have I ever seen any of the insurance schemes pitched actually benefit a charity. I would love to be proven wrong by hearing good stories. That case: it was a policy that Barry Kaye's foundation bought on a trustee of an entity I worked for! The trustee survived the 2 year non-contestability and they did sell the policy for a profit! A very large pledge was made and at least a very significant payment was on it by the Kaye Foundation. After that, I moved on in my career don't know if the institution ever received everything promised.

That was the exception to the rule. Most of the promoters of these schemes won't admit that no one (but themselves) has benefited. Ask for names and phone numbers of charities which have seen monetary benefit from being involved in one of these things. I invite the world to report back on all of the great get rich quick charitable insurance schemes that have worked marvelously for your institutions (miraculously if you ask me).