Life Insurance: What's It Worth? (and Who Says?) Pension Protection Act Forces Appraisers of Donated Policies to Reassess Methods, Qualifications
[ILLUSTRATION OMITTED] EXECUTIVE SUMMARY * Gifts of life insurance policies to not-for-profit organizations can benefit both the organization and the donor, the latter in the form of an often sizeable income tax deduction. However, under the new requirements of the Pension Protection Act of 2006 (PPA), determining the fair market value of policies will require the help of an appraiser with the appropriate expertise and experience. * Cash-value policies, such as whole life, are valued at fair market value, limited by their cost basis. A paid-up policy is valued at its replacement cost. A policy that is not fully paid up is valued at the lesser of premiums paid or its interpolated terminal reserve amount. * The PPA now requires non-cash charitable contributions to be appraised by a qualified appraiser according to generally accepted appraisal standards. The Uniform Standards of Professional Appraisal Practice (USPAP), developed by the Appraisal Standards Board of the Appraisal Foundation, is considered as satisfying this requirement. * A qualified appraiser is one who, among other things, performs appraisals regularly and is qualified by experience, education and other factors to appraise the type of property in question. He or she must have earned an appraisal designation from a recognized professional appraiser organization or meet minimum requirements for education and experience. For returns filed since February 2007, such education includes relevant college or professional-level coursework. Experience must include at least two years of buying, selling or valuing similar property. * In addition, the PPA increased taxpayer penalties for appraisals that cause a tax understatement. ********** Not everyone can make a multimillion-dollar bequest to his or her alma mater, but many alums have an insurance policy for which they might easily be persuaded to name their school or another not-for-profit organization as owner and beneficiary. University development offices and other prospective nonprofit beneficiaries are well aware of this, and many encourage gifts of policies. What they and prospective donors might be less sure of--and consequently need your help in deciding--is how to properly value donated life insurance interests for tax purposes. And you may need to brush up on the new provisions for qualified appraisals under the Pension Protection Act of 2006 (PPA). Qualified appraisals are a concern for taxpayers donating noncash charitable gifts of all kinds. The questions of appraiser qualification and responsibility remain an area of concern for the IRS due to a long history of valuation problems dealing with gifted life insurance. Life insurance can be prone to incorrect valuation because of the plethora of types of policies available, ownership and beneficiary issues and misunderstanding of valuation methods of how to apply fair market valuation principles. Many CPAs may be more attuned to providing an estimate of the value of business interests and other types of assets rather than those required for life insurance policies. This article, therefore, is intended to help you and your clients navigate this murky mine field and offers suggestions on how to find a qualified appraiser who can complete and sign the revised Form 8283 for charitable donations of life insurance interests. THE COMMODITY ITSELF For donors, gifted life policies can be a Pension Protection Act forces appraisers of donated source of tax deductions and can help meet estate and personal financial planning objectives. In some cases, these policies also allow for the building of a less costly legacy with worn-out assets that may no longer be needed. More than 70% of life insurance policies, including group and secondary-market policies, lapse for nonpayment because they no longer meet any pressing estate planning or business planning needs. …