“We have written many times in the past about ideas that agents and clients pursue to attempt to make life insurance premiums tax-deductible. Many such strategies, such as Section 419A plans or captive insurance plans, eventually get negative IRS scrutiny and fall out of favor.

One idea that has been circulating for some time is the concept of creating a charitable LLC and using that entity as the conduit to buy needed life insurance. If properly implemented, advocates have said, the premium for needed life insurance coverage will be mostly pretax.

The Service has been paying attention and has made some strong statements regarding charitable LLCs. Read on for a general overview of how the strategy works, how life insurance is involved, and the IRS’s attitude toward such implementations.”

Jennifer Lollar and Linas Sudzius provide members with commentary on life insurance, Charitable LLCs and FSA 20260401F.

Jennifer Lollar J.D. is President of Advanced Underwriting Consultants. Linas Sudzius, JD, CLU, ChFC is a Senior Consultant with Advanced Underwriting Consultants. AUC provides outsourced advanced sales services to life insurance companies and their producers. 

Here is their commentary:

EXECUTIVE SUMMARY:

We have written many times in the past about ideas that agents and clients pursue to attempt to make life insurance premiums tax-deductible. Many such strategies, such as Section 419A plans or captive insurance plans, eventually get negative IRS scrutiny and fall out of favor.

One idea that has been circulating for some time is the concept of creating a charitable LLC and using that entity as the conduit to buy needed life insurance. If properly implemented, advocates have said, the premium for needed life insurance coverage will be mostly pretax.

The Service has been paying attention and has made some strong statements regarding charitable LLCs. Read on for a general overview of how the strategy works, how life insurance is involved, and the IRS’s attitude toward such implementations.

COMMENT:

Charitable LLCs

In a way, the charitable LLC has a misleading name. The LLC itself is a for-profit entity—not subject to any of the normal tax reporting or administrative requirements associated with a Section 501(c)(3) charity or other nonprofit organizations. The feature that makes the LLC charitable is that the individual member or members intend to use the for-profit entity, in part, for charitable purposes.

It’s possible to have a benign configuration of a charitable LLC. For example, say Moe and Larry form a for-profit LLC to run a pie bakery. Moe and Larry elect to have their LLC taxed as a partnership.

Example 1. If their business is a success, the owners might decide to donate 20 percent of the business’s annual profits to Shemp Ministries, a Section 501(c)(3) organization. The business’s donation to Shemp Ministries would generate a potential charitable income tax deduction for Moe and Larry.

Example 2. If Moe and Larry decide to chase after a larger initial charitable deduction, they might transfer a 20 percent ownership interest in the LLC to Shemp Ministries. In that case, they might claim an immediate deduction of 20 percent of the value of the company instead of 20 percent of the annual operating profit.

The IRS describes how even more aggressive charitable LLCs work as follows:

In the “Charitable LLCs” scheme, promoters create documents establishing the LLC for a fee. They then assist in the transfer of the taxpayer’s assets to the LLC and create documents that purport to transfer membership units in the LLC to a charity. The promoter might supply an appraisal supporting the valuation for the claimed gift and might even provide a list of charities willing to accept the membership units or identify a single charity that will accept the donation.

Promoters might incorrectly advise clients that they can retain control and legally access the cash or other assets transferred to the LLC for their own personal use after the donation. Promoters might also execute an “exit strategy” for taxpayers to buy back their contributions at a significantly discounted price after a period of time.

https://www.irs.gov/newsroom/irs-alert-charitable-contribution-scams-on-the-rise-taxpayers-beware-of-those-promoting-fraudulent-schemes

The Life Insurance Angle

How do those who have implemented more aggressive charitable LLCs use them to attempt to provide life insurance protection on a pretax basis? Here’s one possibility using the facts of example 2.

Moe and Larry’s LLC, now 20 percent owned by Shemp Ministries, generates a business profit of $250,000 in 2026. The proper allocation of that profit among the LLC members would be as follows:

·      40 percent ($100,000) to Moe

·      40 percent ($100,000) to Larry

·      20 percent ($50,000) to Shemp Ministries

Moe and Larry, as controlling owners of the LLC, decide that the portion of profit allocated to Shemp Ministries will be used to buy LLC-owned insurance policies on their lives. 

Because the profit in the example was allocated to a nonprofit organization, Shemp Ministries pays no income tax on it. When that untaxed money is used to buy the LLC-owned life policy, the effect is that the insurance policies are paid for pretax. At least that is the tax result championed by promoters of the charitable LLC concept.

In the example, the details of how the life insurance is ultimately available for the use of the company or the insureds are left for the future. The solution might be to pursue an exit strategy where Moe and Larry buy back at a substantial discount the minority interest in the LLC from Shemp Ministries.

IRS Scrutiny

The IRS has attacked tax-aggressive charitable LLCs relentlessly. For example, about ten years ago, the Service reviewed a strategy marketed as “The Ultimate Tax Plan” by Florida attorney Michael Meyer and some others.

According to court documents and statements made in court, from at least 2013 through 2021 . . . Meyer prepared boilerplate transaction paperwork for his clients that made it appear they had donated valuable property to charities Meyer controlled. In fact, the clients retained complete control and use over the donated assets. Meyer wrongfully advised clients they could legally access their donated assets for their own personal use through tax-free loans and execute an “exit strategy” to buy back their donations at a significantly discounted rate. In some instances, Meyer backdated documents so that clients could claim purported donations on their prior years’ tax returns.  

Over the years, Meyer ignored a chorus of people who advised him that his plan was illegal, including the IRS. Indeed, the IRS conducted several audits of Meyer’s charities, and found that the Ultimate Tax Plan was an economic sham. Meyer signed documents acknowledging that finding, and agreeing to close the bogus charities. However, Meyer simply created new “charities” and continued to promote his illegal shelter to wealthy taxpayers. 

https://www.justice.gov/archives/opa/pr/florida-attorney-sentenced-8-years-prison-fraudulent-charitable-contribution-tax-scheme

Meyer was criminally charged in connection with the activity, was convicted and was sentenced to eight years in prison.

An Ohio doctor who bought into the Ultimate Tax Plan was also subject to intense IRS scrutiny. In 2018, the doctor received a subpoena from the Justice Department ordering him to turn over records related to the Ultimate Tax Plan. The doctor, with the help of plan promoters, prepared false and backdated documents in an effort to hide what had actually happened.

The doctor pleaded guilty to corruptly endeavoring to obstruct the due administration of the internal revenue laws. See https://www.justice.gov/archives/opa/pr/client-fraudulent-tax-shelter-scheme-pleads-guilty-obstruction.

In its 2024 press release on charitable LLCs, the IRS warned:

The IRS is currently using a variety of compliance tools to combat abusive donations, including thorough audits of tax returns and civil penalty investigations. The IRS has seen hundreds of tax returns filed using this abusive charitable contribution scheme. 

https://www.irs.gov/newsroom/irs-alert-charitable-contribution-scams-on-the-rise-taxpayers-beware-of-those-promoting-fraudulent-schemes

Finally, last month the IRS released Chief Counsel Advice memorandum FSA 20260401F (https://www.irs.gov/pub/irs-lafa/20260401f.pdf). In that document, the Service described a charitable LLC implementation and explained why the taxpayer’s claimed charitable deductions were disallowed.

Here’s a summary of the IRS’s description of what happened:

1.    The taxpayer set up an LLC. On the same day, he transferred a nonvoting interest in the LLC to a donor-advised fund (DAF).

2.    In the following year, the taxpayer opened a brokerage account for the LLC, retaining personal signatory authority to manage the investment and business activities of the LLC. The taxpayer deposited assets, including marketable securities into the brokerage account in that year and in the subsequent year.

3.    After depositing assets into the LLC brokerage account, the taxpayer claimed a charitable contribution for the prior transfer of ownership interest in the LLC to the DAF.

The taxpayer remained in control of the LLC after the purported transfer of the nonvoting interest. As a result, the IRS concluded that the gift to the DAF lacked economic substance and the claimed charitable deduction was disallowed.

Conclusion

Financial professionals have been seeking the holy grail of life insurance planning for decades—income tax-deductible premiums for a business while the insured need not include the premium in personal taxable income. Creative planners have developed strategies to try to achieve the goal, and eventually the IRS or other barriers have kept the ideas at bay.

Life insurance agents should add—in our opinion—charitable LLCs to the list of tax nirvana tries that do not work. The Service has figured out the game and enjoys a winning advantage.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Jennifer Lollar

Linas Sudzius

CITE AS:   

LISI Charitable Planning Newsletter #359, (March 25, 2026) at http://www.leimbergservices.com. Copyright © 2026 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission. Our agreement with you does not allow you to use or upload content from LISI into any hardware, software, bot, or external application, including any use(s) for artificial intelligence technologies such as large language models, generative AI, machine learning or AI system. This newsletter is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI.