Posted March 1st, 2006

Understanding Estate Settlements

Charitable organizations and institutions often go to great lengths to communicate the benefits of planned gifts and devote staff and other resources to cultivating donors who have included a charitable interest in their will or other plans. All too often, however, efforts to make certain that gifts through bequests and trusts are given proper attention after the donor passes away may slip through the cracks of an organization. The responsibility for these matters is sometimes mixed or unclear, often preventing a nonprofit from receiving funds that the donor intended to be devoted to charitable purposes. It is critical, therefore, that there be a team effort directed at ensuring proper procedures are adhered to following notification of an estate gift, during the estate administration process, and after the funds are received.

Importance of following through

Consider a case where I was named executor of the estate of a widow who had no surviving children or other close relatives. She left a majority of her estate to three charities. We immediately notified the charities that had been named as beneficiaries. None of them ever asked how much they could expect to receive or when they could expect a payment.

When I began reviewing the assets of the estate, I discovered that shortly before her death she sold her farm to an individual who had previously rented it from her. I thought this was unusual, since she had used our law firm to draft her will and do all her other legal work, and we had no knowledge of the transfer. Upon further review of the documents, we discovered that the deceased had indeed sold the property and the buyer had given her a note for the entire sales price. No payments had been made on the note. Further, the note provided that the debt would be forgiven at the client’s death.

Because of our familiarity with the circumstances of this case, the decision was made to take legal action against the purchaser of the farm for fraud. The case was subsequently settled for what we believed was a fair amount. The charities received at least five times more than they would have received if we had not pursued this action. Unfortunately, all too many executors and trustees—especially a professional fiduciary with little knowledge of the donor’s affairs and, therefore, no reason to believe anything was amiss—would not pursue legal action if the beneficiaries were charities that had shown little interest in the outcome of the estate administration.

Real cases show real dilemmas

Let’s look at two other actual cases that raise similar issues.

Case 1–Charity A receives notice from the executor of an estate that one of its donors has passed away and bequeathed a beachfront home to the charity. The charity is on the east coast and the beach house is located on the west coast. The executor informs the charity that, unless there is an objection, he plans to arrange for a sale of the property through a qualified real estate agent in the area who is familiar with the local market and the house in question, since he is a relative of the deceased donor. The executor further states that no action will be required of the charity and that upon the sale of the property, it will receive a check for a significant sum.

What should the charity do? Should the charity rely on the representation given by the executor and simply wait for the money? While many might do so, this would in most cases not be the wisest course of action. The charity was advised instead to obtain a written appraisal from a qualified independent appraiser who is familiar with the type of property and with the local real estate market. Values of residential property can vary tremendously from location to location and from one type of property to another. Beachfront property in particular is a unique market, and an appraiser who has experience in appraising that type of property in a particular area and price range should be retained. The appraisal should be paid for by and directed to the charity.

After determining the value of the property and taking title to it, the charity was further advised to retain an independent real estate agent who has experience in selling the type of property in question. The real estate agent should be informed of the amount of the appraisal and an agreement should be reached concerning the value the charity can reasonably expect to receive upon the sale of the property. The real estate agent’s fees should also be agreed upon.

Case 2–Charity B has a long-time relationship with a donor, her husband, and friends of the donor. The donor and her husband made numerous gifts throughout their lifetime to the charity. The husband predeceased the wife, whereupon a trust was created that named the charity as one of the beneficiaries of a very large sum at the death of the wife. The wife was given the right to change the beneficiary of the trust. A short time after the death of her husband, the wife modified her will and exercised her right to remove the charity as a beneficiary of the trust and instead named her caregiver to receive the assets in the trust at her death. The surviving spouse passed away within a year and the charity discovered that it would receive nothing from her estate.

What should the charity do? Where significant sums are involved, as in this case, the charity should in most cases immediately contact counsel. Since the donor in this case lived outside the area where the charity was located, an attorney in the donor’s area who is familiar with the probate process and is willing to contest the matter should be retained. The local attorney should contact the representative of the donor’s estate and begin an investigation of the facts surrounding the change of beneficiary from the charity to a caregiver. The local counsel should also talk with appropriate persons to determine the mental condition of the donor when she changed the beneficiary.

Many caregivers who assist the elderly have the highest of motives and offer their assistance because they truly want to help. In some cases, however, their motive is not generosity, but rather greed. In this case, the attorney or a representative of the charity should determine if the caregiver has a pattern of assisting the elderly and being named as a beneficiary. This does not mean that all caregivers named as beneficiaries are acting improperly, it just means the circumstances should be investigated. Counsel should make certain that he has filed any objections or claims in the estate of the donor within a timely fashion in order to avoid any statute of limitations questions, as there is no substitute in these matters for quick and decisive action. The charity and its regular counsel should monitor the actions of the local attorney to make certain that the position of the charity is protected.

The above are just two real examples that could be cited. Charity A followed the advice set out above and reaped substantially more than it otherwise would have on the sale of the beach house. Charity B did not follow the recommended course of action in a timely manner. As a result, statutes of limitation ran out and that inaction ultimately resulted in the loss of millions of dollars that should have been received from the estate. Worse than that, the wishes of a couple that had intended their assets to be devoted to charitable use were totally thwarted.

Getting your fair share

Nonprofit organizations and institutions should have procedures in place to monitor gifts from trusts and estates. If staff is not available and/or qualified to perform these tasks, an outside party should be retained for this purpose. Here are some of the basics steps that should be taken:

  • When notice of a gift pending from an estate is received, someone should be assigned to monitor the estate until it is closed. The possibility of staff turnover should be taken into account and provided for.
  • The responsible person should review the trust or estate for the following:
  • The name and contact information for the trustee or executor.
  • The type of gift to be received, such as an outright gift, a gift of property, a percentage of the estate, or all or part of the residue of the estate.
  • If it is a gift other than cash or other liquid assets, the approximate value should be determined as quickly as possible. If real estate is involved, steps should be taken to assure that an independent appraiser and real estate broker are consulted. Obtaining appraisals should not be limited to real estate. This also applies to personal property such as art work, antiques, collections, jewelry, and other property that has more than nominal value. The appraisals will normally be well worth the investment involved. Beware of relying on appraisals that might have previously been obtained for gift tax or other purposes as they may be artificially low.
  • If the bequest is a percentage or the remainder of the overall estate, ask the executor when a partial distribution can be expected. The executor will then be on notice that someone is monitoring the estate and funds may be received earlier than would otherwise be the case.
  • At the first indication of a possible problem, raise the issue with the representatives of the estate or trust and make sure your counsel is aware as legal procedures may need to be undertaken to protect your interests.
  • Do not accept a final distribution and/or waive an accounting without assuring that someone who is knowledgeable in estate settlement matters has reviewed all documentation and determined that it is appropriate to do so under organizational policy guidelines.
  • Examine donor records and review the overall relationship with the donor. In many cases, you can learn valuable lessons about what led to the donor’s decision to include the charity in their plans. Such lessons can be translated into ways to encourage gifts from others. Keep in mind that the closing of an estate can also represent a wonderful opportunity to contact the other beneficiaries and family members and create a relationship with them that can lead to additional gifts, both current and deferred, in the future.

The above suggestions are only a general outline of the steps nonprofits should take to assure they are acting responsibly when it comes to the receipt of legacies that have been left to them. Each organization is of course unique, and all should create policies and procedures that take into account the availability and experience of internal and external staff and other resources. The resulting estate settlement guidelines should then be carefully followed, from the notification of a gift through the closing of the estate.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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