In the fourth of this six-part series, Sharpe Consultant Aviva Shiff Boedecker explains why it is important to pay close attention to certain aspects of the estate settlement process.
The math of estate administration is a whole topic in itself.
If the testamentary gift is a specific bequest (i.e., a stated dollar amount or a particular item), the charity need only take steps to assure timely receipt of the gift. However, if the gift involves the residue of the estate, or any portion of it, it is essential to pay attention to how the charity’s share is calculated.
A few things to watch for if the bequest is all or any portion of the residue of the estate:
- Inventory values compared to valuations in the final accounting or on the estate tax return. Is there a difference? If so, why? The final accounting is the basis for determining how much each beneficiary receives, so pay special attention to assets that were valued at higher amounts on the inventory than on tax returns or other documents that were prepared later in the administration process.
- Expenses of administration. All administrative expenses should be itemized, related to the administration of the estate and reasonable. Certainly, property must be maintained, but it’s probably not necessary for the entire family to fly to Europe at the estate’s expense to check on it! On a more mundane level, subscriptions and cable service should be stopped promptly, and the administrator should not be using the estate as an ATM for the benefit of family members or former employees.
- Fees paid to the estate administrator, attorney and professionals. While probate fees may in some cases be set by statute, the amount of the fees can sometimes be questioned and administrators can be required to justify them. For example, if the estate includes a closely held business, out-of-state or international assets or if there is an audit or a will contest, the fees will naturally be higher. Check that fees were not paid twice for the same work, such as to both the attorney and the accountant for filing the same tax return. If the amount seems high, or something doesn’t make sense to you, don’t hesitate to ask questions. The fees and expenses paid by the estate can have a direct effect on the distribution to charity.
- How taxes are allocated. It’s not unusual for taxes to be apportioned equally among beneficiaries of the estate, but in some cases language in a will or other document will provide that taxes are not to be paid from assets to be distributed to charity.
Tax apportionment rules and language can be very complex, so be sure to consult an expert if estate administrators maintain that taxes are to be charged against amounts distributed to charity. If the testamentary document is silent, tax should be paid by each beneficiary on the taxable distribution to them. Normally the charity does not pay tax because the distribution to it is tax-exempt. This aspect of monitoring the estate can fall under the heading of “don’t try this at home.” Call in the experts if the document does not have specific language governing the payment of taxes.
Negotiations and settlements
As soon as it appears that there may be a dispute in the estate or resistance to making the full charitable distribution, it is essential to seek legal counsel. Sometimes a matter can be resolved in favor of the charity with just a letter from the attorney, and even when a dispute between other heirs does not seem to affect the charity, the costs and resolution might have an impact on the amount it ultimately receives.
While the charity should not agree lightly to accept a reduced distribution, it is important to understand what litigation entails. It is a costly and time-consuming process, but sometimes it is impossible to avoid. In some cases, compromising to reach a reasonable settlement on advice of experienced counsel might be a good business decision. Remember, it is the charity’s money, and the law requires charitable beneficiaries to take all reasonable steps to safeguard their interests.
In Part 3, learn the basics of estate administration, from learning of the bequest to making sure the funds reach your organization or institution.
In Part 5 of this series, we discuss the ins and outs of gifts received at death from sources other than bequests.