Waiting on Bequests | Sharpe Group
Posted November 1st, 2010

Waiting on Bequests

Regardless of their size or mission, many nonprofits across the country are experiencing various challenges with bequests. Economic, demographic, and political situations are combining in unprecedented ways to cause more charities to have to wait longer for what may be smaller bequest distributions.

As Vice President of Estate Settlement for the American Heart Association, Andy Fussner is on the front lines of bequest administration at one of the nation’s largest charities. Here he shares with Give & Take some of the reasons behind the delays and declines that are currently frustrating many charities, as well as tactics members of his staff have found helpful in speeding up distributions.

Give & Take: How did you become involved with estate settlement?

Andy Fussner: Before coming to the American Heart Association, I worked for a number of years at a law firm in Tampa practicing estate planning and tax law. About 10 years ago, I had an opportunity to join the American Heart Association as a planned giving director. Over time, my role evolved into my current position, Vice President of Estate Settlement. I oversee estate settlement and bequest administration for the American Heart Association across the country. I also work very closely with our planned giving office because we feel bequest administration is a vitally important “feedback loop” for planned giving.

Given the natural relationship between bequest administration and planned giving, we do all we can to keep the dialogue open. For instance, each year we compile a list of all of the attorneys and trust officers who were our primary contacts on estates and trusts. We then convey that list to our planned giving officers to provide them with an opportunity to thank these advisors and create a relationship that may be strengthened in the future.

G&T: How is your bequest administration staff organized?

Fussner: While the main headquarters of the American Heart Association is in Dallas, we have designated the St. Petersburg office as the national bequest center.

We have field offices all over the country that handle local fund-raising efforts and mission implementation, but all of the bequest staff with the exception of persons at two of our affiliates are located here in St. Petersburg. We have four paralegals on staff, each of whom is assigned to a geographic region within the Heart Association. If a bequest is received in Kansas, for instance, it gets forwarded here. We process everything here for that Kansas bequest just as we would for a bequest from Florida, North Carolina, or any other state.

G&T: What issues and trends are you now observing in estate settlement?

Fussner: Most of the trends we’re seeing are negative, unfortunately. We are experiencing a significant decline in the number of new estates, and I would say to some extent we’re also seeing a drop in the overall value of estates.

We’re also noticing a slowdown in the distribution of estates. In the present economy, it can be very difficult to liquidate real estate. As a result, the administration of estates containing real estate can be held up, especially in places like California, Florida, and Arizona, where real estate markets are really struggling.

The uncertainty regarding the estate tax is also slowing down distributions. Most of the estates we receive are under $1 million and are therefore not affected by the estate tax. However, institutions and law firms administering our largest estates are, in many cases, very hesitant to make any distributions until Congress finalizes estate tax regulations for 2010.

Additionally, budget cuts in local and state governments across the country have led to backlogs in courts and delays in the probate process. Distributions from states that require attorney general approval for charitable bequests have also slowed down as a reduced number of state employees are charged with handling the same number of files as in years past.

G&T: What other issues sometimes arise in the estate settlement process?

Fussner: About 10% of our estates for one reason or another require something more than basic processing. Some estates require clarification of the beneficiary because the charity wasn’t clearly named. Other estates are held up because someone has contested the will. While most will contests are brought about by a disgruntled family member, at times we are forced to contest a will because we’ve received evidence that someone exerted undue influence in the final months of a decedent’s life. While this situation did not occur often in the past, it is something that is unfortunately happening with increasing frequency.

G&T: What percentage of bequests do you know about in advance?

Fussner: Right now, I would estimate we know about 5 to 10% of bequests in advance, but that number is growing every year. About 40% of our bequests come from donors who supported us during their lifetime. That percentage has been increasing fairly steadily for the last five or six years. Where we seem to be losing bequests is from those “over the transom” donors that we never had a relationship with or who never gave to us during their lives.

G&T: How many estates do you handle each year?

Fussner: We process about 1,200 estates per year, but that number has fallen from previous years. My counterparts at other large national organizations have also seen a decline. Demographics can explain some of the drop. There were significantly fewer people born in the Depression years of the 1930s and WWII years of the early 1940s, and that’s the group now approaching their eighties and starting to pass away. We can expect to live with this phenomenon for the next decade or longer until the upturn in birth rates in the mid 1940s begins to come into play.

For us personally, we are also seeing the long-term effects of cutbacks we made in the last five to seven years in the acquisition of elderly donors through our direct mail program. Our goal now is to reverse this trend by actively seeking larger numbers of donors in their seventies and older.

G&T: What types of bequests do you typically receive?

Fussner: Roughly half are specific bequests that can be as small as $100 or as large as $1 million, though our typical specific bequest is $5,000 or $10,000. The rest of our bequests are residual bequests. While these can range from 1% to 100%, the typical range is about 1/6 to 1/7 of the estate. These residual bequests are usually many times the size of our specific bequests.

Seven or eight years ago, the Heart Association was, on average, one of five charities named in a will. Now we are typically one of seven. It seems that there’s a lot more competition out there now than there used to be. For instance, a typical will from the 1980s named two to three charities, whereas now it’s not unusual for a donor to leave bequests to 10 or 15 charities.

Also affecting the size of larger estates is the fact that we are now receiving distributions from estates of wealthy donors who passed away at the bottom of the 2008-2009 market decline. We hope that trend will begin reversing soon.

G&T: How long does the estate settlement process usually take?

Fussner: It really depends on the state it’s coming from and the type of bequest it is. As a general rule of thumb, we expect to receive a specific bequest within 6 months of being notified of the estate, within 12 months for a residual gift from a non-taxable estate, and within 18 to 24 months for a residual gift from a larger, taxable estate.

G&T: What do you think will happen with the estate tax? Can you talk more about how the uncertainty is affecting distributions?

Fussner: It’s interesting. Some administrators and attorneys are taking the position that as there’s currently no estate tax, they should distribute funds now. They seem to feel that, since there was no estate tax in place at the time of death and distribution, the IRS would legally be unable to require payment even if a retroactive tax is instituted. Others are taking a “wait-and-see” approach, deciding to hold up distributions to charities and individuals so that they will not later have to ask for the money back in order to pay taxes.

Personally, I think it will be very difficult for Congress to impose any kind of retroactive tax for 2010. Doing so would create a slew of problems and litigation. I’m hoping sane minds will prevail and 2010 will come and go as a year in which there was no estate tax.

That being said, I don’t think the estate tax will go away permanently. It’s a revenue source the government simply can’t afford to lose. I believe that in 2011 the estate tax will return with an individual exemption level of between $3.5 million and $5 million.

G&T: What are the most effective practices you have developed to facilitate estate settlement?

Fussner: We use a tickler system to remind us to follow the progress of open estates. Often charities get so busy with day-to-day business that they forget about pending distributions they could use to fund their missions. Simple as it may seem, just using a tickler system to regularly monitor estates is probably our most important estate settlement best practice.

We also have a standing policy of working with other charities to resolve problems with estates—whether they’re simply progressing too slowly or we’re anticipating a potential will contest or something similar. When problems arise, we try to work with the other charities to rally together and present a united front. We’ve found it’s a lot more effective if all of the charities are calling than if only one is raising an issue.

One piece of advice for those responsible for estate settlement in smaller charities: If you feel there is a problem with the way an estate is being handled—whether the administrators are charging abnormally high fees, or the will is being contested, or the entire process is taking too long—and a large, national charity is also a beneficiary, don’t hesitate to call on that national charity for help. A larger organization like the Heart Association may have a staff to handle estate settlement issues and will be happy to work with you to resolve the problem.

It is possible you may have discovered a problem that has not yet become evident to others and could be handled more easily sooner than later. It’s in everyone’s interest to work together so that the donor’s funds can start doing the important work he or she intended to enable.

More on Estate Settlement

As many bequest beneficiaries have noticed, it has been taking longer to receive distributions from both large and small estates. We decided to ask John Jensen, a Sharpe Senior Consultant and certified financial planner, for his observations concerning the causes of the delays:

When dealing with larger estates that will likely be subject to an estate tax, many executors and banks have chosen to hold on to assets for the time being out of concern that the estate tax may be imposed retroactively on estates. The estate tax decision may be finalized during the lame duck session of Congress after the November election, and a number of administrators feel nothing can be done until then.

For many 2010 estates and trusts, the final estate tax decision by Congress will determine whether a portion of an estate will go to estate taxes or charitable gifts. In other cases, attorneys and banks are moving slowly when handling both larger and smaller estates. Many banks and law firms have recently cut employees for economic reasons. With a smaller and/or less experienced staff, there are simply fewer people available to process the estates.

Additionally, many executors are hesitant to sell real estate until the market recovers. Worries about potential liability may underlie part of this decision.

Even if executors are willing to sell at a reduced price, there may be little demand and/or financing available. Estates and charities are often more reluctant than others to consider creative financing or holding a mortgage as a way of speeding up a sale. Instead, the estate simply remains open longer and must hold (and spend) more cash until the property has been sold.

The down economy also seems to have created a greater propensity for disinherited family members to take legal steps to reduce or eliminate gifts intended to go to charity.

In the final analysis, estates cannot stay open forever. However, the longer an estate remains open, the more estate expenses tend to grow and the less ultimately goes to charity. In this environment, charities should be prompt and assertive about following up on estates.

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