Bequests and other deferred gifts are a bedrock of any successful planned giving program. The deferred nature of these types of gifts, however, can lead to complications and delays in collecting the gift.
The charity’s board, officers and staff should develop appropriate internal processes to navigate the complexities and difficulties that may arise during estate or trust administration and to protect the charity’s interests. These processes will depend largely on the type of deferred gift, whether an outright bequest, a remainder interest in a charitable remainder trust, an interest in a charitable lead trust or another interest in a trust, including the right to discretionary payments from a charitable trust or private foundation.
Below are some of the most important issues a charity should consider in formulating processes to facilitate the receipt of deferred gifts and to manage the complexities of estate and trust administration.
When a charity becomes aware of a donor’s death or, in the case of bequests of which the charity is unaware, receives notice from the donor’s personal representative, the charity should have a process to evaluate whether to accept or reject the bequest and how to oversee and manage receipt of the bequest. If the charity does not already have this information in its file, the charity should determine:
- the donor’s date of death,
- the donor’s domicile at death,
- type of gift anticipated,
- the name and contact information of the personal representative, and
- whether there are restrictions or other conditions associated with the gift.
If not provided by the donor’s personal representative, the charity should request a copy of the donor’s will or other testamentary documentation.
A charity should develop a process for determining how involved it will or should be in the administration of the donor’s estate beyond obtaining the essential information noted above. In developing its process, the charity may wish to distinguish between specific bequests (specific assets or a set dollar amount) and residuary bequests (a portion of what is left after all debts and liabilities, taxes, costs of administration, and specific bequests). If the charity is entitled to receive $100,000 and is paid that amount, the charity likely has little concern about other activities of the estate. But if the charity is a residuary beneficiary, taxes, costs incurred by the personal representative, and other issues can affect what the charity receives. A residuary bequest may warrant significantly greater oversight and involvement.
A charity that is a residuary beneficiary should be aware of and protect its right to information. Wills are generally public documents and can usually be obtained through the probate court. Additionally, state laws typically give beneficiaries certain information rights, such as a formal notice of the personal representative’s appointment, copies of an inventory of the estate’s assets, and periodic accountings that show receipts and disbursements made during the administration of the estate.
Many states have adopted “informal” or “unsupervised” probate procedures. An informal or unsupervised administration often results in less accountability imposed on the personal representative. In a state that permits unsupervised administration, the charity should consider whether to request a supervised administration. In making this determination, the charity should consider the size of the bequest, its knowledge of the personal representative and the personal representative’s interactions with the charity, its relationship with family members or other beneficiaries, and the anticipated additional costs of the supervised administration.
Interest in a Trust
To protect its rights or interest under the terms of a trust, whether a trust that pays an income stream or provides for a one-time principal distribution, a charity should understand its rights as a beneficiary. Unlike wills, trust agreements typically are not public documents. State trust laws, however, impose on trustees certain duties to provide beneficiaries with information related to the administration of the trust. In states that have adopted the Uniform Trust Code (UTC), a charity that is a “qualified beneficiary” (generally, a beneficiary currently eligible to receive distributions from the trust or presumptively entitled to receive a distribution at termination of the trust) typically must receive notice of a new trustee, notice that a trust has become irrevocable and advance notice of a change in the trustee’s compensation. The charity can also request a copy of the trust instrument, request an annual report from the trustee and waive receipt of an annual report to which the charity is otherwise entitled.
The charity should develop policies about when it is appropriate to request a trustee’s report and under what circumstances the charity may waive its right to receive the report. Where appropriate and cost-effective, the charity may agree with the trustee to receive an account statement or other informal means of confirming the trust’s assets and operations.
If a charity is receiving reports or accountings from a trustee, the charity should have processes in place to review these reports timely. In many states, the receipt of the report or accounting starts the statute of limitations for making claims against the fiduciary related to matters shown on the report. The UTC imposes a one-year statute of limitations (which some states have modified) on claims against the trustee if the trustee sent the beneficiary a report (which might be as simple as an account statement) that adequately discloses the potential claim and that informs the beneficiary of the statute of limitations. Because of the short time period for bringing a claim, a charity should review any trustee’s report promptly and address any concerns with the trustee or seek legal advice.
Although the UTC and most states’ laws provide beneficiaries with rights to information, state law often permits the trust document to modify or to waive those provisions. Some states also allow for “secret trusts” that under certain conditions can totally eliminate a beneficiary’s right to information, including notice that the trust even exists. Oftentimes, trustees are not forthcoming with information (or funds), creating concerns whether the trustee is properly administering the trust. When presented with a secret trust, a trust that waives information or a nonresponsive trustee, the best recourse is often to obtain legal counsel to review options and, if necessary, make appropriate court filings.
Other Dispositions at Death
Many assets do not pass to the beneficiaries named in a decedent’s will or other estate planning documents. These assets include jointly held property with rights of survivorship, retirement benefits, and insurance proceeds that pass pursuant to the terms of a beneficiary designation, as well as assets held with transfer-on-death provisions. Oftentimes, a charity will be named as a recipient of these types of assets. A personal representative or trustee will not be involved in the administration of the assets. Instead, the charity should make direct contact with the financial institution or insurance company holding the assets, but also should recognize that the personal representative may need certain information for estate tax purposes.
The charity should have a policy to obtain information about the assets it may receive as soon as possible. Many states allow a beneficiary to disclaim, or refuse to take, a bequest. If the charity is left an asset that may impose an undue burden on the charity, it may want to disclaim the asset. A charity also may want to disclaim if the donor imposes burdensome restrictions on the use of the asset that are not acceptable to the charity or fall outside the charity’s exempt purposes. It is important for the charity to obtain this information quickly, as many states require beneficiaries to make disclaimers within certain time periods.
Will Contests and Other Disputes and Litigation
Even a donor’s best-laid plans can become waylaid by disgruntled heirs or family members and poorly selected fiduciaries. When disputes arise and litigation ensues, the charity must consider whether to become involved in the dispute by actively participating in litigation. In some states, all the beneficiaries of an estate or trust are necessary parties to litigation, meaning the charity often cannot avoid involvement in litigation instituted by other beneficiaries.
A charity should have procedures in place for determining the nature and extent of its involvement in any such disputes or litigation. The policies should consider the charity’s interest in the estate or trust and the nature of the claims. In particular, the charity should determine whether any claims could impact its interest in the estate or trust and the anticipated cost of enforcing its rights. The charity should have a policy related to the retention and management of counsel and the approval of legal fees. Normally, the estate or trust pays the fiduciary’s legal fees as long as the fiduciary acted in good faith. Beneficiaries of estates and trusts, including charities, are more likely to bear their own legal fees. Litigation also may result in a non-public trust agreement becoming a public document through the pleadings filed in connection with the suit. The charity’s involvement in the litigation also will become a matter of public record. Litigation can significantly delay the distribution of the assets to the beneficiaries, often for years.
Charities also should consider other factors in developing a litigation policy for interests in estates and trusts, such as the charity’s fiduciary duty to pursue funds that rightfully belong to it, public relations issues, and concerns about opposing family members who also may be donors to the charity. If the charity is involved in a claim, it should seek counsel to review any no-contest clauses included in the will or trust document to ensure that its participation does not cause it to forfeit its interest.
Waiver, Receipt, Release and Refunding Agreements
Before making complete or partial distributions from an estate or trust, a fiduciary often requests the beneficiary to return funds if unknown liabilities or tax obligations arise after distribution. While refunding agreements are generally appropriate, these agreements often waive a beneficiary’s right to seek court review of the fiduciary’s actions and release the fiduciary from liability. Sometimes these agreements also request the beneficiary to indemnify the fiduciary against third-party liabilities the fiduciary may incur. Charities carefully review these agreements to determine the full scope of possible liability. Sometimes, the indemnification provisions are not limited to the value of the assets the beneficiary received from the estate. Also, the charity should not release the fiduciary from any claims unless the charity first determines there were no financial or other improprieties. Advice of legal counsel related to these agreements is often prudent.
Bequests and other testamentary gifts to charities offer tremendous benefits and resources and, when significant, can change the trajectory of the charity and its benefit for the public. But the charity must be prepared to protect its interests and rights with respect to bequests and other deferred gifts. Appropriate processes and procedures enable the charity to do so effectively and timely.