GORDON & SYKES, LLP
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Monthly Archives: August 2015

Protecting Charitable Legacies or How to Avoid Losing a Charitable Bequest

1. INTRODUCTION.

Charitable organizations spend countless hours and resources developing planned gifts and assisting potential donors in making good choices to carry out their charitable intent. This article provides a guide to help charitable organizations protect planned gifts in wills, trusts, and non-profit corporations so that the donor’s charitable intent is fulfilled.

2. DRAFTING IS IMPORTANT.

A donor may make a planned gift to a charitable organization by naming a specific organization as a beneficiary in a will or trust or by designating a charitable purpose to be fulfilled without designating a specific organization. They may also use a donor advised fund sponsored by a community foundation or financial institution, or by naming a charity as a beneficiary of an insurance policy, retirement account or annuity. The instrument creating the gift will designate the beneficiary or charitable purpose and the person who will manage the fund and make determinations concerning the amount and terms of a gift or grant.

3. RULES OF CONSTRUCTION.

On occasion, the instrument creating the gift may be ambiguous or incomplete. When this happens, a charity’s gift may be put in jeopardy in a lawsuit to construe the will or trust. A court will attempt to interpret the gift document to fulfill the donor’s intent. With planned gifts, the donor is deceased and determining his or her intent may be harder than it sounds. Examples of lawsuits that might affect a gift to a charity include confusion over the name of the charity, the purpose of the gift or the timing or manner in which the gift is to be made. The real life case studies set out in paragraphs 4 to 7 below provide examples of issues that have arisen regarding ambiguous gift documents.

4. NAME CONFUSION.

Many organizations have an affiliation with another organization. For example, the Red Cross is a national organization with local affiliates. If a donor makes a gift to the Red Cross and he or she intends for the funds to be used locally, then the instrument creating the gift must contain language specifically identifying the local affiliate. Other organizations may have a separate foundation that collectively manages its funds with other charities’ funds such as a Community Foundation. If the donor intends the funds to benefit the specific charity, care must be taken in gifting funds to a Community Foundation in order to identify the particular charity who should receive the funds. The take away for the charity is to make sure that its correct name is included in all of its information pieces and website so that the donor can clearly name the correct organization as a beneficiary.

5. GEOGRAPHIC CHANGES.

A donor may wish to have his or her funds expended to benefit people in his or her hometown or state. With the consolidation of financial institutions, many locally owned banks that serve as trustees of charitable trusts have been acquired by large interstate banks. This has resulted in local communities losing control over the charitable trusts with money being diverted outside their community. The legislature sought to address this problem with an amendment to the Texas Property Code to limit the ability of a trustee to move the situs of the administration of a trust out of state. Section 113.030 requires a trustee to notify the attorney general if any change of trustee would cause the situs of the trust to be moved out of the State of Texas. In working with donors, a charity might recommend that a donor specifically provide in the gift instrument that funds be used for the specified community, e.g. “benefit of needy children in Tarrant County, Texas.

6. CHANGE OF CHARITY.

Many charitable organizations will change over time or even split into multiple entities. For example, a local church who was affiliated with a national denomination left to become an independent church. The split created confusion as to which church was entitled to receive bequests made to the church in wills drafted many years before. Some changes may not be able to be anticipated by a donor and therefore a donor could provide a method for resolving disputes, such as arbitration or mediation in the document creating the gift.

7. GIFTS OF SPECIFIC ITEMS OF PERSONAL PROPERTY

Many donors desire to make gifts of specific property. For example, a donor may donate artwork to a museum or horses to an equine therapy program. If the charity cannot accept the gift due to its gift acceptance policies there should be language in the document creating the gift authorizing the trustee or executor to sell the item and then distribute the proceeds to the charity. Without such language, the charity may be limited to either accepting the gift as is or rejecting it.

8. PROTECTING THE LEGACY BY AVOIDING WILL CONTESTS.

Wills and trusts may be contested if the decedent lacked testamentary capacity or was unduly influenced. Many fundraising professionals develop close relationships with donors through personal contacts and social activities. In general, these types of activities are common and should not raise an issue in a potential will contest proceeding. However private dinners between a fundraising professional and a donor that appear more like a date, can cause a jury to determine that undue influence was exerted. When possible, it is best to have another person meet with the fundraising official and the donor. Consider the time of day of the meeting. Include the donor’s professional advisers and when in doubt, have the donor’s physician give an opinion of capacity. Remember also that emails, notes and journal entries should be written with the assumption that they will be offered as evidence at trial. Because the motive of a donor to make a gift is important, ask yourself: Does the donor have a history with the organization? Does the donor currently support the organization? What interests does the donor have? A fundraising professional should document the file with information regarding the interests of the donor and his or her connection to the organization.

9. PROTECTING THE GIFT BY WATCHING THE FIDUCIARY

Unfortunately many charitable dollars are lost to unscrupulous and dishonest fiduciaries. A trustee or attorney may charge unreasonable compensation or delay the distribution of the gift. Fortunately, there are some things that a charity can do to minimize loss on account of breach of fiduciary duty. A Charity should ask for and obtain a copy of the will or trust, the initial inventory of assets and the estate tax return, if any. Thereafter, the charity should obtain annual accounting from the executor or trustee. One might also have their attorney or a board member monitor the estate. Expect a distribution within eighteen months from date of death. Most estates remain open for a minimum of twelve months before distributions can be made. If your organization has not received its gift within eighteen months, contact should be made to the executor or trustee asking for the status and timing when distributions will be made.

10. ATTORNEY GENERAL’S CHARITABLE DIVISION

The Texas Attorney General is charged with protecting charitable interests for the public. At the earliest sign of trouble, one should contact the Attorney General’s Charitable Organizations division for advice or to express concern.

The contact information is:
Office of the Attorney General
P.O. Box 12548
Austin, Texas 78711-2548
512-475-4233 phone 512-475-2994 fax

11. CONCLUSION.

A charity may increase its chances of receiving a donor’s gift by working carefully with the donor in drafting the gift instrument. Provisions should be included to specifically identify the beneficiary and anticipate any changes that might occur. Special consideration should be given to the type of property transferred. geographic limitations and restrictions of the persons or entities who may serve as trustees are important. The fiduciary’s compensation should be clearly defined. Fundraising activities should be kept on a professional basis and should look like meetings rather than dates. A charity should monitor gifts by keeping copies of gift instruments when provided by the donor, including copies of wills naming the charity as a beneficiary. When a donor dies, the charity should obtain a copy of the will and contact information for the executor and the executor’s attorney. The Charity should request and receive a copy of the estate’s inventory and, if an estate tax return is filed, ask for a copy of the return. The Charity should know the date that letters testamentary are issued and monitor the estate so that if the gift is not received within eighteen months, further inquiry is prudent. Legal counsel should be included as a monitor of the estate process. If anything appears wrong or suspicious, one should seek contact the Texas Attorney General or legal counsel.


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The Prequel: What Happens Before the Beginning of a Dispute Resolution Proceeding?

The kind of disputes I’m writing about arise from performance of the “deal.” Something has gone wrong, costing someone money, directly or indirectly. You’re defending or seeking to recoup the loss, and groping for a way forward.

There are so many variables besides these first few that it’s difficult to generalize about what to do first but in most cases, there are a few standard steps to take as soon as you realize there may be a dispute to be resolved by a third-party: a judge or arbitrator.

  1. Preserve all documents. Send out an email reminding all your people not to delete their emails and electronic files. Get with your in-house IT resource or an outside consultant to make sure that older electronic files and emails related to the project aren’t deleted as part of your routine document handling procedures. If you delete files after you reasonably know there may be a dispute process, there’s a good chance deletion will be held against you—even if the documents would have been favorable to you.
  2. Gather the documents and other evidence related to the developing problem and organize them. If something is missing, find out who might have a copy.
  3. Think about all possible consequences of any action or inaction you may immediately feel is appropriate under the circumstances.
  4. Make an appointment with an attorney. You need advice about what to do. It may be that you ought to continue to work on the project, even though there’s a dispute that makes you feel you must stop or quit. It may be that you don’t yet have grounds to terminate an under-performing contractor. You need legal advice about what the deal documents actually say, and the notices required.
  5. Working with your attorney, start the process of investigating what happened. The resulting analysis will usually be protected from disclosure, if it is prepared for the attorney.

When the documents and evidence are preserved and organized, and the deal documents have been read and evaluated, in light of the investigation and analysis prepared for the attorney, you are ready to make intelligent and informed decisions.

There are a few other things to think about that are worth mentioning. Most important perhaps is to consider the impact of the dispute on external and internal relationships. If this consideration didn’t come up in working on step 3 above, now is certainly the time to think about it. Is a continued relationship with the other parties involved in the dispute more important than the dispute itself? If so, a strategic concession may be more important than “winning” the dispute. Usually the attorney is oblivious to this aspect of a dispute. Make sure the attorney knows that relationships are important.

Similarly, you may conclude that a particular person in your organization is responsible for the problem, and the temptation may be to prevent any future recurrence by terminating the responsible party. Not a good idea if the person is a key witness, and you expect to contest the claim that the error or omission is the root cause of the problems creating the dispute. Who will the other side be talking to? A disgruntled former employee.

As you put together your plan of action, make sure there is no misunderstanding about who is responsible to coordinate the dispute process. Someone needs to be the point of contact with the attorney, to see that time deadlines are met, and communications are received. A challenging task, but an essential function in the process of preparing for a dispute resolution proceeding.

Changes to Texas Law Regarding Small Estate Affidavits

It is highly recommended that all persons living in Texas who own property should have a properly prepared will. Unfortunately, there are those who die without a will. When a person dies without a will, the state law will specify the heirs and their share of the estate. A probate proceeding will be required for the heirs to be able to obtain the decedent’s bank accounts, assets and to transfer title to property. The proceeding is filed by an attorney with the Probate Court. The Probate Court will enter an order determining heirship and appointing an administrator to administer the Decedent’s estate. Heirs may not represent themselves in court without an attorney. The cost of a probate proceeding in an intestate estate generally exceeds the cost of a probate proceeding when an individual dies leaving a will.

However, the cost of a probate proceeding may be minimized if the value of the estate is less than $50,000.00 excluding the value of the Decedent’s homestead.

A new law effective September 1, 2015 directs the Texas Supreme Court to create a form for a Small Estate Affidavit for use in small estates where the value of all property in the estate, exclusive of the Decedent’s homestead is less than $50,000.00. In order to qualify as the Decedent’s homestead, the Decedent must be survived by a spouse or a minor child living in the home at the date of death. Thus, if the Decedent is not survived by a spouse, and all of the heirs are adults or non-children, a Small Estate Affidavit may not be used even if the value of the estate is less than $50,000.00.

If the estate meets the criteria of a “small estate”, the heirs may file a small estate affidavit with the court. The affidavit must be signed and sworn to by all heirs before a notary public and also by two disinterested witnesses. The affidavit must list the names and addresses of all heirs, and must include a list of the Decedent’s assets and debts.

If the affidavit meets the requirements of Texas law, the Court will approve the affidavit and will provide the heirs with a certified copy. The heirs may use the certified copy to collect estate assets or sell the homestead without any further action of the court.

Our firm specializes in probate and provide you with superior legal advice in connection with the administration of a decedent’s estate. Please call or email us if you have any probate or estate planning needs.


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