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The Perilous Quest for Bequests

Planned Giving Today

Originally Published in Planned Giving Today.


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When an enterprising planned giving officer embarks on a “bequest program,” he or she usually has in mind an organized campaign to encourage friends of the charity to remember the institution in their wills or living trusts. This sense of “bequest” is actually something of a misnomer. A gift which a donor makes by will is a “bequest” only if it involves a gift of assets other than realty; a gift in a will of realty is more properly called a “devise,” which charities are often just as happy to receive as a “bequest.” A more accurate term that includes both bequests and devises would be “testamentary gift.” Similarly, as more and more donors seeking to avoid the time and expense of probate proceedings choose to organize their affairs by utilizing living trusts, it is more accurate to say that a charity seeks a “trust gift,” rather than either a “bequest” or a “devise” from a trust.

However it is termed, a testamentary or trust gift to a charitable organization can be a mixed blessing, depending on how carefully the gift provisions have been drafted, and how diligently the charity has informed the donor and his or her attorney as to the needs of the charitable institution.

Misidentification

One of the most common problems in testamentary or trust gifts is the inadvertent misidentification of the charity. The law books are full of suits involving attempts by judges to figure out exactly which charity a donor had in mind in making a testamentary or trust gift. Many charities have similar names or missions, and this is often a point of confusion. A testamentary or trust gift to “the children’s hospital,” for example, is hopelessly ambiguous if there are a number of children’s hospitals in the general locale of the donor’s residence. Faced with such a vague grant, judges have reacted in a variety of ways, among them: to make the grant to the closest “children’s hospital” to the decedent’s residence; to try and determine the “children’s hospital” with which the donor was most closely associated, either by gifts or by having a relative who was treated therein; or to void the gift altogether, and let the property pass instead by intestate succession or alternate disposition.

Another common problem is a testamentary or trust gift for a use which is obsolete or otherwise inappropriate. For example, an older will or trust might make a gift to a charity for use in caring for Spanish-American War veterans, or for making additions to a building which no longer exists. Similarly, the gift may involve amounts far in excess of those which are needed, as for example a gift of several hundred thousand dollars to provide a library with a computer inventorying system, with no indication of what the donor intended to be done with the overage. In circumstances such as these, the court must be asked to rule.

Conditions

Yet another problem which sometimes crops up in the area of testamentary and trust gifts is the linking of the gift to certain conditions or reversionary rights. For example, the gift may be made to charity “so long as it is used for a park.” In some cases, such language may be followed by a provision that, if the designated use ceases, the property reverts to the donor’s heirs. More commonly, unfortunately, no alternate disposition is made. If the property in this example should cease to be used as a park, the judge would need to decide whether the property was to revert to the donor’s family, or whether the use restriction involved merely “precatory” language–that is, language expressing merely a wish and not a requirement on the part of the donor.

Occasionally it occurs that a testamentary or trust gift is made to several charities, with no clear designation of how much each charity is to receive. In such a case, the judge would probably conclude that an equal distribution was contemplated, although this may not reflect the intention of the donor.

Testamentary or trust language sometimes purports to give the income from certain property to a charity, with no clear indication of what is to become of the principal. A judge might conclude that such language constituted a poorly executed attempt to create an endowment fund, or may conclude in the alternative that the donor wished to create a continuing charitable trust. One disadvantage of a continuing charitable trust is that it would likely be treated by the Internal Revenue Service as a private foundation with all of the attendant shortcomings, including higher government scrutiny, and various excise (i.e., penalty) taxes.

Unacceptable Gifts

A testamentary or trust gift may be made of property which is wholly unacceptable to the charity, such as profoundly illiquid real estate, perhaps with a hazardous waste problem, or restricted securities. In such a case, the charity will always have the option to refuse the gift, if the will or trust fails to grant the executor or trustee discretion to satisfy the gift from other property.

As to institutions which have established autonomous foundations or other fund-raising ancillary organizations, a testamentary or trust gift might erroneously be made to the central institution, rather than the foundation. This is usually of little concern, except where the foundation is a qualified charitable organization but the central organization is not. Similarly, a gift may be made to a department within a charitable organization, such as, for example, to a school of law at a university, which could create an unpleasant battle within the institution as to which group would control the gifted assets.

Donor’s Intent

If a court encounters ambiguous testamentary or trust gifts such as these, it must attempt to give effect to the intention of the donor. This is, of course, frequently difficult or impossible to determine with certainty. The court is supposed to try to determine intention from the “four corners of the instrument”–that is, from the face of the document itself.

If review of the document fails to resolve the ambiguity, then the court may consider, on a limited basis, some background facts and circumstances. Resort is often had to the hoary doctrine of cy pres. If the use of the gift is obsolete or otherwise inappropriate, and the court determines that the donor’s charitable intent was “general” and not “specific”–that is, if the court feels that the donor would have wanted to make a charitable gift even if the use described were obsolete–then an alternative use can be selected under the cy pres doctrine. Of course, all such interpretive court proceedings involve delay, attorneys’ fees and costs, and uncertainty for the charity involved.

Undoubtedly, the best way to avoid these pitfalls is for the planned giving officer to provide information to donors and their advisors. For example, some planned giving officers combat the misidentification problem by mailing rolodex cards or other easy-to-file instructions to attorneys and accountants, setting forth the institution’s correct name and address.

Suggested Language

In addition, an important part of the testamentary or trust gift program will be to provide attorneys and other advisors with suggested language, which should include provisions for expressly unrestricted gifts, as well as categories of acceptable restricted gifts. The more specific the language the charity can place in the hands of the advisor, the less likely it is that the advisor will commit one of the drafting errors summarized above.

The best time for the planned giving officer to make suggestions to the attorney is during the actual drafting process, if possible. If a donor informs a planned giving officer that his or her attorney is preparing a will or trust with a gift to the charity, the planned giving officer should make contact with the attorney, to provide suggested language.

However, as testamentary or trust gifts have a habit of popping up unexpectedly, they may fall through the cracks of even the most well-organized program. Often a charity does not learn of the trust or testamentary gift until after the donor has died, when it is too late to change the will or trust. In such a case, the planned giving officer should contact the attorney for the executor or trustee promptly, and explore the possibilities of a judicial proceeding to clarify the ambiguous gift language.

Despite these and other pitfalls and problem areas, charities are, of course, well advised to encourage testamentary and trust gifts. Nor should they be discouraged by the fact that a testamentary or trust gift can always be revoked before the donor’s death. Planned giving officers should continue to seek testamentary and trust gifts both in their own right, and as a significant first step in a successful courtship of a donor.

IRS Circular 230 Disclosure: To the extent this message contains tax advice, the U.S. Treasury Department requires me to inform you that any such advice, whether in the body of the message or in any attachment, is not intended or written by my firm to be used, and cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. Advice from my firm relating to tax matters may not be used in promoting, marketing or recommending any entity, investment plan or arrangement to any taxpayer.

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