Thursday, August 27, 2009

Final Chapter in the Alabama Hall of Fame Case

This Alabama case and a subsequent real situation has morphed into a classic planned giving ethical quandary discussion. See previous posts under the label Alabama Ethical Dilemma for discussion of when to think twice about accepting a CGA when it is being created on behalf of an incapacitated person.

When we last left off, a friend had read my blog (about the Alabama case involving a CGA created by a son/guardian where a court later took back the funds because the CGA didn’t make sense in his mother’s overall estate plans) and called me about their own quandary. With a check for multiple hundreds of thousands of dollars in hand and a “power of attorney” cousin wanting to create a CGA for her 90+ incapacitated relative with no history (giving or otherwise) with the organization in question, we were trying to figure out how much due diligence should be done before completing the gift (thinking positively). And, based our discussion, they called the “power of attorney” to see if there were any children or siblings who should be notified of this big gift.

Well, they confirmed that there were no children or grandchildren. So, they finalized the gift.

Why this postmortem post? They admitted to me that the “power of attorney” didn’t sound too pleased to answer the questions so they cut off the questioning – not to jeopardize the gift. My problem is: why should the “power of attorney” be concerned about answering questions? She is taking hundreds of thousands of dollars out of this incapacitated relative’s estate. I would think that some caution and transparency would be what everyone expects.

To the organization's credit, this was not the only charity that the “power of attorney” was creating CGAs for, so if it ever becomes an issue in a surrogates court, at least the story in the NY Post or Daily News will have several charities to mention.

Something though has me thinking that this is probably a case of an underlying family dispute and the emptying of the elder great aunt’s estate at the expense of others. Will it stay off the radar of the eventual estate and executor, if the CGA is being used to cut out inheritances to more direct relatives?

This is another example of where a carefully drafted gift acceptance policy could have solved this quandary for us. The policy should say that the organization does not accept CGAs created by representatives/guardians/power of attorneys unless….

You fill in the blanks. How about a form signed by the guardian or power of attorney? How about a requirement that the institution confirm from an objective, third party that the gift makes sense and is agreeable to all living next of kin of the donor’s estate?

If you are a trustee of an organization that manages a gift annuity program, wouldn’t it make sense that out of the ordinary, sticky situations be brought at least to a gift acceptance committee or an executive committee to assess the risks involved? Isn’t there a risk that a guardian or power of attorney is overstepping their bounds – even if on paper they are allowed to make a gift – and that the there could be negative consequences down the road?

Better yet, is accepting a gift like this the right thing to do?

Thursday, August 20, 2009

Follow-up to Alabama Hall of Fame CGA

This should make an important chapter in my online book in the section on sticky ethical issues. As a follow-up to the Alabama case reported in my previous post (http://plannedgift.blogspot.com/2009/08/hall-of-fame-cga-interesting-alabama.html), one of my friends/blog readers called the day after that post with a ripe quite question right on point and one many planned giving folk deal with periodically.

Here is the story (facts altered, of course). Charity already has in hand a check (for hundreds of thousands of dollars), a copy of the durable power of attorney (reviewed - let's assume completely legal), and the agent/attorney-in-fact (a supporter of the org.) ready, wanting and able to sign off on a CGA for her 90+ relative (not parent or sibling).

Legally, there is no question whether this gift is acceptable - at least right now.

What are the questions we should be thinking about based on the reading of the Alabama case?

My first question: does the 90+, obviously incapacitated "donor" have any giving history or other inclination towards the organization? The agent/attorney-in-fact does, yes. The "donor" in this question does not (if she had been, I would have been less concerned about the next questions but would have still asked them).

Next question: do we know anything about the donor's overall estate? Is this a small part of her estate? Is this a large part of her estate? The point I am getting at is whether this "gift" makes sense at all in her overall financial and estate plans.

Most important question: Are there other living beneficiaries (i.e. children - or anyone else who would stand to inherit from the donor besides the agent/attorney-in-fact)?

This is a really tricky situation. My initial response was that they should contact a known financial adviser of the donor (revealed in the power of attorney paperwork) and see what he/she thinks. Problem is that the agent, who is the real donor here of a really major gift, didn't tell them to call this person. Do they start meddling around this person's back - possibly causing the agent to withdraw the offer?

I have to admit that I personally have taken gifts like this through agents. I have even helped a charity orchestrate a "death bed" CGA. But, as far as I can recall, these were always gifts being made by next of kin - those who would have inherited the money anyway. So, even where the donor didn't have a history with the charity, no one was getting "cheated." Here, we weren't sure if the agent was the next of kin or not. And, if there are next of kin, maybe they should be consulted as this "gift" will have a direct impact on assets they would likely have received.

To top this all off, in this year, when numbers are down, this is a really important gift. No one at the organization will be thrilled if it doesn't happen. Problem is: we know that some more due diligence needs to be done or else there may be a surrogate's court taking the money back and possibly a non-flattering story in the New York Post (and not so far off in the future).

Regardless, our job as gift planners - from an ethics point of view - is to do the right thing and not just take suspicious gifts without investigation. And, not to be clouded by the fact that we will take the credit for the gift today. Someone else may have to clean up the mess in years to come and it won't be pretty. This gets back to another of my ethics posts (http://plannedgift.blogspot.com/2009/08/planned-giving-buck-stops-with-us.html), the ends can't justify the means. We have to take the high rode even when it means passing up on oodles money.

In the end, the consensus was to confirm from the agent if there are other next of kin of the "donor," and if there are, to ensure that they are informed of the gift. And, to put a memo in the file detailing this information and writing a letter to the "family" in appreciation for the gift (and put it in the file). If they can't do that - I really doubt this is a proper gift. A tougher attorney may have even required the next of kin to sign off that they are informed and happy with this gift.

Monday, August 17, 2009

Hall of Fame CGA - Interesting Alabama CGA Case

This recent case doesn't have wide-spread legal significance as it is from Alabama and the facts are rather unique. But, the facts provide some worthwhile ethical guidance when dealing with similar cases.

http://coa.courts.mi.gov/documents/OPINIONS/FINAL/COA/20090709_C282979_61_282979.OPN.PDF

Let me sum up the case: Mentally incapacitated elderly mom, son looking to enrich himself at the expense of his deceased brother's children. Son donates $300,000 of mom's funds, in his role as conservator/guardian, to the Alabama Sports Hall of Fame for a charitable gift annuity. 8%, two-life, mom first income beneficiary, son the second income beneficiary. It wasn't so clear if he really had a right to do this or not. Lots of various arguments proffered, as lawyers will do.

Listen to the court's reason in deflecting the son's argument that he could make such a "gift" of 67% of his mother's assets: "Furthermore, there is no evidence that Roosen (the mom) might have been expected to make a charitable gift in the amount of $300,000 to the Alabama Sports Hall of Fame."

In other words, in situations where a conservator/guardian wants to make a significant charitable gift such as a gift annuity, there better be a history between the "donor" and the institution. And, the size of the gift has to make sense within the entire estate of the older person.

Getting back to basic ethics, should the Alabama Sports Hall of Fame have accepted this gift in the first place? This one should have not passed the "smell" test - son creates really big CGA with mom's money to benefit his mom AND HIMSELF. Maybe the institution didn't know that his brother had died 4 years earlier, had left a few children, mom wasn't there mentally anymore and that the son's right to do this was in question (even if he was officially the conservator/guardian at the time). The Hall for sure had to return any funds left of the CGA - maybe the entire $300,000 (that wasn't clear from the ruling).

Another tidbit. Even if the Mom loved the Alabama Sports Hall of Fame, gift planners should always be on the look out for future litigation. Here is the general rule: if children or other relatives would receive funds from an estate if the decedent didn't have a will, that person has standing to sue. Standing is everything in these cases. It could also be established by a preceding will (if it's found). Once someone has standing to contest a will or other things in an estate, out of the ordinary charitable gifts will be ripe for scrutiny. I think if they had known of the general facts surrounding this donor, they should have stayed away.

I had a situation a few years back with a client and FORMER planned giving director. The former planned giving director was pushing a donor in her 80s to do an irrevocable life estate gift to the charity (multi-millions in value). The FORMER employee's reasoning: the daughter might challenge the estate and it puts the charity in a better position. The FORMER employee actually admitted that she suggested that the donor name the charity as executor of the estate - also to help against litigation. My response: what a disaster the FORMER employee was creating and she was even limiting their chances of receiving a bequest. I told the client - good thing it was a former employee and to take the high road as to everything they were doing with this donor. In other words, I advised them to strengthen their legal position vis-à-vis this donor (give proper public recognition, back off pushing anything that could be seen as overly aggressive, reach out to the child in friendly terms, etc.) because the entire giving was a risk by the overly aggressive actions of their previous planned giving director.

Once you realize that a child in particular may not be interested in the gifting of the elderly parent, you better think twice before pushing large, irrecoverable gift arrangements. And, a child making a gift for an incapacitated parent should also raise a red flag. Maybe all children or other beneficiaries should be consulted prior to considering such a gift?

Thursday, August 13, 2009

Charitable Bequest Headlines

New York papers like the NY Post and the NY Daily News always seem to have interesting takes on charitable bequests.

One of today's Daily News headlines focused on the "megabucks" of a woman who passed away with around a $300,000 estate.

http://www.nydailynews.com/money/2009/08/13/2009-08-13_eccentric_hippie_had_megabucks_to_match_a_huge_heart_.html

In a previous story about this bequest on Monday, the Daily News reported "Israel's Hebrew University gets $100K from NY homeless Holocaust survivor." Today's story was about how she really wasn't homeless. In that first story, they described the bequest as a "whopping gift to the Jewish college."

I think $100,000 is a significant bequest but for anyone who has worked inside larger non-profit organizations, this is by no means "whopping" or "megabucks." It's actually a typical sized bequest and a typical story, an unexpected gift from an unexpected donor. It goes to show that even those people who have modest wealth - and $300,000 is certainly modest these days - often leave significant charitable legacies.

Running Charities Ethically - Behind the Tabloid Stories

I couldn't resist this one and my apologies to my friends at Hadassah.

Did anyone notice the headline "Ex-Hadassah CFO says she had affair with Madoff?"

Yes, the affair part is probably why people are looking at this story. But, when I read these pieces, I am always left wondering: "Are they out of their minds?"

I saw the story on the JTA (Jewish Telegraphic Agency) website. I figured they would report fairly without much embellishment on the lurid parts.

Here is the link to their coverage: http://jta.org/news/article/2009/08/13/1007227/ex-hadassah-cfo-says-she-had-affair-with-madoff

I was looking to see how much Hadassah might have lost when I stumbled on to a few tidbits. Yes, they are reported to have lost $40 million in funds invested with Madoff. They thought those funds had grown to $90 million.

Here is what shocked me into writing this blog post. "Hadassah believed the value of the portfolio had grown to $90 million, not including $130 million that it had pulled out over the years."

Not including the $130 million it had pulled out over the years?? That doesn't make sense to me. Maybe they had invested more than $40 million but had taken back some principal? That number can't be correct.

But the article goes on to say: "Both Weinstein and Hadassah have said that the first $7 million the organization invested with Madoff in 1988 came from a donor who insisted the money be handled that way. Hadassah invested another $33 million with Madoff by 1996, the year after Weinstein left the organization."

The point I saw was that Hadassah admitted publicly that they followed a donor's requirement to invest money with Madoff. That is incredible. Yes, I am sure it happens all the time but it isn't allowed! It puts into question whether the gift was really a completed gift since Hadassah allowed the donor to control the investment after the gift. If I were someone in the IRS tax-exempt section, with time on my hands, I would start wondering about their practices.

Additionally, if Hadassah really withdrew $130 million from initial investments of $40 million, if I were the receiver over the Madoff disaster, I would want some of that money back.

Lastly, the article ends by saying: "Hadassah is "moving on" from Madoff, the spokesperson said, noting that the organization recently received a $1 million gift and is close to securing two more." Something doesn't sound right with that last statement. I would hope that three $1 million dollar gifts to Hadassah are not so rare as to really console them over their Madoff losses. Well, according to the article, they made off like bandits with Madoff.

Thursday, August 6, 2009

Repeat of CGA story

For my dedicated readers, the last post was a re-write of a previous one on the Court ruling involving CGAs that came out in June, in a more serious tone. I am trying to take this story and get it into other publications. If you want to add a quote, email me your thoughts and I will see if I can include them. (Include your name, title and organization)

Best regards!

Important Legal Ruling Impacting Planned Giving Marketing

Charitable gift annuity marketing scrutinized

The U.S. Court of Appeals for the 9th Circuit issued an opinion in a case involving Robert Dillie, this past June. Mr. Dillie operated a fraudulent foundation between 1996 and 2001. This foundation was in actuality a ponzi scheme which issued $55 million in gift annuities to over 400 donors, sold through investment advisers who were receiving commissions on the sales of new gift annuities. He is now serving 121 months in prison for his crimes but the legal fallout from his nefarious operation lives on.

The receiver assigned to recover any remaining funds to repay defrauded donors sued the investment advisers for the return of their commissions. The Federal Court of Appeals, the highest level court below the U.S. Supreme Court, rejected the various arguments by counsel for the investment advisers and concurred with lower court rulings requiring the return of the commissions.

While the underlying facts of this case were truly unique, the significance of this ruling is how the Court viewed gift annuities in light of the marketing techniques used. This can be best exemplified in the first few sentences of the opinion:

This appeal presents the question, inter alia, of whether the charitable gift annuities sold in this case were investment contracts under federal securities law. We conclude they were, and we affirm the judgment of the district court.

Not only did Robert Dillie promise his investors “a gift for your lifetime and beyond,” he pledged “preservation of the American way of life,” “preservation of your assets,” and “preservation of the American family.”


The Court looked at the various gift annuity promotional advertisements used by Mr. Dillie, all of which are very similar to those used in the marketing of gift annuities throughout the non-profit community. And, the Court had no difficulty at all in concluding that gift annuities were in fact an investment contract under federal securities law, despite specific exemption from such laws under the Philanthropy Protection Act of 1995 (“PPA”).

While Mr. Dillie’s scheme specifically violated the PPA by offering commissions, this point was not used as a reason for its conclusions and the case certainly raises the specter of potential Securities and Exchange Commission regulations for charitable gift annuities. Even more troublesome for charitable entities is the potential for a disgruntled gift annuity donor to use legal standards from the area of investments and securities in any legal conflict with a charitable institution over a gift annuity.

The “take home” conclusion of this case is that charities should be very careful in their marketing of gift annuities and other life income vehicles. A court will certainly look at advertisements and direct mail pieces in any potential litigation. Therefore, it is extremely important to emphasize that charitable gift annuities and other life income vehicles are first and foremost gifts.

A copy of the opinion can be viewed at:

http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf

Tuesday, August 4, 2009

Planned Giving - The "buck" stops with us

In light of the recent scandal in New Jersey, and my dedication to warning against risky/questionable insurance deals for charities (as seen in my coverage of Barry Kaye's reported troubles in the press), its as good a time as any for the fundraising world to do our own soul searching and remind ourselves of some basic values that we need to live by.

Did anyone notice that part of the scandal involved the use of non-profit entities for money laundering? Personally knowing about this particular community, I can guarantee 100% that the "profits" from the alleged money laundering through those charities was for the charities - not someone's pockets.

Doesn't make it right. In fact, it was the worst thing they could have been doing with their charitable entities - the consequences destroying precisely what their missions are supposed to accomplish.

While I wouldn't jump to classify the various charitable insurance schemes and other "pushing the envelope" plans out there as criminal activities (as money laundering certainly is), there is a common denominator between them all. The question is how far should your non-profit organization go to raise money for your worthwhile cause?

Do you help your donors commit tax fraud by accepting donations that are really to pay private/religious school tuition? Or, do you "pay" your private/religious school teachers by reducing their tuition bills? Or, do you get involved in one of these impossible to understand insurance arrangements that might magically bring in a big wind fall for your charity? Or, do you join a multi-organization raffle that is clearly violating numerous federal and state regulations? I could go on all day - these are real situations that I come across all the time.

Planned giving, as a field in particular, has always been about doing the right thing for your charity and for your donors, within the boundaries of the law and with ethics. Numerous times, I have had to explain to donors or advisers that I only work within the boundaries law. Gift planners play by the rules, that's our game.

We take pains to inform donors of the consequences of their gifts, even if it means the gift won't happen. We sit through countless classes given by lawyers reviewing all of the various legalities involved in giving. We have a code of ethics promulgated by the national planned giving organization and they even ask you to attest to them before attending their conference.

The planned giving community screamed out against flim-flamsy split interest insurance deals (donors get charitable deductions on life insurance premiums but family gets most of the death benefits). We self regulated the donor advised fund business for 30 years (without scandal until the IRS idiotically gave the Fidelity Gift Fund its 501(c)(3) status). The field voluntarily adopted various codes of ethics and always comes out against the latest "can't be beat" plans that are legally questionable .

Bottom line for charitable institutions is that these no easy way out of good, old fashioned fundraising. Asking for money - that is how over 200 billion dollars a year in this country is raised. Various schemes, selling of products, other business entanglements, just don't compare to tried and true ways of raising money (major gifts, annual fund, direct mail, events, etc...).

Just think twice before you step outside of the traditional fundraising realm to raise funds for your charitable institution. Is it legal? Are you really running a business out of your charity? What are the potential consequences of government scrutiny? What are the potential consequences of this getting into the press? Does this make sense for your charity to be involved?

To quote one of my former clients who refused to be involved in one the insurance schemes discussed recently in this blog: "thank goodness we passed on this one."