Planned Giving Ethics - Merrill Lynch Case Part 1

As mentioned last week (see http://plannedgift.blogspot.com/2009/11/planned-giving-nightmare-crt-case.html), there was a recent court ruling out of the State of Delaware regarding a really botched charitable remainder trust situation.

Rather than trying to review the entire case in one post, I plan on writing short posts related to the many ethics issues raised in the case. In other words, I think the case itself is great for training purposes - getting accustomed to the nuances that we planned giving officers should be aware of, but the ruling itself should have little or no impact on the field.

If you try reading the case (http://courts.delaware.gov/opinions/%28jt5l5vngapjgmyzobwkq5ejj%29/download.aspx?ID=126540), you'll see some nice biographical info on the victims but here is my short version (at least the relevant facts):

Husband and wife (she is 75 and he is 10 years or more older) save over $800,000 in Esso/Exxon stock from his career, their nest egg. At some point, the husband comes to rely on a Merrill Lynch broker and instructs his wife (not typically involved in the family finances) to stick with this guy's advice when his health starts to deteriorate. Sadly for this family, the wife listened to her husband on this issue and followed the advice of the Merrill broker to put their entire Exxon stock nest egg into a 10% Charitable Remainder Unitrust, income for lives of husband and wife, and then to their 3 children, before eventually distributing remainder funds to 5 charities in approximately 50 years. This was finalized in 1996, before the 10% remainder rule came into effect - their deduction on this $840,000 CRUT was less than $10,000.

The first lesson: A Merrill Lynch stock broker, or any other stock broker or insurance salesman or financial planner, is NOT YOUR ESTATE PLANNING ATTORNEY. Even if he has a law degree or even practiced estate planning law. He (or she, too) is a salesman who is selling products or investments. Your attorney is someone who represents only YOUR interests, not the interests of the commissions to be had from selling various products to you.

In other words, beware of Merrill Lynch guy's estate planning advice.

In truth, this also applies to planned giving officers.

The take way for planned giving officers is to remember and communicate that donors need independent counsel, their own attorneys, to review various plans that have any impact on a donor's estate. Educate your donors not to rely on you or their Merrill Lynch stock broker for estate planning, especially significant parts of an estate.

To be continued.

Planned Giving Nightmare CRT Case

This new legal ruling is for the die hard planned giving folk out there:

http://courts.delaware.gov/opinions/%28jt5l5vngapjgmyzobwkq5ejj%29/download.aspx?ID=126540

I haven't spent enough time on it to give readers my summary and my uptake but from my first glance, it's a real doozy of a fact pattern.

Here is a glimpse and a quote from the introduction of the opinion: A Merrill Lynch broker

"advised an elderly woman to place most of her life savings in a charitable remainder unitrust with a 10 percent annual payout, lifetime gifts to her children as successor-beneficiaries, and the remainder to go to five charities, an event expected to occur almost half a century later -- objectives that all now seem to agree and understand were unrealistic and likely unattainable. In the spirit of cross-selling, a trust company sister entity of the brokerage firm was designated trustee. Legal advice was provided by an attorney selected by the brokerage firm; the attorney never even spoke with her client, the trustor."

I think this case will be a spring board for a series of blog posts on ethics in the planned giving area!

Second Thoughts on Forbes Article

Like most articles in the mainstream press about planned giving, attempts to create a catchy/interesting story end up doing a real chop job on the truth.

The Forbes article is no different.

http://www.forbes.com/2009/09/29/charitable-gift-annuity-crescendo-personal-finance-marketing.html

Basically, the accusation is that by using canned planned donor stories, you are guilty of making a "Dubious Annuity Pitch" or "Canned come-ons cite yields unavailable to most buyers."

Come on writers!!! The only crime or misdeed involved is shoddy marketing!!! It doesn't take a genius to figure out that real stories, with pictures of real donors, will go a lot further than some obviously canned stuff (spot-table a mile away).

But, as this article is in a major publication, we have to give it some due and think about the issue it is hitting on (however skewed and misapplied it is).

It actually reminds me about the Wall Street Journal article this past spring talking about how CGA programs are going under and how it was so bad for donors (when in reality, it was just one CGA program going under and the donors should have known better than to do a CGA with that so-called organization).

Why? That notorious Wall Street Journal article actually did hint to a larger problem of potentially faltering CGA programs due to investment losses (which seems to have turned around).

The Forbes article also hits on a topic often discussed in this blog: fodder for plaintiffs' attorneys. A good friend and attorney made this point to me as I complained about the article and on second thought, I agree.

The chances of a charity being sued over a CGA arrangement are low, very low. But, they aren't so low that it will never happen. Any marketing that your charity engages in while promoting CGA programs in particular can come back to haunt you. Attorneys representing disgruntled donors or family members will look at any means to challenge a gift, especially your own marketing efforts. Fraud in the inducement is pretty powerful. And, even if you can fight off that particular legal challenge, the attorney has just biased the judge or jury against your organization for being sleazy.

I am not trying to be overly nuts on this issue - go ahead and market planned gifts. The point is that as your institution proceeds into the public realm with various promotional materials, it is a good idea to think about whether you are stepping over boundaries that could later haunt you. I tell clients to stay away from using canned donor stories. I also tell anyone willing to listen to avoid use of investment terminology when promoting CGAs.

Have a great weekend and thanks for sticking with my blog!! (please forward stories to friends!)

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?

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.

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?

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.

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."