Death and Taxes - The Blog

Charitable Beneficiaries Play Hardball

When I was a young associate, I handled an estate involving a number of charitable beneficiaries.  Under the decedent's Will, money was also to go to a charity that didn't exist (something like the Pet Society of Chicago), which raised all sorts of questions about the decedent's intent.  Most of the other charities agreed that the money should go to another of the animal-related charities mentioned in the decedent's Will, but one charity (we'll call it ARThur's Institute) resisted.  Essentially, their argument was, "we're not going to leave money on the table -- we want a share of the money that was to pass to the Pet Society of Chicago, even if we're not entitled to it."

I was reminded of that case when I read this article, about the UW (University of Wisconsin) Foundation and the estate of Harold Mennes.  The timeline is fairly clear:

1996: Mr. Mennes executes a Will leaving most of his estate (about $800,000) to UW.  In the Will, he disinherits his daughter, Mary Ellen Jenson, from whom he was then estranged.

2000: Mr. Mennes and his daughter reconnect and are close until Mr. Mennes' death.

2001: Mr. Mennes, in a letter that was notarized and witnessed, leaves his daughter $100,000 from an investment account upon his death.

2004: Mr. Mennes dies.

Did the letter constitute a codicil (amendment) to Mr. Mennes' 1996 Will?  What about the fact that Mr. Mennes got rid of the investment account before he died?

This case was finally settled, although the UW Foundation's tactics have been criticized by the administrator of the estate.   As the article puts it:

The case highlights a dilemma for nonprofit groups: how hard to pursue money they believe is theirs. Fight too hard and they risk antagonizing potential donors, but too soft might mean they lose money for their cause.

Georgia O'Keeffe's Gift

The painter Georgia O'Keeffe is famous in estate planning/probate/estate tax circles for the "blockage" discount taken by her estate after her death.  (You can read more about this issue here.) 

There's now a new controversy surrounding a gift of artwork made by Ms. O'Keeffe during her life to Fisk University, which is discussed in this article.  Actually, Ms. O'Keefe made two gifts to the University:

Gift #1: "97 works of art owned by O’Keeffe’s husband, Alfred Stieglitz, and donated by his widow to Fisk University in 1949 at the suggestion of a friend."  As the article states:

When the gift was delivered to Fisk in June 1949, O’Keeffe included a letter of transfer confirming the university would not sell the artworks. Charles S. Johnson, who was then the president of Fisk, replied saying Fisk “will not at any time sell or exchange any objects in the Stieglitz Collection.”

Gift #2: "[F]our paintings from O’Keeffe’s personal collection that she initially loaned to Fisk and later donated to the university in the 1950s."  This includes a painting entitled Radiator Building - Night, New York, which Fisk University would like to sell (possibly for $10 million).

Is the Radiator Building painting subject to the same conditions as the paintings comprising Gift #1? Does it matter that the then-President of Fisk may have agreed never to sell the painting?  If Fisk is acting inappropriately, is there anyone with standing to stop them?

These are all interesting questions.  My own take on this situation is that donors should build a little flexibility into their gifts.  Telling a charity that they may never sell a donated item can place a tremendous burden on the charity.

Warren Buffett's Charitable Gift

Warren Buffett has decided to start giving away his fortune, in what has to be the largest charitable gift ever -- around $40 billion.  Fortune magazine has the details here.

Andrew Sullivan makes somewhat of a link between the gift and the estate tax debate here.  One of his points:

Nepotism is indeed a corrosive element in a democratic society; dynasticism is poison to democracy. I know it's only natural to want to hand over all your wealth to your children, and I'm not saying there's anything wrong with it as such.  But it is not the only moral claim; and those who elevate the biological family to supreme status in our society seem to me to be missing something important.

I'm on record as saying that "I see no reason why the government should try to topple family dynasties when (1) such social engineering rarely if ever works, and (2) family dynasties (usually via incompetent and/or lazy members of following generations) do such a good job of toppling themselves." 

That being said , I don't have any problem with first generation folks deciding to stop a family dynasty before it starts.  In that sense, I agree with Mr. Buffett's statement that "when your kids have all the advantages anyway, in terms of how they grow up and the opportunities they have for education, including what they learn at home - I would say it's neither right nor rational to be flooding them with money."  I love my daughter, but how will leaving all of my property to her at my death really make her life better?

Joan Kroc, NPR, and Charitable Giving

Today's New York Times has an interesting article (in the Arts & Leisure section) about Joan Kroc's $230 million gift to National Public Radio (NPR), and how the gift has changed that organization's culture and outlook.  (The article can be found here, although registration is required.)

Two points in the article (which was written by Jacques Steinberg) stood out to me:

1. The gift came as a surprise to NPR, which (presumably) means that Mrs. Kroc hadn't been in contact with NPR about making the gift.  I usually advise my clients who are inclined to make large charitable gifts that they may want to coordinate such gifts with the charity.  The main reason for such coordination is that it allows the client to make sure that the charity can handle the gift, and has a plan for its use.

2. Nina Totenberg (NPR's legal affairs correspondent) mentions one downside to the receipt of a large gift, stating that "My one fear is, people will think, 'We don't have to give.'"  Lots of charities struggle with this mindset -- a similar mindset often appears when donors are solicited to make planned gifts to charities that deal with social ills, and say something like "if you [the charity] do your job, won't this problem be eradicated before I die?"

Gifts to Charity: The Slate 60

Slate annually compiles a list of the 60 largest American charitable contributions.  This article explains the idea behind the list -- the list itself can be found here.  You'll note that the top contribution came from the estate of Cordelia Scaife May, who died in January of 2005.  I blogged about Ms. May's Will last March.

More on Problems with Charitable Bequests

A few days ago, I wrote about a problem with a charitable bequest to a Connecticut library.   These types of problems are instructive, because giving to charity under a Will or a trust can be fairly tricky business. 

The biggest difficulty involves guessing about a charity and charitable causes -- and sometimes, this guessing has to be done years in advance.  What if the charity you give to is no longer operating when you die?  Or, what if the charitable purpose for which you are giving money is no longer important when or after you die?  These issues can usually be dealt with through a well-drafted document, but what about the changes that even a good charity can go through over a period of time.  While resources like Charity Navigator are great for evaluating charitable gifts being made right now, it's much more difficult to evaluate what a charity's effectiveness will be in 20 (or 30 or 50) years.

I think the rise in the use of foundations and other vehicles such as donor advised funds can be traced pretty directly to the above concerns.  These vehicles view charitable giving as an ongoing (rather than one-time) process, and allow family members to perform due diligence before gifts are made.

Charitable Bequest Problem: Yale, the Pequot Library, and Christopher Columbus

Placing conditions on a gift can be a good way of forcing your beneficiaries to do what you want, even after you've passed away.  Is your child a slacker with the books? You can withhold distribution of his or her trust until graduation from college.  Does your child have a drug problem?  Consider making distributions contingent upon the child passing a drug test.

The problem with using conditions in estate planning is that the conditions have to be crafted carefully, which doesn't always happen.

Some people also place conditions on charitable bequests, in an attempt to restrict how a charitable beneficiary uses the bequest.  That's what happened in the case of Mary C. Wakeman, who left a collection with 212 books and 43 manuscripts to the Pequot Library in Southport, Connecticut, with the requirement that the collection "be preserved intact and fully insured."  (Ms. Wakeman's case is discussed in detail in this article.)

There are two problems with the above requirement: (a) it's impractical, and (b) it may not be representative of Ms. Wakeman's real intent.  The requirement is impractical because the Pequot Library is small, and doesn't have the resources to care for the collection (which is why the collection has been on loan to Yale University for more than 50 years).  Furthermore, if Ms. Wakeman really intended to benefit the Pequot Library, the requirement could do more harm than good.  As the above article points out, the collection includes a letter written by Christopher Columbus, which may have a value of more than $1 million.  By selling this letter -- that is, by possibly violating the requirement that the collection "be preserved intact" -- the library could create a space to house the rest of the collection (and its other special collections) in an appropriate manner.

May the Pequot Library sell the letter?  That's a question for the probate court to decide.

Great Resource for Charitable Giving

How do you know that the charity to which you're donating is using your money wisely?  One great new way to check is by visiting Charity Navigator, a website that rates over 3,900 charities.

Here's one sample report (note my conflict of interest -- I'm co-chair of this organization's planned giving committee):

Greater Chicago Food Depository (overall rating: four stars out of four)

The Rabbi on Estate Tax Repeal

Rabbi Marc Gellman has this article on the MSNBC/Newsweek website.  The article's title is "Philanthrocide," and it talks about gifts to charity and the repeal of the federal estate tax. 

Charities are worried about federal estate tax repeal because of its effect on donations (which are deductible for estate tax purposes).  Of course, charities aren't talking about their concern, because they don't want to anger rich donors by opposing repeal (see this New York Times article - registration required).  Rabbi Gellman takes the position that (a) the estate tax is spiritually unjust and (b) we ought to get rid of the charitable deduction -- people should donate money to charity because they want to, not because they receive a tax benefit for doing so.

My criticisms of the Rabbi's arguments:

1. How far is Rabbi Gellman willing to take his point (b)?  For instance, if I'm reading the Rabbi's comments correctly, we should get rid of all tax provisions that favor married couples because such provisions violate the sanctity of marriage, and promote the (unsavory) idea of marriage as a financial relationship.  Similarly, we should dispose of the various child-related deductions and credits because the existence of these tax incentives "replaces compassion with calculation" (to use the Rabbi's phrase).

2. I've been practicing trusts and estates law for almost ten years, and I've never had a situation where a client with no charitable inclination made a charitable gift.   My clients who make charitable gifts do so because they want to AND because there are good tax reasons for doing so.   Near the end of the article, Rabbi Gellman talks about people being basically good or basically selfish beasts.  But people are more complex than the Rabbi thinks, and I don't believe we can sensibly demand purity of motive from charitable donors.  People give to charity because they think it will get them to heaven, or because they want attention, or because they lost a loved one to a disease, or because Sally Struthers on TV told them to.  Sometimes they give to charity for all of these reasons, and more.  Can the Rabbi (or any of us) really attempt to sort through all of these complex motives and decide which ones, if any, are "proper"?

3. Rabbi Gellman raises the double taxation argument employed by many opponents of the federal estate tax, commenting that "[t]axing the same income twice is unfair no matter what charity benefits from the heist."  But the Rabbi ignores the fact that a lot of property people own at death -- such as appreciation on stocks, real estate, life insurance, and business interests -- has never been taxed.  [added on 5/14/05: Michael Kinsley discusses this fact in his very well-written article entitled "Dead Wrong - The estate tax doesn't double dip, and they know it".]  Along those same lines,...

4. The Rabbi argues that it's "confiscatory and cruel" to subject assets to taxation "when we try to give the fruits of a lifetime of labor to our children and to the children of our children’s children."  Over the past two days on this blog -- here and here -- I've discussed easy ways to make large gifts during life ($220,000 per year, in one example) without paying gift taxes and without even needing to hire an attorney.  These techniques exist in addition to the $2 million in gifts that a married couple can make (gift tax-free) during life, and the $3 million (soon to be $7 million) in gifts that a married couple can currently make (federal estate tax-free) upon death.  Such a system doesn't strike me as "confiscatory" or "cruel."

5. Rabbi Gellman complains about the "marginally legal tax shelter that ends up consuming in administrative costs large pails of money meant for the poor."  But this is a real case of throwing the baby out with the bathwater.  If the problem is "charities" that aren't performing charitable work or aren't aiding society, then the government should strengthen the definition of "charities" to prevent such abuses. 

6. The Rabbi supports repeal of the federal estate tax without discussing what should replace it.  The Joint Committee on Taxation estimates the cost of federal estate tax repeal for the years 2006-2015 to be $289,893,000,000, or about $29 billion per year for that 10-year period (see here).  How should we deal with this shortfall?

a. By raising other taxes by $29 billion per year?  If so, which specific taxes should be raised?

b. By cutting government spending by $29 billion per year?  If so, which specific governmental programs should be cut?

c. By simply ignoring the shortfall, and viewing it as another gift "to our children and to the children of our children’s children"?