Guest Article: Focus on Charitable Bequest Accounting

13 Sep 2018

Perhaps one of the most gratifying pieces of correspondence a not-for-profit organization can receive is an envelope containing an “Accounting” and a “Receipt and Release” from an executor of an estate or a trustee of trust. This is the culmination of coordinated efforts of everyone involved with a donor, resulting in an organization being named a beneficiary in the donor’s will or trust. It also means that the executor or trustee believes his or her duties are complete and that it is appropriate to make distributions to the beneficiaries.

Certainly, it is a time for excitement! With a mere stroke of a pen and the cost of a stamp, an organization will soon realize a substantial boost to its operating account by depositing a significant distribution check. However, a nonprofit must be mindful that it owes a duty to its ultimate beneficiaries and a responsibility to honor the generosity of the deceased donor to ensure the receipt of every dollar the donor intended to give. Therefore, before returning the signed receipt and release form, it is imperative that the fiduciary’s accounting be carefully examined and that the following questions can be answered in the affirmative:

  • Have all the assets been collected?
  • Has all the income been collected?
  • Were the investment losses (if any) unavoidable?
  • Are the expenses necessary and reasonable?
  • Are the attorneys’ fees reasonable?
  • Are the paid debts legitimate?
  • Are the estate taxes apportioned correctly?
  • Do the fiduciary income tax returns correctly use the charitable set-aside deduction?
  • Were the beneficiary distributions made appropriately?
  • Are the executor’s commissions calculated correctly?
  • Are the proposed residuary distributions calculated correctly?

Here are two examples of how improperly reviewed accountings directly result in reduced receipts:

1.) The executor of a multi-million-dollar estate with 100% charitable residuary beneficiaries (those who receive all of the property that remains after specific gifts are made) circulated a simple, informal (no court) accounting. Distracted by the size of the checks they were about to receive, the charitable beneficiaries quickly returned the receipt and release forms. A more thorough examination of the accounting would have revealed that the fees paid to the attorney were equal to 5% of the gross estate and should have included all the other legal and professional services for which the estate paid separately. That oversight cost the beneficiaries over $350,000!

2.) Another executor of a relatively small estate with 100% charitable residuary beneficiaries circulated a lengthy, complicated accounting. The beneficiaries having an aggregate residuary interest of about 85% quickly signed and returned their receipts and releases. Fortunately, the 15% hold-out, noticed the large amount of income taxes having been paid (very unusual for an estate with charitable residuary beneficiaries). It was discovered that non-deductible debts were paid with the proceeds of the retirement account, which reduced the charitable set-aside deduction and caused a substantial income tax to be paid by the charitable remainder beneficiaries. Through extensive negotiations, the executor waived a substantial portion of his commissions, which resulted in a partial recoupment for all beneficiaries.

Understandably, the lure of receiving a substantial distribution check in exchange for signing a simple form is incredibly persuasive. However, if your organization is not laser-focused in its analysis of these accountings, it could be leaving hundreds of thousands of dollars “on the table.”


Michael D. Humphrey, Esq.

Counsel

Vishnick McGovern Milizio, LLP

(516) 437-4385 x129 | mhumphrey@vmmlegal.com

Michael D. Humphrey, Esq. is a member of Vishnick McGovern Milizio’s Trust and Estate Accounting, Administration and Planning Practice Groups and leads the firm’s Charitable Bequest Management Practice Group.


This article was also featured in our newsletter NFP Advisor Vol. 18