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A Notorious Estate Further Complicated by Allegations of Racketeering and Embezzlement

August 18, 2022
A Notorious Estate Further Complicated by Allegations of Racketeering and Embezzlement

Just when it seemed it couldn’t get any worse, it does.  Jeffrey Epstein was the wealthy financier who committed suicide in a New York City jail cell two years ago.  Epstein was awaiting trial on a number of serious and salacious charges.

The settlement of the Epstein estate – originally valued at more than $600 million – has been proceeding in the U.S. Virgin Islands (USVI).  The testamentary documents consist of a simple pour-over will (available to the public) and numerous trusts (not available).  The exact terms of the trusts are unknown and may forever remain such.  Therefore, we do not know whether and to what extent Mr. Epstein intended his substantial wealth to benefit charitable organizations.  (Another interesting issue is whether charities would accept such gifts.  Depending upon the size and secrecy/publicity of the bequest, acceptance would be a wrenching moral and practical question, given the testator’s unsavory reputation.)

Nonetheless, the Epstein case illustrates several important points that merit attention, especially for charities that manage their own bequests.  The lessons apply to estates large and small.

An Introduction to the Epstein Estate Case

First, the “worse” part.  At the outset of the estate settlement process, the Attorney General of the USVI tried, unsuccessfully, to intervene in the probate litigation.  She then filed an independent lawsuit – a racketeering case – alleging that Mr. Epstein had financed his misdeeds with tax benefits claimed from USVI.

The deductions and credits are available only to legitimate businesses.  The Attorney General persuaded the court to freeze some of the estate assets to satisfy any judgment in favor of the USVI.  Some time later, the Attorney General was back in court alleging that the administrators of the estate had created a new trust to benefit themselves, siphoning off more than $10 million of the Epstein assets to fund it.

Epstein’s intended beneficiaries – whomever they may be – will share in a reduced pot of gold.  The estate has already expended 75 percent of its assets on (ordered by amount, highest to lowest): federal taxes, compensation to Epstein’s victims, legal and trustee fees, maintenance of non-monetary assets (artwork, homes, yachts, etc.), and routine costs of administration.  If the USVI racketeering suit is successful, the remaining funds will shrink by another 50 percent.

What Is There for Charities to Learn From This Tragic and Complicated Tale?

Litigation Against Estates

The estate has been subject to litigation on a number of fronts.  More than one hundred of Epstein’s victims have received compensation from a fund valued at well over $100 million.  In addition to the tax litigation, the estate is now facing a $5 million dollar claim for legal fees from one of Epstein’s accomplices now serving a 20-year prison sentence for her role in his misdeeds.

Charities should seek expert assistance if litigation emerges against any estate in which the organization has a meaningful stake.

CCK TIP:  Charities should seek expert assistance if litigation emerges against any estate in which the organization has a meaningful stake.  Even if the charity is not the target of the case, the legal process will always delay and frequently reduce the payout.  Charities need to have a seat at the negotiation table!

The Impact of Taxes

While taxes have no impact in most estates, they are significant in high-value matters.  These are the kinds of cases in which charities may have the most to gain or lose.  Nor are these issues limited to so-called “death” taxes.

In the Epstein case, the USVI is seeking to nullify, retroactively, tax breaks that Epstein claimed.  While this is an unusual move, it is virtually certain that other state governments have taken notice of the tactic and will attempt to use it – very creatively – in other estate administration cases.

Disregard of Fiduciary Duties

Most fiduciaries – executors, trustees, administrators, and personal representatives – are scrupulously honest and committed to doing a respectable job.  A few, however, are not.  The jury is out on the Epstein trustees, but the USVI has made serious allegations based, presumably, on reliable evidence.

Few estate settlement matters receive the judicial and/or government oversight present in the Epstein case.  It falls to the beneficiaries to keep a watchful eye on things.  Usually, this is an easy matter, but it sometimes requires great attention and even independent research.  Just consider the next paragraph.

Non-Cash Assets

Epstein had valuable non-cash assets.  The cost of maintenance of these items during estate administration has been significant.  His art collection sits in a temperature-controlled vault that rents for $15,000 a month.  His yachts, aircraft, and mansions must also remain in pristine condition to produce maximum sales prices.  Nonetheless, some of these non-cash assets that have been sold have failed to fetch the expected price.  Charities can learn from this situation, as the tip below illustrates.

CCK TIP:  If a charity receives a non-cash asset of considerable value, it must consider the marketability of the item(s) and the cost of maintaining it in buyer-ready condition until sale.  Even if the charity is receiving a portion of the sales price, it needs to ensure that the price received is not less-than-market-value.  This can happen if the executor sells the item to himself or a friend at a bargain price (infrequent) or takes a low offer from a buyer just to move the probate toward completion (much more frequent).

Wills vs. Trusts

The news media has been unable to obtain information about the terms of the Epstein trusts.  Depending upon state laws, trust beneficiaries can find themselves in the same position.

If the settlement of a trust-based estate is going off the rails, a charity with a significant stake may need to consult expert counsel to ensure that it is taking every reasonable measure to protect its interests.  Unlike wills, trusts are not necessarily public documents and even a beneficiary may see only a few lines that describe its gift.

UPDATE (December 1, 2022)

The Attorney General has reached a significant settlement with the Epstein estate.  The USVI will recoup $80 million in tax breaks taken earlier by Mr. Epstein’s businesses.  In addition, the local government will receive 50 percent of the proceeds from the sale of one of Epstein’s private islands.  That share is valued at roughly $25 million, which will be used to provide needed social services to local residents.

Most of the remaining value of the estate is held as investments.  The trustees have agreed to a one-year deadline for producing the cash to fund the settlement.

This case provides an excellent example of the value that an attorney general can bring to a bequest case.  Thanks to the diligence and persistence of the USVI authorities, Epstein’s victims and similarly situated persons will have received more than $150 million in compensation and services, while taxpayers in the islands will recover $80 million in previously lost revenue.  While no private “exempt organizations” appear to have received benefits, the quarter billion dollars secured by the diligent efforts of local authorities will be used in service of charitable, social welfare, and other public purposes.  Kudos to Denise George, the effective attorney general of the USVI!