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Bequest Management

Is Management of a Matured Bequest a Fiduciary Duty?

March 2, 2022
Is Management of a Matured Bequest a Fiduciary Duty?

Is the management of a matured bequest a fiduciary duty? In other words, when a donor makes a testamentary gift to a charity, and the donor then passes, does anyone owe a fiduciary duty to act so that the charity receives the gift as intended?  If so, who owes that fiduciary duty, to whom is it owed, and what does the duty require?

A Hypothetical Situation That May Befall an Organization

Consider the following hypothetical situation, which has surely occurred on all too many occasions:

John Smith died.  His will left a substantial bequest to a charity dedicated to the eradication of Nickelhoffer’s Disease.  Unfortunately, the nomenclature used in the will was applicable to two organizations.  One was the Nickelhoffer’s Disease Foundation (NDF), the leading player in the field.  The second was No More Nickelhoffer’s (NMN), an organization with high overhead and fundraising costs and charitable programs of questionable value.

The executor dutifully notified both charities of the ambiguous bequest and requested their input.  NMN provided accurate evidence of the decedent’s regular, but modest, contributions to the organization.  Although NDF had a long relationship with Smith and had received substantial annual gifts from him, it failed to respond to repeated requests from the executor.

NDF “went dark.”  Based on the evidence he had, the executor awarded the gift to NMN and closed the estate.  Smith’s only daughter (Emily Smith) had received a large inheritance from her father through beneficiary designations that passed outside of the estate and was not a participant in the probate case.

When she learned that NMN had received her father’s generous bequest she was – to put it mildly – incensed.  Her father had died of Nickelhoffer’s Disease and she herself possessed the rare genetic mutation that causes this incurable ailment.  She demanded that the charity explain its laissez-faire approach to bequests.

As it turns out, the organization entrusted that responsibility to its one gift planning officer, Merton Miller.  Merton had neither the time nor the knowledge to become involved in a more-than-routine estate administration.

Is Miller a Fiduciary? 

A fiduciary is, among other things, a person (natural or corporate) who has special powers with respect to charitable assets.  An organization cannot create fiduciary status in a person simply by “assigning” duties that the individual is incapable of executing in a satisfactory manner.  While Miller may well become the “fall guy” within NDF if outrage grows over the bungled bequest, it would be difficult, if not impossible, for NDF to seek reimbursement from him for the loss.

If Miller is Not Responsible, Who Is?

Someone must be responsible, at least in the legal sense, for the lost revenue.  Like any organization, charities act through agents.  The management of charitable assets is usually a function of the board and routinely delegated to senior staff.  Somewhere within that community of persons is the party/parties responsible for NDF’s loss.  Responsibility will be a function of position, authority, and responsibility.

CCK COMMENT:  Most charities are meticulously careful about managing donations, investments, and other assets.  A fair number of those charities – like NDF in our example – fail to monitor matured bequests during the estate administration process.  The neglect is sometimes due to the erroneous perception that testamentary gifts do not become charitable assets until they are received.  That is not true.  Some charities actually “book” a value for bequest expectancies from living donors.  Even more tellingly, the Restatement of the Law of Charitable Nonprofit Organizations identifies “remainder interests” (by definition not yet received) as assets with respect to which the charity must exercise fiduciary care.  The charity has a legal right to receive a matured bequest.  It is therefore a charitable asset.

What Are the Penalties for Failure to Oversee Matured Bequests?

Frankly, not many.  The Attorney General oversees charities in most states but generally takes punitive action only in the case of intentional misconduct.  If a particular director or officer of the corporation is responsible for the failure, that person might be removed or terminated by the organization.  Beyond that, as a practical matter, there would be few individual penalties.

In the case at hand, it is conceivable, though not likely, that Emily Smith might sue NDF for its negligent handling of her father’s bequest.  The legal question of whether a private party has “standing” (i.e., the legal right) to sue a charity for its operating procedures is unsettled.  Sometimes, courts permit plaintiffs with a “special interest” and/or “special connection” to the matter to institute such lawsuits.

Emily could well argue that as her father’s daughter and a potential Nickelhoffer’s patient, she could sue for damages.  Of course, it would be interesting to consider what the damages might be.  NDF is in a real sense both the tortfeasor and the victim.  Loss of the money was a self-inflicted wound.  Requiring NDF to pay out more money to Emily (for emotional distress, or something like that) would seem to make a bad situation worse.  There is a potential that the loss, once recognized, would be identified and reported in the charity’s annual audit and annual report.

It Seems That Ignoring Bequests Might be a “Victimless” Act of Negligence.  Is That True?

Not a bit.  It is possible to identify at least four injured parties in the posited hypothetical.

  1. John Smith.  Although his injury is not legally cognizable, Mr. Smith was damaged because NDF failed to satisfy its obligation to implement his wishes.  NDF was in a unique position to present evidence to the executor and/or the court that certainly would have shown that the testator was not looking to benefit NMN.  In this regard, NDF failed miserably.
  2. The organization was injured in two ways.  First, most obviously, it lost the money and the associated fuel for its mission work.  Second, depending upon the publicity the case received, future testators might well become wary about including NDF in estate plans.  It is surprising, sometimes, how stories about bequests-gone-sour can become fodder for news articles and even law school textbooks!
  3. Nickelhoffer’s Victims.  If NMN squanders the bequest that NDF would have put to good use, the ultimate beneficiaries of its charitable work suffer.
  4. The Charitable Community.  Incidents like our hypothetical are real.  Every occurrence of neglect of a testamentary gift to a charity erodes public confidence in exempt organizations.  While it is impossible to place a monetary value on the erosion, it is obvious that mismanagement of charitable bequests acts as a disincentive to future testators.

CCK COMMENT: It is important for all charities to have a careful, disciplined, and systematic approach to managing matured bequest gifts.  For starters, our blog highlighting tips for managing charitable bequests might prove helpful!