Rejecting a Bequest: When, Why and How to Say “No Thank You” Part 2

Gift planners can be squeamish about rejecting all or part of a bequest.  This is quite understandable. Anticipatory rejections, made before the donor’s death, risk the rupture of the relationship and loss of any bequest.  Rejections during the estate administration process avoid this issue but may set up an unpleasant confrontation with the decedent’s family.  At the very least, saying “no” to a bequest seems impolite.

The second part of the post addresses more of the issues surrounding this delicate situation. Did you miss Rejecting a Bequest Part 1? Read it here.

What Are the Best Reasons for Rejecting a Bequest?

All bequest rejections are based on one of two reasons: (1) the real possibility that the burden of the gift will be greater than its benefit, thereby impairing the charity’s ability to conduct its mission; and/or (2) the organization will be unable to achieve the donor’s express or implied intentions in making the bequest.

An example may illustrate the above.  Suppose a testator gifts an environmental charity with a beach house in a desirable area.  The property needs complete renovation before it can be put to any use or be offered for sale.  Further, the testator gives the charity his collection of high-quality reproductions of classic “nature” paintings with the instruction that they be preserved and displayed for enjoyment by the public.  The charity reluctantly decides that it must decline both bequests.

The beach house will require a considerable investment of funds.  Given the vagaries of the market, the charity may have to make a large investment in renovation and wait some time to recoup that money.  The amount involved could impair its ability to carry out existing programs.  This rejection would therefore be based on the first reason listed above.

The rejection of the paintings might be based on both reasons.  The charity may have no way to display them in accordance with the donor’s wishes.  Further, the burden of safe storage and maintenance of the artwork could, over time, be a significant financial commitment.  We believe that while all rejections are based on reasons that are situation-specific, the two listed rationales are always in play.

What Kinds of Bequests are Typically Rejected?

This varies from charity to charity, but the most typical cases involve the following:

• Debt-burdened, unmarketable and/or environmentally suspect real estate.  (This can include real estate-like assets such as various forms of timeshares and interval ownership, as well as cemetery plots.)
• Interests in private partnerships or other business concerns with no clear market value, especially where the charity would become a de facto owner of the business, with the attendant risks.
• Gifts from suspect sources.
• Gifts with unreasonable restrictions.
• Gifts that would trigger ongoing expenses for the charity more than the value of the bequest.
• Pets and other living things.  (One wag in the nonprofit world is fond of saying that a charity should never accept as a gift “anything that eats.”)

Can a Charity Reject One Part of a Bequest but Accept Another?

Absolutely. In the example above, the charity could have accepted the house but rejected the paintings. Sometimes, when the situation permits, a charity will try to avoid partial rejections which do have the appearance of “cherry-picking.”

One of the best and most thoughtful examples of this that we have seen occurred several years ago. One of our clients received a significant but modest cash gift in a will, along with a diverse collection of family heirlooms.  The latter consisted of hundreds of travel souvenirs and similar memorabilia from every corner of the United States.  All of these dated from the mid to late nineteenth century and had been stored in a way indicating the affection that the testator had for the collection.

Recognizing this, the charity scoured the marketplace to find a dealer in such items. He explained that the nature of the collection was such that it would need to be sold piecemeal and that most of the items were worth $20 or less.  To avoid the risk that the collection would simply be discarded, the charity gave it to the dealer to sell.  Happily, about a year later, the dealer reported that nearly all the items had been sold.  He voluntarily gave the charity the proceeds of the sales, which were a total of less than $3,000.

Is There Any Kind of Rejection that Could Place a Charity in Legal Jeopardy?

There is one. We have previously written about the “transfer on death” deeds, which are designed for the expeditious disposal of real estate in an estate plan. Many states allow the use of these instruments for charitable bequests.  In almost every jurisdiction, the charity takes some form of “ownership” at the moment of the testator’s death.  The organization then becomes, at least for a while, an “involuntary owner” unaware of what it owns.

Charities can reject TOD real estate gifts.  In most states, a timely rejection within the statutory period will “relate back” to the testator’s death.  This effectively extinguishes, retroactively, any interest that the charity had in the property.  It wipes the slate clean.

Now, here is the rub.  Real estate, as everyone knows, carries potential liabilities.  There are always concerns about environmental issues, personal injuries (such as “attractive nuisance” cases), tax and other liens, etc.  Is a rejecting charity liable for those?  In the “clean slate” situation described above, the charity is in the clear.  However, consider these situations:

• If a charity files a “late” disclaimer of a TOD real estate gift, there is always the possibility that a court will find the organization at fault for the delay.  If so, and the disclaimer is rejected, the liabilities listed above could be visited upon the organization, all because of a parcel of real estate that it never wanted and never took any action to acquire.
• In states where the law on TOD disclaimers is unsettled, charities need to consider relevant case law that treats bequest disclaimers as “transfers” by the beneficiary back to the estate.  On this view, the disclaiming charity would be in the chain of title, for example, on a rejected parcel of real estate.  Mere presence in the chain can sometimes give rise to legal problems, especially in environmental cases.

CCK TIP:  While we believe that the situation described in #2 directly above is unlikely to occur, the question of the rejection of TOD real estate gifts is sufficiently murky that we advise charities to take the following steps with respect to any such gift:

• Subject the real estate to the same vetting and investigation as any proposed gift in this asset class; and
• If the charity decides to reject the TOD gift, engage counsel to ensure that the rejection complies with all formalities and/or recording requirements.