Walking the Probate Tightrope: Recovering Lost Revenue from the Donor’s Estate
The charity’s role in a probate proceeding is typically that of the grateful recipient of a testamentary gift. Less frequently, the tables are turned, and the estate owes the charity money because the donor failed to fulfill a pledge.
In that case, the organization must file a claim with the executor to receive its entitlement. This significant revenue is not a bequest, of course, but it is still a charity sharing in the assets of the estate. This article discusses, in Q&A format, the opportunities and risks involved when a charity makes the difficult decision to make a claim against an estate.
It just seems wrong for a charity to file a lawsuit against a deceased donor. Isn’t there another way?
Unfortunately, there is not. It is important, though, to understand what a “claim” is. It is not a lawsuit, but rather a notification to the executor of an obligation that survived the decedent. If the claim is rejected, the charity has the option to file a formal legal action, but the claim itself is much more informal.
The resistance of some charities to filing a claim is because it reverses the normal roles where the donor freely gives and the charity graciously accepts. Even seasoned bequest managers may find the idea jarring.
In reality, the charity-as-claimant is not uncommon. Routinely, charitable gift annuitants pass away, and the death notice reaches the organization months later. In the interim, multiple annuity payments have been deposited into the decedent’s bank account. The charity files a claim to seek reimbursement for the overpayments. Unfulfilled pledges are similar, but less common. Financially, they are often quite significant.
Wouldn’t a post-mortem claim on a pledge put a charity in a bad light? Can’t a charity just “let it go?”
Many pledge claims are paid without objection. Every so often, the situation does turn into a public relations fiasco.
In 2016, Duke University made headlines when it filed a $9.9 million claim against the Estate of Aubrey McClendon to recover the remaining balance on a much larger pledge. Mr. McClendon, a long-time major supporter of Duke, was a business tycoon closely allied with the “fracking” industry, i.e., the controversial process of extracting oil from shale. He died in a fiery single-car crash a day after his indictment on federal antitrust charges. His family condemned the Duke filing as insensitive and adversarial. The University reacted well, withdrawing the claim just a few days later.
During the brief media firestorm, Duke explained that it viewed the claim as “routine.” It probably was. Large nonprofits with zealous and committed donors rely heavily on significant pledges paid over time. Inevitably, some donors will die leaving a sizable unpaid balance.
Can the charity simply ignore the debt and decline to file a claim? That is a complicated question. Most unfulfilled pledges fall into the category of charitable assets. Charity managers have an obligation to protect those assets.
All things being equal, where significant amounts are involved, there is a duty to file a claim. Of course, there are countervailing considerations that can make it reasonable to do otherwise in a particular case. Duke’s withdrawal of its claim in the McClendon case cannot be faulted. It reflected a desire to avoid further pain for a valued supporter’s family and the alienation of other donors.
A note of caution: A charity should be very deliberate about foregoing a claim against the estate of anyone who was a high-ranking official of the charity or a major donor. Such individuals may have been “disqualified” persons under 26 USC §4958. Providing a financial benefit to their surviving families such as waiving a claim against the estate could subject the estate and/or the individuals responsible for approving that decision to enormous penalties.
CCK COMMENT: If the situation addressed in the preceding paragraph arises, the charity should consult with nonprofit tax counsel. (For those who might be wondering, it does not appear that Mr. McClendon was a “disqualified person” despite the substantial level of his support of Duke.)
Is probate really designed for a charity’s efforts to redeem unpaid pledges? If the decedent wanted the charity to have a share of the estate, the charity would be in the estate plan. Isn’t this just crass opportunism?
Attempting to recover unpaid pledges is completely legitimate. The Uniform Probate Code anticipates that charities (large and small) will use the probate process to recover promised donations. Section 3-715(4) authorizes the personal representative to:
satisfy written charitable pledges of the decedent irrespective of whether the pledges constituted binding obligations of the decedent or were properly presented as claims, if in the judgment of the personal representative the decedent would have wanted the pledges completed under the circumstances.
At the very least, this section encourages and facilitates the payment of pledge claims. The personal representative is vested with an extraordinary amount of discretion. As a practical matter, in both UPC and non-UPC states, the PR will be more inclined to pay claims that are clearly contractual in nature. That said, there are some states (like Florida) where pledge-based claims are viewed with skepticism; in other jurisdictions (like Iowa) courts are far more lenient.
The UPC refers to “written” pledges. Will claims for oral promises not be enforced?
Usually not, but there is a growing willingness of courts to enforce charitable pledges of all varieties.
A case in point is In Re Estate of Smith, 2022 WL 1423597 (Ill. App. 2022) (Not Reported in N.E. Rptr.). William Smith made an oral pledge for $1,000,000 to Congregation Beth Tefillah (CBT). He made a $350,000 payment on the promise, but died before he could pay the rest. CBT filed a claim for the balance. The executor (Smith’s son) rejected the claim. In the ensuing litigation, the court awarded the remaining $650,000 to CBT, primarily because of contemporaneous CBT notes documenting William’s promise. Also relevant was the fact that the project moved forward, at least in partial reliance on receipt of the entire pledge.
CCK NOTE: The Smith case is an outlier. In general, written pledges are more likely to be enforced. See, e.g., UPC 3-715(4), supra.
So, are all written pledges enforceable against estates? Are they paid before bequests?
Enforceable debts take precedence over bequests. A written pledge may or may not be enforceable. For example, if the estate is administered in a UPC jurisdiction and there is a sympathetic personal representative, a simple “I promise to pay” statement may be sufficient to redeem a pledge.
However, in most cases, a personal representative will want more evidence of enforceability. In short, they will want a written commitment that would be enforced by a court of law. Among other things, this will provide some cover for the PR if other legatees (especially those who will take the residuary estate) complain that estate assets were improperly expended.
What makes a written pledge enforceable?
This is very much a matter of state law. There are four theories that courts typically use to enforce pledges. (Remember that the availability of these theories varies depending on the state that is involved.)
- Explicit Reference to Enforceability. Ideally, a pledge agreement will contain language expressly addressing this issue: “This pledge commitment is legally binding and enforceable by the charity against the donor and his heirs and assigns.” Empirical research suggests that language like this appears in well under 10 percent of charity pledge agreements. The reason is apparent: the provision risks throwing icy water on the warm relationship that generated the gift. (On the other hand, a reference to enforceability can produce favorable tax consequences for the estate.)
- Description of Consideration. If the agreement describes some kind of meaningful quid pro quo (the granting of naming rights, etc.), some courts will enforce a pledge. Of course, this approach is not without its problems. If the consideration provided by the charity is more than de minimis, undesirable tax consequences may emerge.
- Reliance By Charity. If the charity acts in reliance on the completion of the gift (e.g., buys a parcel of real estate in anticipation of erecting a science laboratory), courts will often view the pledge agreement as enforceable. For that reason, it is prudent to (1) reference the reliance specifically in the agreement and/or (2) keep good records of the charity’s actions that reflect an expectation that the donor will keep his promise.
- Benefit to Society. In a small but growing number of states, courts are enforcing pledge agreements simply because doing so is viewed as good public policy. This very liberal approach is supported by a provision [Section 90(2)] in the influential Restatement (Second) of Contracts that makes charitable pledges enforceable in the absence of consideration and even if there is no reliance.
Suppose a donor stopped paying on a pledge years ago. Can a charity file a claim against his estate?
This is a question about the revival of time-barred actions. If the statute of limitations for suing a donor had already run by the time of death, it is very unlikely that a claim or subsequent litigation would be successful.
What if we filed a claim in an estate where we are also getting a bequest? Would one be counted against another?
This is an interesting question that involves the doctrine of ademption by satisfaction. The short answer is that a pledge paid out of estate assets should not count against a bequest from the same estate unless the testator, during their lifetime, intended the pledge to replace the bequest.
The chronological sequence of will-vs.-pledge would obviously be relevant to that determination, as would any communications that took place between the donor and the charity. When dealing with large lifetime gifts in a situation where a bequest is possible from the same donor, it is always prudent to address the ademption question in agreements, letters, or other documents.
It is rare that lifetime gifts are determined to replace bequest gifts. The case of YIVO Institute for Jewish Research v. Zaleski, 874 A.3d 411 (Md. 2005) is one such example. It is both interesting and instructive.
Jan Karski was a Polish national who served as a resistance fighter and quasi-diplomat during World War II. He is credited with playing a key role in informing the Allies of the nature and extent of the Nazi atrocities. Karski had a lengthy private meeting with President Franklin Roosevelt in 1943. Some historians believe the meeting to be the first time FDR received first-hand reports of conditions in the death camps (Karski had risked his life by adopting various disguises to gather direct evidence of the Nazi program). Karski later emigrated to the United States, where he enjoyed a successful career as a member of the faculty of Georgetown University. He received honors from many countries, including the United States Presidential Medal of Freedom.
During his lifetime, Dr. Karski agreed to provide a $100,000 endowment to the YIVO Institute for Jewish Research. He stipulated that the gift would be made either during his life or through his will. In the mid-1990s, he made stock gifts to YIVO totaling $99,997.69. He augmented that with a check for $2.31 to bring the total to exactly $100,000.00.
Dr. Karski’s will, executed prior to the stock gifts, made a specific bequest to YIVO of additional stock not involved in the lifetime gift. At the time of his death, the bequeathed stock was worth just around $100,000. YIVO sought a distribution of that gift as well. YIVO’s effort was opposed by the personal representative and by two other charities that were residuary beneficiaries of the Karski estate. Their argument was that the lifetime stock gift had satisfied, or adeemed, the bequest.
Even though Dr. Karski did NOT specifically identify the lifetime gift to YIVO as replacing the stock gift in the will, the Maryland Court of Appeals considered the facts and circumstances of the earlier gift and decided that YIVO was not entitled to a second share of Dr. Karski’s bounty.
The court ruled that the gift-by-will had been adeemed by the earlier contribution. No doubt, Karski’s meticulous provision of the $2.31 check had a considerable influence on the decision. Also relevant was the testimony of a close friend of the decedent that Dr. Karski intended the earlier gift to replace YIVO’s inheritance and that he did not change his will simply because he was certain that YIVO was “too decent” to seek a distribution at his death.
This illustrates the delicate balance that charities must maintain between aggressive pursuit of testamentary gifts and conduct that might seem overreaching and risk alienating other donors. No doubt, YIVO was in a difficult position in this case, and its claim was certainly appropriate even though unsuccessful. It was and remains an extremely reputable organization.
CCK COMMENT: The discussion above illustrates the difficulty that a charity faces in deciding whether to pursue a claim for an unpaid pledge. On balance, seeking payment may frequently be the better option, even though some may see it as an aggressive “second bite at the apple.” Regardless, it remains true that the decedent at one point desired to make the gift to the organization to further its mission. Whether or not a probate claim is successful, it will usually be difficult to fault a charity for making the effort.
It is certainly in a charity’s interest to create enforceable pledges. The ideal way to do that is through a frank discussion with the donor, supplemented by unambiguous language in a written pledge document.
In cases where a less aggressive methodology would be desirable, charities might consider some or all of the following:
- Pre-commitment correspondence and/or solicitation literature that supports enforceability;
- Maintenance of contemporaneous records of communication with the donor, especially anything that supports knowledge of/consent to enforceability;
- Proof that the charity was relying on the pledge and that the donor knew it; and
- Provision of as much donor recognition as a situation permits without creating a quid pro quo transaction.