Tips on managing a bequest program

by Jackie W. Franey Director of Planned Giving American Heart Association

Introduction

Bequest administration is the process of reviewing documents when an individual who has named a charity in his/her estate plan has died. The goal of bequest administration is to ensure that the charity receives all that it’s entitled to under the decedent’s estate plan, as quickly as possible. In order to accomplish this, you must know what documents to review, what information must be monitored and have a general understanding of the probate and trust administration legal processes.

Overview

The following is a list of the documents that we are entitled to receive from the personal representative of an estate when the decedent has named a charity as a beneficiary under the Last Will and Testament. The documents are listed in the order in which they are normally received. In your state, the documents may be called something else, but the purpose may be very similar.

Notice of Administration

The typical progression of an estate begins with notification from the personal representative or the decedent’s attorney. A copy of the Last Will and Testament usually accompanies the notification. If you do not receive a copy of the Last Will and Testament, then one should be requested.

In a trust administration, there may not be a formal notification. Instead, your charity may receive correspondence from an attorney for the trustee, or the trustee, indicating that you have been named as a beneficiary in the trust.

Last Will and Testament

The Last Will and Testament tells what type of bequest has been given to your charity. There are different types of bequests: specific, residuary and contingent.

Specific: These bequests are paid after all claims against the estate have been met and before the residual beneficiaries are paid.

Residuary: These bequests are paid after specific bequests, taxes and expenses have been paid. A partial distribution may be made once the residual interest is finalized. In most cases, we ask the executor to make a partial distribution of the residual interest.

Contingent: These bequests are contingent on a future event such as the death of a primary beneficiary, or the death(s) of surviving heir(s). There is always a possibility that the contingent beneficiary will receive something, although remote.

Trusts

There are three main types of trusts: testamentary (the trust is established at the death of the decedent through his Last Will and Testament, revocable (living trust arrangements) and irrevocable. A charity can learn the terms of the testamentary trust by having a copy of the decedent’s Will. Information on revocable trusts is normally confidential until they become irrevocable; while a charity may or may not learn the terms of a charitable remainder trust. In many cases, the donor retains the right to change the remainder beneficiaries.

Charitable Remainder Trusts: If a charity is an irrevocable remainder beneficiary in the trust, income must be recorded once the net present value of the future gift is known. While it may be many years before the remainder beneficiary receives the gift, the “future interest” needs to be tracked, using the age and gender of the income beneficiaries.

Inventory

In most states, a detailed inventory and valuation must be filed after the personal representative for the estate has been appointed. The Inventory lists all the assets of the decedent as of date of death and places a value on them. Everything from money in bank accounts, stocks, bonds, real estate, etc. can be reflected on the Inventory. If a charity is a residual beneficiary, then it’s entitled to a copy of the Inventory.

The length of the estate administration process can be predicted using the Inventory. If the estate is valued at over $1,000,000 during 2002-03 (increasing to $3,500,000 by 2009) it usually takes 16-18 months to administer the estate due to the filing of an estate tax return. On average, most estates take about nine months to a year to complete.

The Inventory also allows a charity to estimate the value of the bequest when there is a residual interest in an estate. If the gift is a remainder or residual gift, review the Inventory for noncash assets. It might be helpful to request to the attorney that the assets are liquidated and cash is distributed, rather than inheriting an interest in real estate, for example. Different types of assets can result in potential problems for your charity. After the Inventory is received, calendar about 6-8 months for receipt of the Final Accounting and distribution of all funds.

Estimating the Value of a Bequest

If a charity is named to receive a specific bequest, you can assume you will receive that specific amount. If, however, the assets of the estate are insufficient to pay all the specific bequests, then the gifts are usually reduced proportionally. Check the statutes in your state for the process of abating the gift and gift reductions.

Determining the remainder or residual gift is sometimes more art than science. A good rule of thumb is to determine the net value of the estate from the Inventory, or from the trust asset statement. Allow a certain percentage (we use 10%) of the net value of the estate to be allocated for services provided by the personal representative and/or attorney for the estate as well as payment of claims to creditors of the estate (i.e., funeral, miscellaneous bills, etc.). After this computation is made, subtract all specific bequests. The remaining figure represents the residual portion of the estate. You can then multiply this figure by the percentage of the residual assets stated in the Last Will and Testament to calculate the expected amount of the bequest.

Develop a relationship with your business office/finance department and understand the accounting rules that pertain to bequest administration. The bequest administrator must work closely with the accountant who will be booking these gifts as income to assure that the estimated amount is supportable, the time frame for receiving the income is reasonable and any restrictions are properly classified.

Final Accounting and Petition for Discharge

The Final Accounting and Petition for Discharge is due twelve months unless an estate tax is due and the Personal Representative has filed a Notice of Estate Tax Due (which automatically extends close due date to twelve months from due date of 706). Within thirty days from the date of service of the Final Accounting and Petition for Discharge, the personal representative should (and in some states must) distribute the estate. In some states with the thirty-day requirement, the thirty-day waiting period may be waived if all interested parties consent to waiver. In addition, the Final Accounting should be reviewed for Personal Representative and attorney fees and estate expenses.

During trust administration, due to the absence of court related processes (such as the need to file an Inventory with the court); it can be more challenging to determine when the gift will be distributed. On average, it can take 8-12 months for gifts to be distributed; due primarily to the tax filing requirements that must be fulfilled by the trustee. Accounting rules dictate at what point you must include on the general ledger the value of a trust interest. Variables in this determination include the type of trust, the terms of the trust and the valuation information. In addition, you should request a final trust accounting or statement.

Administration of bequest files

Developing a good calendar system is essential to proactive bequest administration. It is imperative that all estates be regularly monitored to ensure that all funds due your organization are received in a timely manner and that no complications occur which could jeopardize the gift or your charity. (e.g. inheriting contaminated real property). It is also recommended that a good working relationship be developed and maintained with other nonprofits. Estate and trust complications can more easily be resolved if all the beneficiaries work together.

The following outlines normal practices with regard to managing bequest files from the time of first notification until final distribution from the estate or trust is received.

Initial Correspondence

After a Notice of Administration is received from the personal representative or his/her attorney, write a letter thanking them for the notification. Request that all future correspondence be sent directly to the Bequest Administrator and provide information on the complete legal name, address and tax identification number. Include an IRS W-9 form and IRS Tax Exempt Letter (501(c)(3) letter): most attorneys and trustees will request this information. If necessary, also request a copy of the Last Will and Testament and/or Trust Agreement at this time. (We also ask for a copy of the death certificate) Make a notation on your calendar or use a database tracking system to follow-up with the personal representative or his/her attorney to confirm that requested information was received (30 days is a good estimate).

If an attorney is unwilling to provide a copy of the Last Will and Testament, go to the courthouse to obtain a copy or explain to the attorney that the exact wording of the language of the decedent is needed. It may be helpful to inform the attorney that the reason you would like the language is to ensure that the wishes of the deceased are followed regarding the use of the funds. In some cases, informing the attorney that your auditors regularly review bequest files for accuracy of information related to bequest administration may assist in securing the necessary language.

If an attorney or trustee is reluctant to provide a copy of the trust (since a trust is not filed with the court), then discuss with the trustee that your charity is a beneficiary and is entitled to information regarding the gift. (Often this is the law). If the trustee wants, he/she can block out the other gifts in the trust. Be careful, however, that you understand all the terms of the trust that relate to your gift. For example, if the attorney sends you information that you have a 25% remainder interest in the trust after specific bequests are made, you need to know the total amount of the specific bequests in order to determine the true value of your gift.

Upon notification of an estate or trust, a paper file is opened. It may be helpful to use a legal document checklist to ensure that the proper documents are placed in the file. At a minimum all files should contain:

• Copy of Decedent’s Last Will and Testament, codicils and/or trust
• Copy of the Inventory and Appraisement
• Written information regarding the value of the trust (preferably a list of assets)
• Copy of all accountings if charity has a remainder interest
• Copies of all checks received
• Copies of all correspondence sent to and received from the personal representative or his/her attorney

If there are complications in an estate, you may want to separate out those physical files from the other files to monitor them more closely. Regularly review the status of all legal matters on a monthly basis. Establish a tracking system using the following guidelines:

If a specific bequest: calendar 9-12 months for review.

If a residuary interest: calendar 4-5 months to receive a copy of the Inventory or asset statement, which shows the total value of the decedent’s estate. Then calendar approximately 4-6 months to follow-up that the estate is closing.

If a residuary interest in an estate or trust exceeding $1,000,000: calendar 16-18 months for final distribution or follow-up. Make a note in your file that an IRS form 706 (Federal tax filing) is required.

If a remainder interest and the Inventory show that there is real estate to be sold: notify the personal representative or his/her attorney that you would like to receive an all cash distribution.

If the remaining asset is a tax reserve, find out how long a tax reserve can be held in your state and calendar for that amount of time to then review the file. Most estates and trusts withhold a tax reserve to pay for the final taxes and miscellaneous expenses of the estate/trust after the bulk of the funds have been distributed.

Open files: Open files should be separated into two types, “active” and “inactive”. Active files are those estates or trusts where we can predict when and how much we will receive. Inactive files involve either funds to be received at a later, undeterminable date, or contingent interests where funds are not definite.

Restricted gifts: The two most common types of restrictions are: 1) when the decedent requests that the money be used for a specific purpose only, or 2) when the decedent requests that the money be used only in a specific geographical area. You will need to properly account for all restricted gifts for audit purposes. If a restriction is designated by the donor that you cannot fulfill, you may need to decline the gift.

Throughout the Administration of the Estate

Throughout the administration of the estate, acknowledge correspondence from the personal representative or his/her attorney in writing. Determine who will be the primary contact for the personal representative or his/her attorney and at what point in time the planned giving staff person may cultivate the donor’s heirs/family and the executor and/or other advisors. In some cases, the planned giving staff person will already have a relationship with the attorney – how will you communicate between the role of the attorney as executor and the attorney as donor advisor?

As the processing of bequests becomes an established routine, there should be certain policies or general guidelines that must be established. Examples of these are: 1) distributions for a bequest should be in cash rather than in-kind whenever possible, 2) in those states where applicable, do not sign off on attorney and/or personal representative fees before the administration of the estate is complete.

Distributions from the Estate

Upon receipt of distributions from the estate, write the personal representative and/or his attorney a thank-you letter. Acknowledge other heirs and family members as appropriate and work closely with planned giving staff so they can steward heirs, family members and advisors connected with the estate. If appropriate, share with the family how the funds will be used to further the mission of the organization. Carefully review the receipting language before signing off on a distribution because you may be waiving an accounting, stating you’ve received full distribution, etc.

Keep track of perpetual and charitable remainder trusts separately and work closely with your business office/finance department and the planned giving staff. The planned giving staff can steward those donors that have irrevocably named your charity as a remainder beneficiary and build relationships with the advisor(s) before the death of the donor and/or income beneficiaries. If you are aware of a charitable remainder trust where the donor(s) retained the right to change the remainder beneficiaries, then it is critical for the planned giving staff to steward the donors to remain as a beneficiary.

Perpetual trusts last forever and under accounting rules, the income received from them, as well as the charity’s percentage share of the principal must be accounted for in the audit. Perpetual trusts payout income only, with the principal remaining untouched. Obtain a copy of the trust’s accounting each year, as close to June 30th (end of charity’s fiscal year) as possible in order to have the most current fair market value information.

Closing the File

When the Final Accounting and Petition for Discharge are received, review them prior to the hearing set by the court to confirm the estate has been administered properly. If the Final Accounting and Proposed Distribution appear to be in order, calendar thirty days for receipt of funds, and in those states where applicable, sign the Receipt of Petition for Discharge and Accounting and Consent to Distribution. Upon receipt of the final distribution, the estate file is closed.

Closed files: Closed files can be organized by fiscal year. At the end of the fiscal year and after the audit is complete, closed files can be separated out and placed in storage. Determine records retention procedures for closed files. The current guideline is that bequest administration documents must be retained for the life of the corporation, although miscellaneous correspondence might not have to be retained that long.

Generally speaking, it takes 6-18 months to close an estate (from receipt of original notice of death to all funds distributed). With trusts, since the court is not involved, the timetable can be much shorter. Sometimes, we will learn of the death of the decedent and receive the funds at the same time.

Audit procedures: Audit approaches do vary since they are dependent on the auditor’s assessment of controls in place over bequest administration as well as their knowledge of the bequest process. Be prepared for the auditors to select a random sample of bequest receivables open at year-end, as well as the largest expectancies. They will want to review the calculation for the amount you expect to receive, your logic for the date(s) you expect to receive distribution(s) and copies of the wording, which indicates any donor restrictions.

The auditors will be interested in looking at any bequests that have stipulated or unusual payout periods. They will also want to see trust statements related to perpetual trust and documents to support the premise that the trusts were set up into perpetuity. In addition, if you have received any non-cash distributions, they will want to understand how you arrived at the value used to record the gift and understand any liabilities associated with the asset.

When to call an attorney

Often situations arise in estate and trust administration when an attorney needs to be contacted in order to protect your charity’s interest. Confirm the timeline for filing a response – often times you have twenty days or less to respond or you lose your right to contest. Determine procedures for when to call an attorney and the standard maximum percentage of a gift that will be spent on attorney’s fees. For example, you could set a maximum of five percent of any gift – therefore for a potential distribution of $100,000 – you would be setting a ceiling of $5,000 in discussing a fee structure with the attorney.

The common scenarios described should be viewed in conjunction with your own internal legal department requirements.

• You’ve written and called the executor/trustee to request appropriate information, and your telephone calls and letters have gone unanswered.
• You’ve been served a Summons and Complaint, or been notified of a legal challenge to a will or trust. For example, someone is challenging the validity of the will.
• You’ve reviewed a pleading and found something unusual.
• You’ve received a document and you’ve exhausted resources to try to understand it (a volunteer, board member, another nonprofit beneficiary).
• You’ve noticed that your organization is misidentified in a will or trust—name or address is incorrect. You’ve tried, through correspondence to and/or telephone calls with the estate/trust attorney to clarify matters, and more documentation is required. A pleading/affidavit may need to be filed with the court to resolve it.
• The executor/trustee is delaying closing the estate/trust past a reasonable amount of time

You will need to share with your business office/finance department a list of all estates in litigation, the issues involved, the likelihood of settlement, and the amount of bequest income at stake, the names of the attorneys representing your organization who are involved, and a projected timeframe for settlement. This information is particularly important if the value of a recorded bequest receivable could be impaired by the litigation.

What to know about non-cash assets

Distributions for a bequest should be in cash rather than other assets whenever possible. Sometimes, as a beneficiary, your charity might be asked to accept real estate (land, homes, condominiums, etc.), personal property and furnishings (jewelry, artwork, mobile homes, etc.), vehicles, stock, bonds, certificates of deposit, notes receivable (mortgages), royalties or mineral rights. You can always disclaim an asset because you do not want it or have concerns about accepting it.

In some states, the personal representative is allowed to follow the intention of the will verbatim and the decedent’s wishes can be followed whether or not you agree with the distribution. If you accept non-cash assets, provide your business office/finance department with a list of these assets and a reasonable market value for each. If a reasonable market value cannot be determined, they will determine the amount to record (e.g. $1.00) so that ownership of the asset will not be forgotten.

Let your business office/finance department know of any liabilities assumed in accepting the asset, e.g. with real property – real estate taxes, maintenance costs, etc. If you do retain securities, they will need to know any interest or dividends earned subsequent to the date of receipt, since this income will be accounted for as investment income and not as bequest income.

Most importantly, work on procedures for disposing of the assets, preferably before accepting non-cash assets. Advise your business office/finance department of any contracts signed for the sale of these assets. If real estate is sold for an amount different from the amount recorded as the fair market value when the gift was accepted, the gain or loss is not bequest income but gain or loss on the sale of an asset, and will be treated differently for income purposes.

Here is a brief listing of the relevant information needed to monitor various types of non-cash assets:

Real estate: the type of property (e.g. residential or commercial), the property address, as well as whether the property is income producing, any liens or toxic problems. The appraised value should be provided by the attorney for the estate/trust. It is also important to note whether (and when) the property is sold for payment of taxes.

Insurance: the insured name and address, owner name, company name and premium payments.

Promissory Notes: the principal amount, interest rate, maturity, whether current, foreclosure or secured and any terms.

Royalties: the date the interest was received (e.g. oil/gas leases), the county and state location (if applicable) and a description of the royalty interest.

Securities: the name and type of stock, number of shares, the value on the date of transfer and date and value when sold.

Partnering with the business office / finance department

Accounting standards require that all receivables must be recorded as income. Distributions from bequests are regarded as receivables, and accordingly, must be entered into the General Ledger by accounting. An expectancy should be recorded after the will is declared valid by probate, no uncertainties as to the likelihood of receiving the gift exist and the amount of the bequest can be determined. Bequests that are conditioned upon future or uncertain events should not be recorded until the conditions are substantially met.

The business office/finance department will need a listing of bequest receivables that indicate the expected date of receipt. They will separate those bequests to be received within the fiscal year from those to be received after the end of the fiscal year. Additionally, the business office/finance department will need to have available how the amounts due were calculated, how the expected distribution date was determined and language from bequest documents that indicate donor imposed restrictions. If the distribution from an estate is less than the amount expected and the amount estimated was recorded by the business office/finance department as a bequest receivable, you must advise them. The amount, which will not be received, will probably be written off as a loss of an asset.

At the end of a fiscal year, the auditors will be looking for a roll-forward of bequest receivables. You may be asked to prepare this. The schedule would show all bequest receivables recorded as of June 30 (end of charity’s fiscal year) of the previous year, less cash received during the year, plus or minus all adjustments to expected receipts to arrive at the balance as of the end of the current fiscal year (June 30th).

If you receive statements periodically from trustees, you should perform several clerical checks. First make sure the beginning balance of the statement ties to the ending balance of the last statement you received. Expect to see trustee’s and accountant’s fees. The trustee’s fees should be in line with the statutory rates or normal rates charged by the bank or investment house administering the trust.

With the help of your bequest records, you should be able to quickly compare the list of beneficiaries and validate that disbursements to these were made appropriately. Review the disbursements made from the trust for any unusual items. If any other disbursement looks unusual or you do not understand the description, call the trustee and ask for an explanation. If you need further clarification, discuss the issue with your CFO or other staff person in a position to assist with bequest issues.

If the trust is a perpetual trust or one that will be active for a long period of time, you may want to ask the trustee what percentage is being invested in stock versus in fixed instruments. You may want to review this mix with someone with financial expertise to determine if the mix makes sense. If 80% is in equities, or 100% is in fixed income, you may need to ask the trustee to alter the composition of the investments to better address the market risk and growth of principal.

Planned giving: building the case for support through your bequest administration program

For many organizations, a gift from an individual’s estate plan represents one of the largest sources of income on an annual basis. For the American Heart Association, “estate settlement” dollars represent approximately twenty percent of our annual income. But this income didn’t just “happen” – planned giving represents the relationship we have with donors as they fulfill their philanthropic goals to support the organizations and missions that are important to them and bequest administration represents our responsibility to fulfill their philanthropic goals. Both sides carry equal weight in the equation – securing the gift commitment and securing the gift dollars.

A pro-active bequest administration process enables an organization to learn what a typical “planned giving donor” looks like:

• Was this person male or female?
• What was the age of this person at death?
• What relationship did this individual have with our organization: a long-term donor from direct mail, a volunteer or board member, a family member of a long-term donor or volunteer or a person who had experience with cardiovascular diseases or stroke?
• Was the bequest a specific, percentage or residual gift?
• ·How many charities were included in the will?

In addition, information such as the average size bequest and number of gifts from bequest administration will enable us to determine if we are “growing” our program. While it is important to track the total dollar amount – how many estates does this figure represent? How many “large” gifts does this figure represent? We track the number of gifts in excess of $500,000 to determine the percentage of large estates that comprise the annual income.

This analysis of information through the bequest administration process provides us with insight on how to market our program, both internally to volunteers and staff and externally to donors and advisors. For example, is our exact legal name being used, or are we still known as the Heart Fund? Another example would be our working relationship with executors and trustees – providing excellent customer service through the bequest administration process could lead to building a relationship with an advisor who is assisting a donor to support cardiovascular or stroke research or specifically, the American Heart Association.

The analysis also enables us to determine how many gifts are coming to fruition from long-term donors and donors that have been cultivated by planned giving staff. We share throughout the Association cultivation and relationship building for planned gift commitments that come to fruition. Most recently, we also “bump up” our gifts from a donor’s estate against our direct mail file to determine if there was ever an existing relationship. The story of a $5 or $10 direct mail donor that included us in the will and never shared that information is then shared across the Association. In addition, we track life-income gift donors to determine how many of these individuals also include us in revocable gifts.

In conclusion, this type of information helps to “build the case for support” for pro-active bequest administration and investing in a planned giving program. As you manage your bequest administration process, think about the opportunities to build your planned giving program! Use these steps to proactively manage your bequest administration program and deepen the commitment to planned giving:

Educate management on the difference between planned gift commitments and bequest administration

• Provide excellent customer service to executors and trustees
• Thank, thank, thank and cultivate heirs
• Analyze donors including your organization in their estate plans
• Track number and size of estates on an annual basis
• Track the average size of a bequest and whether specific, residual or percentage
• Implement a tracking mechanism to proactively manage the process

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