Tuesday, September 23, 2008

$9 Million Verdict in Split-Dollar Charitable Contribution Dispute

When charities have more than a charitable interest in their fundraising outcomes, it should come as no surprise when dissatisifed donors start treating charities as vendors rather than facilitators.  Such is the case with  the National Heritage Foundation, a Virginia charity that aggressively marketed split dollar life insurance policies as a vehicle for charitable giving.  According to an article in the Chronicle of Philanthropy, a Texas jury has recommended $9 million in damages be paid by National Heritage Foundation for its part in a split dollar life insurance plan:

A Texas court is poised to rule on a lawsuit against the National Heritage Foundation, a Virginia charity that was one of the leading promoters of a controversial giving technique that was effectively abolished by a 1999 law. The lawsuit claims that the National Heritage Foundation misled a Texas couple who had donated to the organization through the questionable giving scheme, failing to carry out the couple’s financial plans or charitable intent.  A 12-person jury issued a verdict last week following a nine-day trial, siding with the plaintiffs, Juan J. and Silvia Mancillas, and recommending the charity pay the couple $9-million in damages. Judge Abel C. Limas, who is not bound by the jury’s decision, is expected to decide the case in the coming weeks.

As it turns out, NHF is no stranger to controversy.  It appears to be a family run community organization that, according to one critical article, exists to enrich its own founders by managing small private foundation like organizations.  NHF issued a press release in response to the adverse jury verdict, stating:

National Heritage Foundation, Inc. was established in 1994. Since its inception, it has helped make numerous charitable projects a success. By establishing a subfoundation at the National Heritage Foundation, a donor can assist their favorite charity or local community need and take part in making a difference.

Between 1997 and 1999 National Heritage Foundation participated in a number of charitable split dollar plans. At that time, these plans were recognized and approved by the IRS, tax planners and tax attorneys alike. In a nutshell, under the plans, a donor could make a donation to a charity, and if the charity used the money to pay premiums on an insurance policy insuring the donor’s life, the charity could split the death benefits with the donor’s chosen beneficiary. In 1999 a law was passed that essentially prohibited the “split benefit” between the charity and the donor’s chosen beneficiary.

In 2005, NHF was sued by a Texas couple in connection with charitable split dollar plans. In 1997, the  plaintiffs created Trusts that participated in the split dollar plans.  When the law changed, their estate planning attorney, who was the Trustee of their trusts, transferred the ownership of the policies to NHF, in order to benefit a local order of nuns, the charity that the plaintiffs had designated as the cause they wished to support. Under the new law, a private person could no longer be a beneficiary on an insurance policy owned by a charity. Therefore, as owners of the policies, NHF first changed the beneficiary to NHF, and ultimately changed it to the order of nuns selected by the plaintiffs.

In their lawsuit, despite the fact that they had at their disposal the advice and counsel of their estate planning attorney, financial planners and CPA, the plaintiffs claimed they were unaware of the change in law and their Trustee’s transfer of the policies to NHF for the purpose of transferring the beneficiaries in order to eliminate the IRS issues. They further claimed that their donations were not donations, but were only payments made for their insurance premiums. However, from 1997 through 2003, the plaintiffs took charitable deductions on their tax returns and represented to the IRS that the donations were “unrestricted” contributions. Consistent with its charter, at all times, NHF’s primary focus and concern  was for charity, and all actions taken by NHF were for that very purpose.

In a split 10-2 verdict, despite significant evidence to the contrary, the jury found in favor of the plaintiffs. NHF respectfully disagrees with the verdict and plans to appeal its findings. NHF is hopeful that the appellate court will address significant legal and factual issues raised in this case that will alter the outcome. While that appeal is pending, NHF remains committed to its core philosophy of supporting charitable endeavors on behalf of its many committed donors.



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The jury that heard all the evidence has spoken LOUD AND CLEAR about the HOUK family and their schemes. Good for them!
Eduardo Alarcon
19319 Inverness Dr.
Spicewood, TX 78669
(512) 217-6655

Posted by: Eduardo Alarcon | Dec 2, 2008 7:37:07 PM

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