This year marks the 70th iteration of recognizing May as Mental Health Awareness Month. Started in 1949 by Mental Health America, the month marks an opportunity for education, outreach and for us to have honest conversations about something that affects approximately 1 in 5 adults in a given year in the U.S. Furthermore, approximately 1 in 25 adults in the U.S. experiences a serious mental illness in a given year that substantially interferes with or limits one or more major life activities. That said, mental health is a big deal that impacts so many of us and also affects situations my practice focuses on, like how people structure their estate plans.
In recognition of Mental Health Awareness Month, I’m adding First, We Make the Beast Beautiful: A New Journey Through Anxiety, by Sarah Wilson to the GoFisch Book Club bookshelf.
Wilson pulls the book from the years she devoted to researching anxiety and her own personal experience with it. From her own exploration into the topic she crafted a new outlook on life that actually involves embracing anxiety, not trying to suppress it or run from it. It’s not so much a memoir or self-help book, it’s a bit more like a guide from a friend who has been there before. Fortunately, the author doesn’t forego attractive rhetoric for practical tips. I also liked that she pulls in the knowledge from a range of voices from philosophers, to mental health experts, to famous people with anxiety.
I would love to hear your thoughts on this book and take your recommendations for future titles. Shoot me an email at firstname.lastname@example.org or give me a call at 515-371-6077.
There is a rumor that has been floating around that only the rich need estate planning. That is extremely false. Everyone needs an estate plan, but the wealthy don’t need estate planning as much as the middle-class and working-class folks. If this contradicts everything you’ve ever thought about estate planning allow me to explain.
The Case of Kingston Lear
Suppose Kingston Lear (get it?!), a wealthy Iowan, decides he doesn’t need a qualified and experienced estate planner, he can do it himself, or use an online, one-size-fits-all service. Hey, Lear figures, this way he’s saving both time and money. Also, nothing is going to happen to him for a while, he can get around to doing a proper estate plan with a proper estate planning professional “someday.”
Of course, “someday” never comes, but Lear’s death does. His three daughters are aghast that Lear has no real estate plan. The template resembling an estate plan is completely inadequate for the size and complexity of Lear’s assets.
A Matter of Trusts
Lear could have easily, with the help of a professional advisor, set up a trust (even a plain, “vanilla” revocable living trust would have worked) to avoid probate. But, the online service he used didn’t even explain the difference between wills and trusts. So, Lear’s assets all must go through probate. This means that the time and money Lear though he was saving is gone in a flash.
Probate Costs and Fees, If You Please
Probate fees are going to equate to at least 2% cut of Lear’s estate. Remember, Lear’s estate is large and complex and valued at $10 million, so the actual figure is probably going to be more like four percent.
Using 4% as the figure for probate fees means a loss of $40,000 ($10 million X .04 = $400,000). This is $400,000 that could have been passed down to his daughters through a trust, or split generously between his heirs and charitable organizations near and dear to Lear’s heart.
Also, court costs may amount to another 1%, or loss of $10,000 more ($10 million X .01 = $100,000).
Loss of Privacy
Another major benefit of a trust—again, not explained to Lear because didn’t seek any individualized advice—is privacy. A will (or most any document that goes through probate, absent very special circumstances) is simply a public document. Anyone can read, copy, share, and write about it.
Consider one of Lear’s major assets was an ongoing business—a Shakespearean-themed jousting complex, where families could have fun practicing jousting.
Unfortunately, in some of the probate papers, it was disclosed that there had been numerous complaints by the Iowa Horse Association about the treatment of horses. It isn’t long until this hits the blogs, and some of the more sensational aspects of the report (though hotly disputed) goes viral. The jousting park, which had been quite profitable, is now eschewed by all the good people of the area. The daughters are forced to sell the business asset to preserve the family’s good name (or what’s left of it) and sell at a loss. While the jousting park had been worth as much as $1 million, the daughters have to sell, so there’s a “paper loss,” but nonetheless less a loss, of another $900,000.
Loss of Future Profits
The $900,000 is a conservative figure; it doesn’t include lost future profits. If not for the scandal becoming public, who knows how long the jousting park could have remained really popular and this profitable. Years? Decades? It’s quite difficult to quantify, but it’s certainly probable that there are some lost profits. The question is: how much?
Costs of Cases
Because Lear’s will wasn’t drafted by professional, there are many ambiguities and loopholes. It’s not long before the three daughters begin fighting and, with unclear direction from their father, they wind up suing each other.
Taking a court case all the way to trial can easily mean $50,000 in attorney’s fees, plus each daughter will want and need her own attorney. So, another $150,000 is lost to attorney’s fees!
Total Losses Equal?
Lear could have had his estate plan done by an Iowa professional for a few thousand dollars. Instead, he lost a total far greater than that:
- Probate Fees: $400,000
- Probate Court Costs: $100,000
- Loss on Sale of Jousting Park: $900,000
- Loss of Future Profits of Jousting Park: Incalculable?
- Attorney’s Fees for Daughters’ Litigation $150,000
This is a hit for the inheritance of $1.55 million, leaving $8.5 million (rounded up), or a little less than $3 million per daughter. But you know what? That still leaves an inheritance of $8.5 million to be split amongst three sisters.
The Rich Can Afford Bad Estate Planning
Lear acted unwisely, arguably recklessly! A great deal of his money was wasted that could have been used for great charitable work in Iowa through local nonprofit organizations. But, for all his foolishness, Lear’s daughters still end up with $3 million each. Will the daughters incur much suffering with “only” $3 million? No.
That’s the rub; the rich can afford to make big (and small) estate planning mistakes.
You Can’t Afford Poor Quality Estate Planning
Let’s look at this from a normal Iowan perspective. At least 2% in probate costs and fees, a huge drop in value in a key asset, attorney’s fees for litigation…can a middle-class estate merely shrug these kinds of losses off? Not a chance.
The rich aren’t like you and me. They can badly botch estate planning. You and I can’t afford to make mistakes with our estates; there’s no room (and not enough money!) for error.
If you’ll think back to the early 2000s, in the aftermath of the Enron scandal (among others such as Tyco, Global Crossing, and WorldCom) the climate of distrust and dramatic malfeasance demanded reform of corporate accounting, governance, and other business practices. Accordingly, U.S. Congress passed the Sarbanes-Oxley Act, a law name that’s easier to remember than the actual full legislation name: The American Competitiveness and Corporate Accountability Act of 2002. In summary, the legislation required adherence to certain governance standards by corporate management, and expanded the role the governing board plays in financial and auditing oversight and procedures. It also applied standards of operation to public accounting firms.
Sarbanes-Oxley’s intended consequences were multitudinous, including closing accounting loopholes, increasing accountability and disclosure requirements, rebuilding public trust in American corporations, and increasing penalties for corporate and executive wrongdoing.
Although Sarbanes-Oxley was passed with publicly-traded companies top mind, there are two provisions that are explicitly relevant to tax-exempt organizations: the whistleblower policy and document retention and destruction protocol.
A whistleblower policy is not technically mandated for nonprofit organizations, but it makes smart sense to adopt such a policy. Why? First off, it encourages stakeholders in the organization to bring attention to problems in the early stages where issues may be more solvable. It’s also important for state and federal liability purposes and ensuring organization executives, board members, and other stakeholders understand their right to report as well as the implications of inhibiting such reporting.
Section 1107 of Sarbanes-Oxley makes it a federal crime to knowingly take any action with the intent of retaliation against a person who has reported truthful information to law enforcement relating to any current or possible federal offense. Violators of this provision are subject to fines and/or imprisonment for up to 10 years.
An ideal nonprofit whistleblower policy should both set a process for complaints to be addressed and include protection for whistleblowers. A well-written whistleblower policy can encourage an appropriate, swift response of investigation and solutions to complaints.
Form 990, the annual information report the majority of nonprofit organizations are required to file, states the following in its instructions:
A whistleblower policy encourages staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization, specifies that the organization will protect the individual from retaliation, and identifies those staff or board members or outside parties to whom such information can be reported.
The acts of document retention and destruction are also covered under Sarbanes-Oxley. Section 802 of the Act defines the criminal penalties for tampering with documents in relation to federal investigations and bankruptcy. It reads:
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.
You read that right. Violators of this provision can be fined and/or imprisoned for up to 20 years.
Additionally, Section 1102 of Sarbanes-Oxley makes it a crime to tamper with a record or otherwise impede an official proceeding. Violators of the provision may be fined and/or imprisoned up to 20 years if they “corruptly” alter, destroy, mutilate, or conceal a record, document or other objects, or make an attempt to do so, with the intent to impair the object’s integrity or availability for use in an official proceeding. (Note, the term “corruptly” is not defined, but your organization can and should use the best judgment on the word.)
Your nonprofit should include specifics related to these Sarbanes-Oxley provisions in a “document retention and destruction policy.” This policy should clarify what types of documents should be retained, how they should be filed, and for what duration. It should also outline proper deletion and or destruction techniques to ensure compliance and reduce liability risks.
Get Policies Set in Place: 10 for 990 Policy Special
Nonprofit organizations should have relevant and updated policies in place that provide guidance for compliance with these Sarbanes-Oxley requirements. I’m offering the 10 for 990 nonprofit policy special where I’ll draft 10 policies related to annual reporting on Form 990 for only $990. Two of the policies included—whistleblower and document retention and destruction—specifically address requirements under Sarbanes-Oxley.
Seize the opportunity to get strong policies in place for a compliant future! Additionally, if you have specific questions about Sarbanes-Oxley compliance don’t hesitate to contact me directly via email (Gordon@gordonfischerlawfirm.com) or by phone (515-371-6077).