Transparent communication now could mean fewer legal headaches in the future.
By Alicia Denton, CFP®
September 26, 2022 – A recent legal battle over the control of a prominent charitable organization exemplifies the need for proactive estate planning and responsible communication.
Two of the late actor Paul Newman’s surviving daughters — Susan Kendall Newman and Nell Newman — are suing the Newman’s Own Foundation for $1.6 million in damages. The lawsuit was filed in Connecticut state court in August and alleges that the foundation improperly reduced its annual donations to Susan and Nell’s charitable entities from $400,000 to $200,000. Newman’s daughters also claim that the foundation’s directors misused funds by dipping into foundation accounts to pay for illegal perks like personal travel expenses.
A private foundation such as the Newman’s Own Foundation is a 501(c)(3) organization. Funds for these types of entities typically come from one family or corporation. Private foundations often use their funds to make grants to other charities and must spend down or gift at least 5% of their assets each year. Newman’s Own and similar private foundations are managed by their own trustees and directors.
If a grantor feels that their descendants wish to be involved in charitable giving, forming a private foundation might be a good fit for their legacy. However, private foundations pose a large administrative burden and require a substantial time commitment from directors as well as trustees. Clients’ children paid as full-time executive directors by such foundations need to put in the appropriate work hours for these roles; not doing so runs the risk of violating self-dealing rules and attracting IRS scrutiny. To avoid such scenarios, it’s common practice to hire a non-family member as a trustee to oversee day-to-day management. Annual administrative costs can run between 1 to 8% of assets under management, depending on staff size and how many directors are paid. It’s worth keeping in mind that several of these costs can be counted toward the foundation’s 5% distribution requirement.
Neither Susan nor Nell formally serve as a director, trustee, or member of the Newman’s Own board, and their involvement with the foundation is not detailed in writing. Unfortunately for their case, this means that neither of them has any say in how the foundation distributes its funds. While Newman’s daughters claim that their father was incapacitated when he appointed his longtime advisors as directors of the foundation’s board, this counterargument could be quite hard to prove in court.
To avoid future situations like this, we recommend designing, executing, and communicating an estate plan that may include a foundation, well before there’s a risk of incapacitation. If the grantor intends to make their family officially involved with their foundation, they should specify as much in writing to steer clear of any disputes. The senior generation should also convey their intentions to their descendants as part of the planning process. Transparency, however uncomfortable, will help avoid headaches after the grantor is gone. Regardless of whether Paul Newman intentionally left his daughters out of the foundation’s governance and distribution policy, written documentation or difficult-but-necessary conversations could have circumvented these legal proceedings. If Susan and Nell were indeed left out by accident, this oversight should have been corrected well before Newman was allegedly incapacitated.
It’s critical for anyone undertaking estate planning to make their intentions clear in writing. Whether it’s an external conflict or in-fighting among family, no one wants to leave their heirs in a potentially litigious situation.
Sources:
- https://www.wealthmanagement.com/high-net-worth/newmans-own-estate-fight
- https://www.forbes.com/sites/ashleaebeling/2016/12/14/10-private-foundation-dos-and-donts/?sh=1fcc5a4b252d
- https://learning.candid.org/resources/knowledge-base/private-foundations-vs-public-charities/
- https://foundationsource.com/learn-about-foundations/what-is-a-private-foundation/
- https://www.washingtonpost.com/politics/trump-foundation-apparently-admits-to-violating-ban-on-self-dealing-new-filing-to-irs-shows/2016/11/22/893f6508-b0a9-11e6-8616-52b15787add0_story.html
- https://www.forbes.com/sites/martinshenkman/2021/11/01/what-estate-planning-should-you-do-now-that-congress-might-not-change-anything/?sh=ea68a7478d5b
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. Please consult with your Advisor prior to making any Investment decisions. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2022 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.