GiftPlanSoAz.org
Wed
04
Feb
2009

National Heritage Foundation Files for Bankruptcy: Gift Annuitants Among Largest Creditors

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Avg: 5 (2 votes)

On January 24, 2009, the National Heritage Foundation filed for Chapter 11 bankruptcy in federal court citing a $6.2 million court judgment in connection with a charitable split-dollar life insurance case as its largest single outstanding debt and numerous charitable gift annuitants as creditors.

Full Text:

In September of 2008, the Virginia-based National Heritage Foundation was found in a Texas District Court to have changed the beneficiaries of three multi-million dollar charitable split-dollar life insurance policies from the donors' children to itself without notifying the donors of the change. In that case, $6.2 million was awarded to Dr. Juan and Sylvia Mancillas. However, while this award may have been the straw that broke the troubled foundation's financial back, a recently released document has uncovered other financial problems at NHF.

Specifically, in connection with court-ordered post-judgment asset discovery, the Mancillas' attorney, Albert Garcia deposed NHF financial analyst Julia Weltmann. In that deposition, Weltmann testified that NHF began making loans in 2005, now totaling $14 million, to Stellar Financial, a subsidiary of Stellar McKim Capital and the company that produces NHF's fund accounting software. According to Weltmann, no credit analysis of Stellar was performed by NHF prior to making the loan; rather, the loans were made on "good faith" because Ian Scott-Dunn, Stellar's then CEO also served as NHF's "investment adviser" even though he was not licensed in that capacity.

Weltmann further testified that Stellar Financial has made no payments on the loan since 2006 and that NHF was in the process of renegotiating the loan and acquiring additional guarantees. The only security for the loan, according to Weltmann, was the source code for the software that Stellar produces.

Of particular concern is the fact that, according to Weltmann, the $14 million loaned to Stellar came from donations made to NHF by numerous donors in exchange for charitable gift annuities which require NHF to make fixed annuity payments to annuitants for their lifetimes. Weltmann expressed further concerns regarding NHF's ability to recover its principal.

For independent coverage on this story, see the following articles from The Chronicle on Philanthropy and Forbes:

In addition, the Planned Giving Design Center received the full transcript of the NHF/Weltmann deposition. It is available as an attachment in PDF format at the bottom of this page.

For previous coverage of NHF-related charitable split-dollar life insurance litigation, see the following PGDC news stories:

AttachmentSize
Deposition of Julia Weltmann.pdf338.43 KB

Copyright © 1998-2009 Planned Giving Design Center, LLC. All rights reserved.

Comments

Wed
04
Feb
2009
157
points
#01 by Richard Morgan    

National Heritage Foundation

NHF made a big name for itself many years ago in being very aggressive with benefiting donor advisers to obtain charitable donations, normally in donor advised funds and in charitable gift annuities. It then got very aggressive on riskier planning strategies, such as charitable split dollar plans. Now it turns out that some slime may have been going on behind the scenes. I think someone may end up going to jail on this one as its donors may end up getting less than they bargained for while the NHF mismanaged (at best) or defrauded the entity and its donors (at worst). Lesson learned: do not entrust your money with those who act slimy with others.

Wed
04
Feb
2009
308
points
#02 by cares    

YC

This is exactly why charities should consider reinsuring at least a portion their CGA programs instead of investing the money and having it subject to mkt losses.

If they don't they are taking on the full responsibility of the future liabilities. Reinsuring not only shifts the liability to the insurer, then the state put also satisfies most states reserve requirements and releases assets to the charity to be utilized to support the community instead of to be invested in uncertain mkts and in addition paying a fee to have the money manage.

Tue
12
May
2009
88
points
#02.00 by J. Eric Persun    

Reinsuring...

I couldn't have said it better myself! and... I can Help!

Wed
04
Feb
2009
154
points
#03 by Douglas Gortner    

National Heritage Foundation Bankruptcy

There is no accounting for such bad behavior. It only demonstrates that, if one is investing a significant amount of one's assets, s/he should become very familiar with the trustee/custodian. I recently wrote in a soon to published article for planned giving officers: "Final Gifts are also the most carefully considered gifts. Donors need to trust your institution and they need to trust you personally."

Some years ago, when planned giving became the "last tax shelter" many individuals were attracted to the field by the profit motive, unlike most of us who had previously taken a pay cut to enter the field. Most of these new private-sector folks were just as ethical as the old-timers who were employed by charities, but a few sleazy fellows came in along with the tide. That is why I always recommend that my clients name specific charities as beneficiaries and try to find one of them who will serve as trustee or co-trustee—along with the donor. The more third parties are involved, the greater the risk.

Wed
04
Feb
2009
169
points
#04 by Jacko    

CGA amid BK

Where exactly in line do the CGA owners stand in the BK proceeings? Above senior debt?

Wed
04
Feb
2009
169
points
#05 by Jacko    

CGA @ BK

I know some CGA's that are reinsured properly instruct the insurance to make payments straight to the donors in case of BK, but what if it wasn't reinsured or reinsured w/o that provision? Where do the donors stand?

Thu
05
Feb
2009
170
points
#05.00 by Albert Garcia    

CGA issued by NHF

According to sworn testimony from NHF's senior financial analyst, 100% of the funds that NHF received from annuitants were "invested" in what NHF calls "Private Placements". The great majority of what NHF calls "Private Placements" was a $14 million loan to a company called Stellar McKim Capital made in 2004. The loan was unsecured and NHF has not received any repayment of principal at all, and no interest since 2006. The guy behind Stellar McKim Capital was NHF's own investment advisor [Ian Scott-Dunne]. Can you say conflict of interest? There was no reinsurance. Since the amounts paid by annuitants were "invested" by NHF in something that has not returned any cash flow to NHF, they are having trouble paying the annuitants what NHF promised to pay them. Big surprise.

Thu
05
Feb
2009
188
points
#06 by Jacko    

CGA issued by NHF

If I understand correctly (and I probably don't), CGA donors become creditors of the charity versus those who own a pooled interest in a fund (who get their prorata share of the segregated fund, which isn't an asset of the charity and can't be attached). The seperate donor advised funds are similiarily shielded.

So the real loosers (through fraud, not market activity) seem to be the CGA holders. The monies received were apparantly blatantly stolen. I know some states have SERIOUS restrictions on investments allowed to "back" annuity payments, and almost all others have some sort of oversight. How'd these guys get away with "loaning" $14,000,000.00 to a fiduciary, insider, fellow crook or whatever without being discovered?

Can the CGA holders go after all the assets, not just the loan? I'm sure they can (correct me if I'm wrong), but I'm sure they'll find no assets to recover (at least through NHF). Just leases, rents, etc.

And extracting money from the perps usually yields zip.

We live in interesting times.

Mon
11
May
2009
93
points
#06.00 by Richard Fox    

Donor-Advised Funds: Shielded?

Why do you say that the donor-advised funds should be similarly shielded? I am sure you know that under federal tax law, the sponsoring chairty of donor-advised funds must have the sole and exclusive ownership and control over the donor-advised funds, which is also spelled out in the donor-advised fund agreement. Thus, the donor-advised funds are the assets of the charity, presumably subject to claims of creditrs. Why would you think they are protected? It seems to me that a donor-advisor to a donor-advised fund has less rights (since he or she only has a right of recommendation) than a holder of a charitable gift annuity, who is at least a general creditor of the charity.

Tue
12
May
2009
129
points
#07 by David Paradine    

NHF

Richard Fox hit it right on the nose.

Where is/was the Board of Directors in all this. Looks like just one more example of a Board completely abdicating it responsibility.

Wed
13
May
2009
128
points
#08 by Lorri Greif    

The NHF, an incredibly bad

The NHF, an incredibly bad apple, has spread its rotten odor over what can be a wonderful opportunity for both charities and donors. As with so many of its other activities, its only out for itself and could care less about its supporters. For approximately 150 years, charitable gift annuities have been issued to the benefit of both supporters of nonprofits - one is able to benefit while helping a nonprofit they love, and ultimately the nonprofit will receive funds it may never have received. What we have all learned is that we have to check where we invest our funds, and all guarantees are only as good as the backing. Not everyone is Bernie Madoff and not all nonprofits are NHF. We're all learning and changing in these surprising times. Stricter regulations, being flexible and quick to make revisions, more oversight and expertise may be necessary. But gift annuities are not the enemy; the are a planned giving option that can and have worked very well.

Wed
13
May
2009
85
points
#09 by Clinton Bucher    

No surprise by NHF troubles

Unfortunately it should come as no surprise to anyone that NHF is once again in trouble. Dock Houk has operated this organization on the fringes (and probably mostly outside the fringes) of what any of us that operate in the charitable arena would like to see. Shame on any advisor or investor who chose to business with his organization. Greed is usually at the heart of most financial downfalls and this is no exception. I hope this will be a lesson to all of us.

Mon
18
May
2009
93
points
#0a by Walter Gray    

Where was the NHF board and who excercised fiduciary responsibli

My question is after the "charitable split-dollar" fiasco, where was the NHF board oversight of their new less-than responsible actions and who was exercising fiduciary responsibility for their clients? Based on the articles I've read, there were enough (maybe, more than enough) "red flags" in the past six or more years for someone not have noticed and screamed about it! The charitable giving industry does not need this "black-eye", but it does need this "wake-up call".

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