Gold Diggers Beware

By Lynda Chung

In the world of trust and estate litigation, claims of undue influence are nothing new. These suits usually concern a caregiver, mistress, or other interloper coercing an unfair share of an inheritance from the deceased.  However, far less common are undue influence cases brought against the wife of the deceased. That is … until a case earlier this year made it clear that marriage is not a license to steal. Indeed, all would-be “gold-diggers” should take note, as this decision is a potential game changer.

In this case, the deceased took the defendant as his third wife in 1999. After divorcing six months later, the couple remarried in 2005. The deceased was a retired real estate magnate worth millions, and had multiple children and grand children from previous marriages, while the defendant had two children of her own. Needless to say, this type of blended-family can be a powder keg when it comes to inheritance.

At the time of his marriage, most of the decedent’s real estate holdings were kept in a trust, which provided for his children and grand children. However, in mid-2005 (after remarrying Wife No. 3), he began introducing a series of amendments to the trust, providing his wife with more and more of his inheritance, and finally giving her the power to disinherit his own children altogether after his death.

Upon his death, his eldest children brought a suit alleging the defendant unduly influenced the deceased into modifying his trust, and that the way in which she freely spent her husband’s money constituted a breach of fiduciary duty. The court found that the deceased “did not know the extent of [defendant’s] spending,” and that “while it is not uncommon for a spouse to spend money or purchase items of which the other is unaware, and the line between such conduct and financial abuse is not always clear, what [defendant] did in this case went well beyond the line of reasonable conduct and constituted financial abuse.”

Widespread financial conflict in blended families is already quite common, but the result of this decision could have far reaching implications for future situations in which a new spouse attempts to disinherit the rest of the family. 

Non-Profit Corporations Must Operate Pursuant to the Rules

By Arlen R. Gunner

I was recently asked to serve as an expert witness in a case that demonstrates the abuse that occurs when people form a non-profit for the sole purpose of personal gain.

As an experienced attorney representing non-profits, I was hired by the plaintiff’s attorney to testify as an expert witness against the founders of a non-profit organization. Rather than using the money raised for the mission of the organization, they were using the entity as their personal piggy bank and had already pocketed large amounts of cash.

They had no interest in running a charitable organization for the public benefit; they were out to milk the business for themselves. Ignoring even the most basic rules, they controlled everything and hired “front men” to run the charity. These individuals were highly paid and were used to front the organization.  Although they were officers of the entity, they were never allowed to review financial statements, attend board meetings, or run the business.

Over the course of my preparation to be deposed, I discovered that this wasn’t the first time they had carried out this scheme. The founders had a history of using a non-profit corporation as a vehicle to line their own pockets.  This is a serious offense, and violates both California and IRS rules for tax-exempt organizations. Finally the IRS pulled the plug on them and revoked their 501(c)(3) status.

As part of the suit against the founders for the recovery of lost funds, I was deposed by the defendants' counsel. When the nitty-gritty details were laid bare, the defendants’ legal team eventually determined they were fighting a lost cause and offered to settle.

The lesson to be learned is that there are very specific rules and requirements to operate a non-profit corporation. Non-profits are not a vehicle for personal enrichment. Business must be conducted in accordance with the mission for which the non-profit was formed.

To obtain tax-exempt status, the corporation must file an application with the IRS and, if granted, it must also obtain exemption from state taxes as well. Once a non-profit entity is formed, a trust is legally impressed upon its assets, which are held for the benefit of the public. The attorney general is responsible for preserving those assets. If you violate non-profit rules, the attorney general and/or the IRS have broad enforcement power to pursue the entity and those who violated the law, in addition, you will likely face the repercussions from those whose funds have been collected under false pretenses.