Senate Commitee Reviews Oklahoma Trustees’ Pay

The U.S. Senate Finance Committee is questioning whether the trustees of a group of 12 Oklahoma charitable trusts worth $1.6-billion deserve to be paid more than $5-million a year.

The committee’s action comes as some state regulators and others have suggested the need for changes in the way the federal government oversees fees for trustees of such organizations, which in many cases are effectively insulated from Internal Revenue Service scrutiny by state laws.

In a letter sent last month to Sharon J. Bell, a Tulsa lawyer who is a trustee of the Chapman Trusts, Sen. Charles Grassley, the Iowa Republican who chairs the committee, raised questions about the reimbursement of Ms. Bell — who is paid at least $1.4-million annually to act as trustee — and the Bank of Oklahoma, which receives at least $3.9-million to act as the other trustee, according to the most recent tax returns filed by the trusts.

Many of the questions focus on how trustees’ fees were set, and the justification for paying them that much.

A Chronicle analysis of federal tax returns filed by 114 organizations like the Chapman Trusts — which are set up as “supporting organizations” under federal law — found that the compensation paid to Ms. Bell and the Bank of Oklahoma was the highest paid by any such organization. As a percentage of the trusts’ assets, however, the fees come to less than 0.4 percent of their total value, which is slightly less than the average percentage paid to trustees of the organizations examined by The Chronicle.

Payout Proposal

Ms. Bell had gotten in touch with the committee last March to urge the committee not to pass legislation that would require trusts and other organizations to distribute at least 5 percent of their assets for charitable purposes each year. The Senate passed a provision requiring such a 5-percent payout in November; the House has not made any similar proposals.

The Chapman Trusts distributed more than $62-million to charity in 2004, according to Ms. Bell, and over the past three years has distributed an annual average of 4.5 percent of its assets.

If they had been required to distribute 5 percent that year, the trusts would have paid out an additional $13-million. Requiring supporting organizations to make grants at that rate, Ms. Bell argued, would threaten their long-term financial viability.

Senator Grassley and his staff members, who have been working on legislation designed to eliminate abuses at charities and foundations — especially at organizations they think pay executives and trustees too much — noticed the payments to Ms. Bell and the bank when they reviewed the materials the trusts sent to protest the payout rule.

Ms. Bell says the compensation she and the bank receive are legitimate.

In her letter to the Senate Finance Committee about the payout rules, Ms. Bell had noted that the trustees’ compensation had been determined by the original trust documents, which “provide that trustee fees shall not normally exceed one-half of 1 percent of total assets,” a requirement that she said the trustees have lived up to.

Several of the trust arrangements, she added, had been approved by state probate courts, to which the trustees must report on an annual basis.

She added that the trustees pay a range of expenses to lawyers, accountants, and others out of their fees, including payments for “income tax preparation, investment performance analysis, and specialty legal services.”

In addition, she noted that representatives of the bank and her law firm serve on the boards of nearly all of the nonprofit groups that receive funds from the trust, which “are scattered in a three-state region.” Serving on the boards, she added, involves “a significant commitment of time, travel, and resources.”

Ms. Bell and the bank said they would soon be sending their response to the Senate committee and that they did not want to answer detailed questions from a reporter until they did so.

Creation of the Trusts

The Chapman Trusts are a group of 12 organizations set up from 1949 to 1979 to support charities in Arkansas, Oklahoma, and Texas. They were established by heirs of James A. Chapman and Robert M. McFarlin, two of Oklahoma’s wealthiest oil tycoons, who made their fortunes in the early 20th century.

The trusts are set up as what are known as Type III supporting organizations under federal law. Such organizations are often created by wealthy individuals, who donate all or the bulk of the organization’s assets and then name a charity or group of charities they want to support with grants from the supporting organization.

More than $120-billion in assets are held by about 2,100 supporting organizations, but it is unclear how many Type III organizations exist.

While supporting organizations are similar in many ways to private foundations, they offer extra tax advantages to donors. In addition, they are not subject to the federal law that requires private foundations to distribute annually at least 5 percent of their assets for charitable purposes.

Concerned by reports that some supporting organizations were taking advantage of loopholes in federal law to lend a big share of their assets to their original donors and were distributing only small amounts of money to the charities they supported, Senator Grassley sought to require a minimum payout.

But the Senate-passed legislation to tighten regulation of the supporting organizations did not deal with compensation issues.

Determining what amounts to undue compensation for trustees has been a particularly thorny issue, several legal experts say, because in many cases the payments are determined either by state laws or by the donors with the approval of state courts.

William Josephson, a New York lawyer who retired as head of the New York State Attorney General’s Charities Bureau in 2004, said he handled many cases involving what he thought was unjustifiably high trustee compensation for little work, but because trustees’ fees are set by statute in New York, he said, the attorney general’s office could not do much.

“I have begged the Senate Finance Committee staff to deal with this on the federal level, so they could pre-empt the state laws,” he said.

New York is one of the few states where trustee compensation is set by statute. In many other states, trust law establishes a ceiling for trustee compensation, usually as a percentage of the assets of the trust.

Those laws do not bar the IRS from reviewing trustee compensation, but they do make it more difficult for the agency to show the payments are excessive, according to one expert on trust law.

“The IRS does have the authority to determine if the fees are excessive,” said Carolyn M. Osteen, a Boston lawyer who specializes in trust law. She added, however, that the way the government does that is to look at “what comparatively situated trustees are charging, which is probably the same amount” within any state, because of the percentage limits set by most state laws.

Under Oklahoma law, trustees get to set their own fees, unless the will or other document setting up the trust specifies otherwise, said Susan Shields, chairman of the Oklahoma Bar Association’s Estate Planning, Probate, and Trust Section.

“Typically, a trustee would look to recommendations from legal and accounting professionals, which would be based on what trustees are paid at similarly sized trusts. The fee would be what the trustee and the advisers think is reasonable.”

Oklahoma has no requirement that the compensation be reviewed by a court, she added. The state requires only that a charitable trust file a copy of its federal tax return with the Oklahoma secretary of state.