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Annals of Wealth: Who Froze the Dogs Out?

May 01, 2009

Blame it on Trouble.

26helmsley_190 I'm not talking about the IRS kind, or the ungrateful grandchildren kind. I'm talking about the little white Maltese that hotelier and real estate magnate Leona Helmsley coddled while she was alive and tried to leave $12 million to when she died. That must have been one unlikeable dog.

(Photo: Jennifer Graylock, Associated Press)

How else to explain the announcement last week that the trustees of the Leona M. and Harry B. Helmsley Charitable Trust -- her brother Alvin, two grandchildren, one of her lawyers, and a friend -- had awarded $136 million in grants to support medical research, conservation, education, and organizations working to provide human services -- and $1 million -- or .7 percent of the total -- to be divided equally among ten animal welfare charities?

Many people, New Yorkers in particular, will remember the public outcry that followed on the heels of a Stephanie Strom article in the New York Times last summer. In the article, Strom revealed that a two-page "mission statement" signed by Helmsley before her death in August 2007 specified that her trust, then valued at between $5 billion and $8 billion, be used for the care and welfare of dogs.

The whole affair came to a boil a week or so later when Ray D. Madoff, a law professor at Boston College (and no relation to the disgraced Ponzi schemer) penned an op-ed for the Times in which she criticized the charitable deduction and, by extension, private foundations established in perpetuity as mechanisms "by which American taxpayers subsidize the whims of the rich and fulfill their fantasies of immortality."

The charitable deduction, Madoff argued, "constitutes a subsidy from the federal government. The government," she continued

in effect makes itself a partner in every charitable bequest. In Mrs. Helmsley's case, given that her fortune warranted an estate tax rate of 45 percent, her $8 billion for dogs is really a gift of $4.4 billion from her and $3.6 billion from you and me....

I'm not a tax expert, but it always seemed to me Professor Madoff conveniently overlooked a crucial point: The billions that Leona Helmsley bequested to a charitable trust were after-tax dollars, in that they had been taxed as income or capital gains while she was alive. How a tax lawyer or accountant can equate the tax revenue forgone when a Helmsley decides to create a charitable trust with the hundreds of billions the federal government has handed out via TARP or the tens of billions it annually gives to American farmers and agribusiness for the production of corn, cotton, rice, and wheat -- i.e., money that actually comes out of my pocket and flows into the pockets of others -- is a mystery to me.

More troubling, in my view, is Madoff's criticism of perpetual foundations and trusts, which, she argues, become less effective over time.

By setting aside assets for the uncertain needs of the future, we deprive ourselves of resources for addressing the obvious and compelling needs of today.

We should not give a blank check to support the whims of the wealthy. There should be a limit -- a dollar amount or a percentage of the estate -- on the estate tax charitable deduction. People could still give to charity as they like, but after a point they would be giving after-tax dollars. The deduction should be lower for bequests to private foundations than for money given directly to good cause....

The implications of Madoff's argument are two-fold: 1) that there's a hierarchy of needs in society at any given moment that foundations and wealthy philanthropists routinely fail to address in a meaningful way; and 2) we should not use the tax code to encourage the saving of a portion of the wealth of society when those needs are pressing, as they are today. Both points are debatable -- and I hope to do so in future posts.

What about Leona Helmsley's final wishes with respect to the charitable uses of her fortune? In February, a Surrogate's Court judge in Manhattan ruled that the two-page document Helmsley drew up was not legally binding as a will and that that the trustees of her estate "may apply trust funds for such charitable purposes and in such amounts as they may, in their sole discretion, determine." The irony of some those funds being used to create two research facilities bearing her name, in perpetuity, at Mount Sinai Medical Center is surely not lost on Professor Madoff.

Leona Helmsley didn't have many friends in life, and she probably wouldn't be surprised by how she has been treated in death. You can blame it on the dog. Or the courts. But you can't say it's fair.

As always, we welcome your comments. 

-- Mitch Nauffts

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Posted by Bruce Trachtenberg  |   May 02, 2009 at 02:08 PM

There's yet another irony to note about this story. On one hand (the unfortunately named) Madoff argues against foundations being allowed to support "the whims of the wealthy" forever. Yet now the trustees get to spend Helmsley's money -- not as she wished -- but according to their "whims" and forever, thanks to the new power they've been granted by the courts.

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