Yesterday, a Cameron County jury awarded $9 million in damages to Dr. Juan and Sylvia Mancillas in their lawsuit against the National Heritage Foundation ("NHF"). Dr. and Mrs. Mancillas sued NHF in 2005 because NHF changed the beneficiaries of three multi-million dollar life insurance policies from the Mancillas children to itself.
NHF is a 501(c)(3) organization headquartered in Falls Church, Virginia that manages thousands of accounts called "donor advised accounts" created by individuals who engage in various charitable projects. NHF acts as the bookkeeper for the hundreds of millions of dollars kept in these donor advised accounts.
The lawsuit involved what the IRS called an abusive tax shelter known as a charitable split dollar life insurance plan. Between 1997 and 1999, NHF peddled this tax scheme to people across the country. The typical arrangement worked like this—a donor made a charitable "donation" to NHF and took a tax deduction. NHF used those donations to pay premiums on large life insurance policies. The beneficiaries of the life insurance policies were primarily the donor's heirs, but a smaller portion of the death benefit would go to a charity chosen by the donor. NHF made money by charging a 4.5% fee on the full amount of the death benefit.
In December 1997, NHF sold Dr. and Mrs. Mancillas a charitable split dollar life insurance plan with annual premiums of about $85,000 on $7 million in life insurance. The Mancillases two sons were the beneficiaries of $5 million of the life insurance, and the Sisters of the Incarnate Word, a organization of Catholic nuns in Brownsville, were the beneficiaries of the other $2 million. The large amount of life insurance was necessary because the Mancillases youngest son suffered a severe brain injury at the age of 6 that has left him unable to speak, walk or care for himself.
In 1999, the IRS determined that donations made in connection with these plans were not tax deductible. At that time, NHF had about 600 of these plans nationwide, with potential life insurance death benefits aggregating between $600 million and $2 billion. If these deals went away, NHF stood to lose between $25 and $90 million in fees.
NHF did not inform the Mancillases that the tax deduction was not allowed or that it could have just paid the premiums themselves to insure that their sons still got the life insurance benefits. Had they done that, NHF would be out of the picture and would lose out on their substantial fees. NHF instead modified the plan—without telling Dr. or Mrs. Mancillas—so that it was the sole beneficiary of millions of dollars in life insurance policies and the Mancillases children would get nothing. Believing that their sons were still the beneficiaries, Dr. and Mrs. Mancillas continued paying the premiums. They paid a total of $548,000 in premiums over seven years with no knowledge that NHF had changed the beneficiary to itself.
"I can't help but wonder how many of the other 600 families with charitable split dollar life insurance plans with NHF have also had their children removed as beneficiaries just so that NHF could be the sole beneficiary", said the Mancillases attorney, Albert Garcia. "Hundreds of families may still be sending NHF millions of dollars each year for life insurance premiums, thinking that their kids will receive the death benefits when they die," warned Mr. Garcia. He added, "NHF said nothing to the Mancillases so why wouldn't they pull the same stunt with these 600 other families."
NHF is no stranger to controversy. Its founder, J.T. "Dock" Houk started the original NHF in 1968. In 1982, the IRS filed suit to revoke NHF's charitable status for violations of the federal tax laws. Mr. Houk was then ousted as NHF's CEO and the organization changed its name to the National Foundation. In 1993, he started the current NHF and installed himself as the CEO, his son, J.T. "Tick" Houk as President, his wife as the chief operating officer, and his daughter and daughter-in-law as vice presidents. In 1999, the IRS disallowed tax deductions for NHF's charitable split dollar life insurance plans, effectively ending that tax avoidance scheme. In 2006, the Congress also outlawed another NHF scheme—charitable employment. Under that program, one would "donate" money to his foundation that was managed by NHF, and take a tax deduction on his tax return. The donor would then "work" for his foundation as a director and pay himself a salary with the very money he donated and took a tax deduction for. Very little, if any, of the donated money would go to charity because it would come back to the donor as a salary.
Dr. and Mrs. Mancillas were represented by Albert Garcia and Adrian Martinez of the McAllen, Texas law firm of Garcia & Martinez, L.L.P. They specialize in complex commercial and personal injury litigation.
