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Perfecting Donor Intent on Gifts to Charity - The Gift Agreement (From the Charity
More and more donors of charitable gifts are specifying the exact use to be made of the gift. The donor has a vision about the charity’s use of the donated assets. But what happens if the donor’s specific gift purposes are no longer viable or even needed by the charitable organization? In this substantive article, Noblesville, Indiana attorney Eric A. Manterfield answers this and other questions about perfecting donor intent.
More and more donors of charitable gifts are specifying the exact use to be made of the gift. The donor has a vision about the charity’s use of the donated assets. But what happens if the donor’s specific gift purposes are no longer viable or even needed by the charitable organization?
The donor’s intent might have made a great deal of sense when the gift was made. It satisfied a need of the charity and it fulfilled a wish of the donor. But times change, of course. A gift made in perpetuity for a particular purpose may, in time, no longer make any sense. The needs of the charitable organization will also change over time; may the charity use the donation for its greater need beyond the restrictions imposed by the donor?
What steps can be taken to avoid these problems? The donor, the charitable organization and the donor’s advisors must work together to identify the donor’s intent and to set forth procedures to deal with the inevitable changes which will occur over time.
The donor may have a general or even specific purpose in mind for the gift. The charity’s development officers may have worked to identify the donor and to develop the case for support. The charity knows why it needs the money. The donor knows the purpose for which the gift will be made.
But once the donation is made, the gift is out of the donor’s hands. The donor no longer has any legal right to direct how the funds are to be used.
That is why the donor’s advisors must work with the donor and the charitable organization to provide for flexibility in the future. Who has standing to change the restrictions imposed by the donor? May the charity unilaterally change the restrictions? Must approval be obtained from someone before the change can be implemented?
What could go wrong?
Here are several cautionary tales:
The Barnes Foundation
The Barnes Foundation was established by Dr. Albert Barnes in 1922 to house his extensive impressionist, post-impressionist and early modern art collection. The estimated value of the collection today is $6 billion. Dr. Barnes housed his collection in a modest structure in Merion, Pennsylvania and specified that it could not be moved nor could any art be sold or even loaned to other museums.
The trustees of the Foundation filed a lawsuit in 2002, asking permission to move the collection to a new building to be constructed in downtown Philadelphia. Ultimately, the court granted the request to move to the new location on December 13, 2004, even though it ran counter to the Foundation’s charter and governing documents. The move was approved, according to the judge, because there was “no viable alternative.”
The Pennsylvania Supreme Court unanimously rejected an art student’s appeal of the decision on the basis that he had no standing to pursue the case.
Thereafter, the Friends of the Barnes Foundation and the local government asked the local court to reconsider its 2004 approval of the museum’s move. The judge ruled in May of 2008 that neither the Friends nor the local government had standing to pursue the litigation because “they have no interest beyond that of the general public.” The public interest was to be protected exclusively by the state Attorney General, according to the judge. Finally, the Friends of the Barnes Foundation and the local government decided in June of 2008 not to appeal this decision, ending the litigation.
The L.B. Research and Education Foundation
The L.B. Research and Education Foundation donated $1 million to endow a chair at the UCLA School of Medicine. The gift agreement specified that the funds were to be used by the University and holders of the chair to “support basic science research activities that may have the potential for clinical application.”
The Foundation brought suit against UCLA and alleged that the University had, among other transgressions, failed to employ personnel meeting the criteria of the Chair. After judgment on the pleadings was entered in favor of UCLA, the issue on appeal was whether the gift agreement created a contract subject to a condition subsequent or a charitable trust. While the parties argued that the answer to this question would determine whether the Foundation had standing to enforce the agreement, the California Court of Appeals held that the Foundation had standing regardless of the resolution of that question.
The Court of Appeals ruled that the agreement was a contract subject to a condition subsequent and that the Foundation had standing to bring suit to enforce the contract. Interesting, the Court also ruled that, had it concluded that the gift created a charitable trust, the power of the California Attorney General to enforce charitable trusts “does not deprive the donor of standing to enforce the terms of the trust it created.”
The Robertson Foundation
Charles and Marie Robertson donated $35 million of A&P stock to Princeton University in 1961 to create a supporting organization to fund the Woodrow Wilson School of Public and International Affairs. The Foundation noted in its Certificate of Incorporation that the School was one “where men and women dedicated to public service may prepare themselves for careers in government service, with particular emphasis on the education of such persons for careers in those areas of the Federal Government that are concerned with international relations and affairs.” Their goal was to have the School graduate high-level foreign diplomats, which was of critical importance to the donors at the height of the cold war in the early 1960s.
While Princeton has devoted a substantial portion of the donation to fund the operating budget of the Woodrow Wilson School, it has also devoted significant dollars to other purposes.
Following the death of Mrs. Robertson in 1972, Mr. Robertson wrote to Princeton to express his displeasure at the low number of foreign service graduates. The school responded by saying the world had changed.
Descendants of the Robertsons filed suit against Princeton in 2002 to redirect the Foundation (valued at $900 million on June 30, 2008) to other universities which would comply with the wishes of Mr. and Mrs. Robertson. New Jersey is one of the few states which have granted the right to sue to donors and their representatives. Shortly before the trial was set to begin on January 20, 2009, the litigation was settled. The funds stay under Princeton’s control; however, the University reimbursed the plaintiffs’ for their $40 million in legal fees!
The Maddox Foundation
The Maddox Foundation was created by Dan and Margaret Maddox in Tennessee, where they lived. It was worth approximately $100 million when Mr. and Mrs. Maddox were killed in a boating accident. One year after their deaths, the trustees moved the Foundation to Mississippi, where it was reincorporated as a Mississippi charity. It subsequently invested the assets in two sports teams and engaged in other non-traditional expenditures. The assets have declined to $40 million.
The Attorney General of Tennessee filed suit to compel the Foundation’s return to Tennessee in a local court in that state. Not surprisingly, the court ruled that the Foundation had no power to remove itself from Tennessee. Thereafter, the Attorney General of Mississippi was granted a temporary restraining order to prevent the assets from leaving Mississippi. The litigation was finally settled by dividing the assets between the two organizations.
Eli Lilly, the grandson of the founder of Eli Lilly and Company in Indianapolis, created a charitable trust of which Earlham College was named as trustee, to own and operate Conner Prairie, an early history museum. Lilly later transferred to the College about $30 million in Lilly stock under terms that created a “first charge” upon the income and principal of the gifts for the development and operation of Conner Prairie, with any unused income (but no principal) being available to the College. Obviously, Earlham had a conflict of interest as the party which decided how much income was not needed by Conner Prairie, which could then use the unneeded money for its own purposes.
Following several years of negotiation and mediation between Earlham College and the board of directors of Conner Prairie over the museum’s operation and governance, the College fired all the independent directors of Conner Prairie and assumed direct control of the museum.
The Attorney General of Indiana stepped in and eventually negotiated a settlement between the parties under which the College resigned as trustee and the endowment created by Mr. Lilly was divided between Earlham and a newly independent Conner Prairie.
Randolph-Macon Woman’s College
Randolph-Macon Woman’s College was established in 1891 for the primary purpose of educating women. When the college announced its intention to become a co-educational institution, several graduates brought suit, alleging that the college was a charitable trust and that the plaintiffs were beneficiaries entitled to enforce duties imposed on the trustees of the college by Virginia’s Uniform Trust Code.
Specifically, the graduates argued that the trustees breached their duties to prior donors to the college by using the funds for purposes which were beyond the college’s governing documents. They asserted that “[r]eal estate, art, money, or other property given to [the College] without any instructions on their use, were impressed with the purpose found in [the College’s] articles of incorporation, as those governing documents existed at the time of the gift.”
The Supreme Court of Virginia ruled that the College was a charitable corporation and, as such, was governed by corporate law and not the Uniform Trust Code. Only the Attorney General of Virginia has the statutory authority to act on behalf of the public if a charitable corporation uses charitable property in a manner inconsistent with the corporation’s governing documents or applicable law.
Dealing With Established Gifts
A charity may maintain a fund which is restricted to a particular purpose, which is no longer a priority for the organization. The fund may produce more income than is needed for the restricted purpose. Who can enforce the donor’s original intention when the charity utilizes some or all of the funds for a new purpose?
The question of “standing”
Before anyone can bring an action to enforce the gift restrictions, that person must have standing. Three constitutional requirements must be met:
1. the party bringing the lawsuit must have an actual or imminent injury;
2. the injury must be cause by the person or entity against which the lawsuit is brought; and
3. the court must have the ability to remedy or prevent the injury.
The plaintiff must individually have an actual or imminent injury. The lawsuit cannot be filed to protect the rights of third parties. The Supreme Court of Virginia essentially ruled that only the Attorney General had standing to file a lawsuit against the Trustees of the Randolph-Macon Women’s College. The graduates did not have standing.
Does the donor have standing to enforce the gift restrictions? Before the donor can take an income tax deduction for the gift, the donor must meet six conditions:
1. the donor must be competent;
2. the gift is made to a qualified charitable organization;
3. the donor clearly intents to “absolutely and irrevocably divest himself of title, dominion, and control” of the gifted property;
4. there is an irrevocable, complete transfer of ownership and control of the gifted property to the charity;
5. the gift is delivered to the charity; and
6. the gift is accepted by the charity.
The donor, in order to obtain the charitable income tax deduction, must irrevocably give control of the asset to the charity. The donor has arguably no standing thereafter to bring a lawsuit against the charity that has used the donation for an impermissible purpose. The donor has obtained the tax deduction; the charity’s impermissible use of the donation will not cause any actual or imminent injury to the donor.
For example, the Carl H. Herzog Foundation filed suit against the University of Bridgeport, alleging that the University had used the funds for an impermissible purpose. The Supreme Court of Connecticut ruled that the Foundation had no standing to enforce the gift restrictions:
“At common law, a donor who has made a completed charitable contribution, whether as an absolute gift or in trust, had no standing to bring an action to enforce the terms of his or her gift or trust, unless he or she had expressly reserved the right to do so. Where property is given to a charitable corporation and it is directed by the terms of the gift to devote the property to a particular one of its purposes, it is under a duty, enforceable at the suit of the attorney general, to devote the property to that purpose…. As a matter of common law, when a settlor of a trust or a donor of property to charity fails specifically to provide for a reservation of rights in the trust or gift instrument, neither the donor nor his heirs have any standing in court in a proceeding to compel the proper execution of the trust….” (emphasis added)
The Estate of Sybill B. Harrington and the Amarillo Area Foundation filed suit in 2003, seeking the recovery of $5 million from the Metropolitan Opera in New York. The plaintiffs alleged that the Opera had used the funds for purposes outside the scope of the donor’s intent. The court ruled that the plaintiffs had no standing to enforce the gift restrictions.
The rigid enforcement of “standing” in the common law has recently seen some loosening in recent years, however.
The widow of R. Brinkley Smithers filed suit after his death in 1998, alleging that St. Luke’s-Roosevelt Hospital Center failed to create an alcoholism research and treatment facility with the funds donated by her husband for that purpose. The New York Supreme Court, Appellate Division, rejected New York’s traditional approach that only the state Attorney General had the power to litigate on these matters, when it stated in its 2001 decision that “[t]he donor of a charitable gift is in a better position than the Attorney General to be vigilant and, if he or she is so inclined, to enforce his or her own intent.” The Hospital settled the litigation in 2003 and agreed to transfer $6 million to another nonprofit organization to establish a free standing treatment center and agreed to restore $15 million to the endowment.
The United Daughters of the Confederacy entered into a gift agreement with Vanderbilt University in 1913, when its gift endowed the “Confederate Memorial Hall.” When the University changed the name to “Memorial Hall,” the United Daughters of the Confederacy filed suit. The trial court agreed that the University had complied with its commitment under the gift agreement and that the name needed to be changed because it “evokes racial animosity from a significant, though unfortunate, period of American history.” The Tennessee Court of Appeals reversed this decision, however, noting that “[A]llowing Vanderbilt and other academic institutions to jettison their contractual and other legal obligations so casually would seriously impair their ability to raise money in the future….” Apparently, no one questioned the standing of the United Daughters of the Confederacy to bring the action in the first place.
Modification of gift restrictions short of litigation
To overcome the uncertainty about standing, The Prudent Management of Institutional Funds Act was adopted at the 2006 annual meeting of the National Conference of Commissioners on Uniform State Laws.
The new Act permits the release or modification of donor restrictions under four circumstances:
1. The charity can release or modify a restriction “with the donor’s consent in a record,” so long as the gift is still used for the charitable organization’s purposes;
2. The charity can ask a court to modify a restriction it the modification will enhance the furtherance of the donor’s intentions or if the restriction is “impracticable or wasteful and impairs the management or investment of the fund.” The state’s Attorney General must be notified of the hearing on the charity’s petition and must be allowed to be heard at the hearing. Finally, the modification must reflect the donor’s “probable intention.”
3. The court may apply the cy pres doctrine if the purpose or restriction becomes “unlawful, impracticable, impossible to achieve, or wasteful.” The state’s Attorney General must be notified of the hearing on the charity’s petition and must be allowed to be heard at the hearing.
4. If (a) the restricted fund is less than $25,000 in size; (b) it has been in existence for more than 20 years; (c) the charity determines that the restriction is “unlawful, impracticable, impossible to achieve or wasteful” and (d) the change is designed to be a good faith reflection of the expressed charitable purpose of the gift, the charity can modify the restriction without court approval, so long as the state’s Attorney General is given notification of the proposed modification at least 60 days before it is made.
UPMIFA has now been enacted in 25 states and legislation to enact it has been introduced in 8 additional states.
If the Act is in place in your jurisdiction, it provides an alternative to litigation. What procedures might be followed by a charitable organization which wishes to modify restrictions which may have been imposed upon a charitable gift years previously?
Consultation with the donor and the donor’s family
Best practice will lead the charity to consult with the donor or, if the donor is no longer living, with the family of the donor. The first alternative under the Act is to modify the restriction “with the donor’s consent in a record.”
Will the donor or the donor’s family agree with a proposed modification of the restrictions? Explain the new circumstances which lead the charitable organization to seek a modification. Were these new circumstances foreseeable when the gift was made and the restrictions were imposed?
If the donor is still living and capable, it may be relatively easy to obtain the consent of the donor to the proposed modification.
If the donor is no longer living, on the other hand, the charity will be dealing with members of the donor’s family. With whom does the charity consult? I recommend you err on the side of casting a wide net when answering that question. Certainly, the spouse of the donor should be consulted. Encourage the spouse to permit consultation with the adult children of the donor. What does “the family” think? Would the donor’s family agree that the proposed modification of the restrictions is consistent with the presumed wishes of the donor?
If agreement to the proposed modification can be obtained from the donor or the donor’s family, the modification should be written as an amendment to the original gift agreement and should be executed by the charity and each member of the family with whom the charity consulted.
It is not clear what is meant when the Act requires the modification to be “in a record.” I recommend the amendment be kept with the permanent records of the charitable organization relating to the restricted gift.
What if agreement of the donor or the donor’s family cannot be obtained?
If the charity believes that the restriction is “impracticable or wasteful and impairs the management or investment of the fund,” the Act permits the charity to petition the court to modify the restriction. The proposed modification must reflect the donor’s “probable intention.” The Attorney General must be given notice of the hearing on the charity’s request.
Note that the charity must establish to the satisfaction of the court that the restriction is either “impracticable or wasteful” or “impairs the management or investment of the fund.” The charity which merely wishes to divert the gift to a more important (to the charity) purpose will not meet that threshold requirement if it is still possible to meet the donor’s original restriction; that is, the restriction may not be “impracticable or wasteful” if the charity simply wants to use the funds for another purpose.
If the consent of the donor or the donor’s family was not obtained and the charity seeks court modification of the restriction, I strongly recommend that notice of the hearing on the charity’s request be given to the donor or the donor’s family, in addition to the Attorney General. The judge will undoubtedly want to hear from the donor or the donor’s family on the charity’s request to modify the restrictions.
Does the court have the power to modify the restriction in spite of the objections of the family? So long as the court is satisfied that the restriction is “impracticable or wasteful” or “impairs the management or investment of the fund,” the answer to that question is “yes.” However, that is a factual dispute, which will be based on the current realities of the charitable organization. The charity’s mere wish to divert the fund to a different purpose will probably not be successful.
How can the cy pres doctrine be utilized?
An alternative strategy under the Act is to seek the court’s application of the cy pres doctrine because, the charity asserts, the purpose or restriction has become “unlawful, impracticable, impossible to achieve, or wasteful.”
Does the word “wasteful” create an opportunity for a charity which wishes to divert a restricted fund to a new program, even though the old, supported program could still function with support from the restricted donation? Does the commitment of the donation to the old program “waste” valuable resources which might be devoted to alternative priorities?
Recall that application of the cy pres doctrine requires the court to determine the overriding goal of the donor. If the donor really wished to support a particular program and if the charity could still carry out that program (even though it does not really want to do that any more), I submit that the doctrine is inapplicable.
The cy pres doctrine has been used historically in situations in which minor restrictions imposed by a long-deceased donor impede the accomplishment of the donor’s overarching charitable goals. The owner of the old English Hotel in downtown Indianapolis, for example, donated the Hotel to the City of Indianapolis when he died; he specified that the property was to be used to house Indianapolis charitable organizations. Mr. English specified that the City could not sell nor demolish the Hotel.
Unfortunately, the Hotel was in deplorable condition when Mr. English died. The court determined that his overriding goal was to provide a central location in which Indianapolis charities could be located. Because the sale prohibition inhibited the accomplishment of that goal, the court removed the restriction and the Hotel was sold and demolished. The proceeds were then used to purchase a building which houses Indianapolis charities.
Could the City of Indianapolis have successfully sought application of the cy pres doctrine to sell the building, so it could use the proceeds to build an NFL stadium simply because that was a higher priority? Undoubtedly not.
Could a charity seek application of the cy pres doctrine to remove restrictions on a planned gift so it could use those funds for an entirely new purpose, even though the old purpose was still capable to achievement? I think not.
Negotiating New Restricted Gifts
The Act makes it easier to obtain a release or modification of donor restrictions; however, the procedures outlined in UPMIFA cannot take the place of a thoughtful gift agreement between the donor and the charitable organization.
The three players in this drama are the donor, the charity and the donor’s advisors. Each brings a different perspective to the process.
The donor undoubtedly has a specific program in mind when considering a gift. It is the immediacy of the result which may be foremost in the mind of the donor. The donor may not be thinking as much about the long-term use of the gift in perpetuity. The charity may have an immediate need and the donor wishes to satisfy that need. However, if the gift is restricted to that immediate need in perpetuity, the horizon of the donor (and of the charity) may need to be expanded.
For example, the donor may wish to support the United Way’s “Success by Six” program, which is an early intervention program for children at risk of falling behind in the educational system. If the Success by Six program is later incorporated into a larger early childhood education program or if the United Way’s program disappears or is no longer needed because of other changes in the country’s education programs, what happens to these restricted funds? Perhaps a better way to express the donor’s intentions is to support “early education for disadvantaged children,” which may enable the supported United Way program to fold the donation into a successor program which has the same purpose.
Another example is a gift made in the 1950s to support a home for unwed mothers. Because society viewed these women as social pariahs at the time, these homes existed around the country to shelter them from public view during the pregnancy. As the perception of unwed mothers changed over time, however, most of these homes went out of existence. This change in society was undoubtedly not anticipated by donors fifty or more years ago. What happens to those restricted funds?
Other donors may seek to impose their own opinions on a charitable organization by restricting the use of the donation to white males or may seek to restrict the use of the donation by those people viewed by the donor as undesirable. These illegal or unconstitutional restrictions must be modified by a court’s application of the cy pres doctrine if the donor’s overall intentions are charitable.
The charitable organization needs to educate its volunteers, its donors and their advisors about its standards and policies about the acceptance of restricted gifts. Its staff must be fully trained in these standards and policies before they approach prospective donors.
Applicable parties who should have the necessary training and expertise may include the charity’s executive director, chief financial officer, chief development officer, planned giving officer and select volunteers.
1. Ethical Issues. The charity should consider ethical standards for its dealings with prospective donors, should educate its own Board of Directors to become ambassadors for the charity within these guidelines and should educate and train its own staff.
The Partnership for Philanthropic Planning (formerly the National Committee on Planned Giving) and the American Council on Gift Annuities adopted “Model Standards of Practice for the Charitable Gift Planner” in 1991 and revised them in 1999. The Preamble states that these ethical standards are designed to enable the donor, the charitable organization and the donor’s advisors “to structure a gift that achieves a fair and proper balance between the interests of the donor and the purposes of the charitable institution.”
Based on these standards, the best practice for a charitable organization which solicits planned gifts should include at least these elements:
1. The role of the charity’s officers and the donor’s advisors and how each will be compensated must be completely and accurately explained to the donor.
2. The charity’s officers cannot act as representatives of the donor without the express written consent of both the charity and the donor.
3. Compensation of the charity’s officers and the donor’s advisors must be reasonable and proportionate to the services provided. Finder’s fees, commissions or other fees to be paid by the charity as a condition of the gift are never appropriate. Commissions paid to the charity’s officers as compensation is never appropriate.
4. The tax implications of the planned gift must be completely and accurately explained to the donor.
5. The charity’s officers and the donor’s advisors must advise the donor within the limits of their own training and expertise and should involve other advisors when each reaches the limits of their own training and expertise.
6. The charity’s officers should always encourage the donor to discuss the proposed gift with competent legal and tax advisors selected by the donor.
7. The donor’s advisors should recommend that he or she consult with the charitable organization on the proposed gift. If the donor wishes to remain anonymous, the advisors should consult with the charitable organization on behalf of the donor.
8. The consequences of the proposed gift to the donor, the charity and, if applicable, the donor’s family should be fully disclosed to the donor and the assumptions underlying any financial illustration of those consequences must be realistic.
9. All parties must comply with the letter and the spirit of all applicable federal and state law and regulations.
10. All parties must act with fairness, honesty, integrity and openness with each other. Except for fully disclosed compensation paid to any party, no one should have a vested interest in the proposed gift which could result in personal gain.
2. The Charity’s Board of Directors. The members of the charity’s Board of Directors are frequently the most effective spokespersons for the charity. Why do they support the mission of the charity with their time and financial support? The Board members must be trained on the intricacies of gift agreements before they unwittingly make commitments on behalf of the charity, however.
A Board orientation program should emphasize the fiduciary responsibilities which each member assumes when joining the Board of Directors. The Board member must put the interests of the charity above any personal interest which he or she might have.
Attorneys who serve on the charity’s Board of Directors must be cognizant of Rule 1.7 of the American Bar Association’s Rules of Professional Conduct when he or she simultaneously serves on the charity’s Board and represents a prospective donor. That rule provides, in pertinent part, as follows:
“a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if … there is a significant risk that the representation of one or more clients will be materially limited by … a personal interest of the lawyer.”
The lawyer’s obligation must be to his or her client and not with any personal wish that the client provide financial support to the charity on whose Board of Directors the lawyer sits.
Does that mean the lawyer is prohibited from representing a client who wishes to support the lawyer’s favorite charity? I do not believe so. Nevertheless, the lawyer must never propose a gift to his or her favorite charity.
In addition, I recommend that the lawyer disclose to the client in writing his or her simultaneous interest in supporting the charity. Emphasize that the client has an independent wish to support the charity and that the lawyer did not recommend the charity to the client. The donor should waive any conflict of interest which the lawyer may have when representing the client and simultaneously supporting the charity which will benefit from the gift.
3. The Charity’s Employees. The charity must be certain that all of its staff members are trained on its policies and procedures for accepting restricted gifts. Indeed, those employees who manage the charity’s specific programs outside of the realm of development frequently are the ones who have the most contact with volunteers and others who may wish to make a restricted gift in support of that program.
The advisors to the prospective donor are critically important in the development of the restricted gift to the charitable organization. The advisor represents the donor in the transaction, rather than the charity.
What expertise does the advisor have? Restricted charitable gifts, along with any number of other planned giving techniques, require intricate knowledge of tax and other consequences, drafting expertise and a vision about future uncertainties. Does this advisor have that capability?
Some advisors inappropriately view the charity’s officers as a perceived threat. How is that possible? Suppose the charity’s planned giving officer works with a prospective donor on a planned gift to support the charity. The prospective donor agrees to make a significant gift, which must be documented by the donor’s advisors.
If the prospective donor meets with his or her advisors (with or without the planned giving officer present) and explains the proposed gift, could that advisor wonder whether the client thinks the advisor (rather than the planned giving officer) should have recommended the gift? “If this is such a good idea, should I have thought of it myself? Does my client think less of me because I did not do so?”
What if the lawyer does not have the necessary expertise to advise the prospective donor? How likely is it that the attorney will admit that to his or her good client?
The risk run by the charity is that the donor’s advisor will shoot down the proposed gift. “You don’t need that” is code for “I don’t get it.” Rather than admit to the client that he or she does not understand the proposed gift or does not have the technical expertise to document it, the advisor scuttles the entire transaction.
Is this possible? Yes. Is there a strategy to overcome this phenomena? Yes.
I recommend that, with the permission of the prospective donor, the charity’s officer meet independently with the donor’s advisors. Explain the plan which was developed with the prospective donor. How will it support the mission of the charity? How will it provide benefits to the advisor’s client? Does the advisor regularly do this type of work? If not, is the advisor willing to work with someone else to assist on a co-counsel basis?
The charity’s frequent need to educate gently the advisors to the prospective donor cannot be underemphasized.
To the extent the charity’s officer becomes a partner with the advisor to the prospective donor, the road blocks posed by perceived threats and lack of expertise can be overcome. Nevertheless, those road blocks are a reality, which must be recognized any time the charity directs the prospective client to work with his or her advisors to document the planned gift.
The charity’s officers should work with these advisors to clarify the donor’s short and long-term goals for the restricted gift. Are they realistic? Does the charity need the advisor to work with the prospective donor to modify these goals and expectations? The advisor usually has a long term relationship with the prospective donor and is in a better position to work with his or her client to articulate these goals and objectives in a more realistic manner.
The advisor to the prospective donor should advise his or her client on the appropriate form of the planned or restricted gift and the timing of the gift. Should the gift be outright to the charity or in trust? Should the gift be made this year, next year or when the client dies? How will the gift be funded?
Development of a written gift agreement
The charity’s officers should work with the prospective donor and his or her advisors to develop a written gift agreement.
Goals of the written gift agreement might include the following
1. To set forth the donor’s intentions clearly.
2. To include specific, realistic and measurable restrictions on the charity’s use of the donation.
3. To provide flexibility in the charity’s use of the funds over time, perhaps specifying changes which might be made depending on future circumstances (for example, the size of the donation falls below a set level or the purpose of the donation is no longer achievable or of strategic importance to the charity).
4. To set forth a mechanism for a non-judicial modification of the donor’s restrictions if those circumstances were to arise. Who can make the change? Is approval by the donor or the donor’s family required? Are there limited modifications which can be made or can the entire gift be changed to a new purpose?
How to get the important issues on the table. Some questions which might be asked of the donor, the charity and the donor’s advisors to help develop the gift agreement might include the following:
1. Are the goals of the donor short-term or long-term?
2. Are the goals of the donor realistic and achievable?
3. What are the measures for success of the donor’s goals, both short-term and long-term?
4. Are the goals of the donor consistent with the mission of the charity?
5. If the donor’s goals are short-term, are they consistent with the charity’s current strategic plan?
6. If the donor’s goals are long-term, what flexibility can be worked into the gift agreement as the donor’s goals and the needs of the charity evolve over time?
7. If the donor’s goals are long-term, who can be given the authority to make a non-judicial modification of the restrictions imposed by the donor as the needs of the charity evolve over time?
8. Are the donor’s long-term goals stated broadly enough to contemplate changes in society and the mission of the charity over many years? Encourage the prospective donor to think years into the future. How may the gift be used under completely different circumstances and still meet the goals of the donor and the charity?
9. Is the charity willing to comply with the donor’s proposed restrictions?
10. Can the charity manage the gift within the proposed restrictions in a cost-effective manner consistent with the mission of the charity?
11. Is the charity willing to accept the asset which is being proposed to fund the gift? Beware of gifts of non-marketable interests in family businesses and gifts of real estate (particularly if there is any reason to suspect environmental issues).
12. What will be the name of the fund? Will it carry the name of the donor, the donor’s family, the purpose of the fund or some combination?
13. What specific assets or dollar amounts are to be donated? Will the gift be made all at once or in installments? If it is to be a lifetime commitment, but completed over time, what happens if the donor dies before the pledge has been satisfied?
14. What are the restrictions which the donor wishes to impose? Is the charity willing to accept those restrictions? Be specific. Restrictions should be quantifiable or measurable objectively.
15. What recognition of the gift should be given to the donor? Is the charity willing to do what the donor wishes in that regard?
16. Is the recognition consistent with recognition the charity has given to other donors for similar gifts in the past?
17. If the donor’s name is to be put on a building, what happens to that recognition if the building is torn down or sold?
18. Will the recognition be given only when the gift has been completed or is it to be given immediately? If recognition is to be given immediately, what happens to that recognition if the commitment is not satisfied in full?
19. How will the charity account for the gift? Is the donation to be kept separate from the charity’s other assets? Should there be separate accounting of fund balances, income earned and expenses paid? Can the charity realistically comply with those accounting expectations?
20. What, if any, reports will be given to the donor or the donor’s family on the charity’s use of the gift? Who receives the report? What is the frequency of the reporting? Will the reports continue in perpetuity or only during the donor’s lifetime?
21. Are there restrictions on the charity’s investment of the donated property? If the gift is funded with an interest in a family business, is there an implied expectation that someone outside of the charity will purchase that interest, so the charity ends up with cash? Recall the charity’s fiduciary duty to maximize its assets. Is the proposed purchase price for true fair market value?
22. May the charity pool this particular gift with its other assets for investment purposes, even though the property will be separately accounted for? Management of multiple funds, each with separate investment objectives, could drain the charity of needed resources.
23. Will the donor attempt to restrict the investment objectives of the fund after the gift is made or may the charity manage the investments according to its normal policies and procedures?
24. Is there a restriction on the rate at which dollars may be taken from the fund, to be used to satisfy the donor’s intentions? May the charity only spend the net income earned by the gift? Does “net income” include realized capital gains?
25. May the charity institute a draw rate (say 5% of the annually revalued donation) that is consistent with its draw on other endowment funds? Under what circumstances may the draw rate be changed?
26. Who may later modify the donor’s restrictions? Here is where great creativity is required!
- If the original purpose of the gift has been accomplished, are there alternative uses of the fund by the charity which would be consistent with the donor’s intentions or should the donation be transferred to another institution?
- If the charity no longer carries out the programs which were supported by the fund, are there alternative programs which would be consistent with the donor’s intentions?
- If the dollars provided by the donation exceed those needed to comply with the stated objectives of the gift, may the charity use the excess funds for its general purposes?
- If the needs of the charity in other programmatic areas are greater than is the need in the programs supported by the donation, may the charity redirect some or all of the fund?
- If the charity determines that the gift has achieved its purpose, is no longer needed for that purpose, is no longer appropriate or is no longer possible, may the donation be redirected to another activity of the charity? Specify who makes that determination on behalf of the charity (by title and not by name).
- What happens if the charity goes out of existence?
- Whose approval needs to be obtained before any of these changes are made by the charity?
- Under what circumstances should approval of the court (and state Attorney General) be required?
27. Who has standing to enforce the terms of the gift agreement? Is this possible under local law? If the donor is no longer living, who has standing to bring a suit if it is believed the charity is not complying with the agreement?
28. Must all of the descendants agree, must a majority agree or can any one descendant bring suit? Be certain that any “standing to sue” clause does not result in the IRS’s conclusion that the gift is not complete for income tax purposes.
29. Under what circumstances can the gift agreement be terminated? The agreement might provide that the donation can be commingled with the charity’s other assets and used for its general purposes if the size of the fund falls below a stated level. Because it is impossible to determine what level will be appropriate fifty or more years from now, the agreement might provide for termination of the restricted fund it the charity determines that continued administration of the donation as a separate fund is no longer economical. Who makes that decision on behalf of the charity?
As charities create new and innovative programs, the wish of their volunteers to fund those programs grows. Charitable organizations must develop policies and procedures for the solicitation and implementation of restricted gifts.
Those organizations which currently benefit from restricted gifts many years ago should develop procedures to modify those restrictions as today’s world and the priorities of the charity change over time. How, if at all, can those old restrictions be changed to reflect the new reality and the new needs of the organization?
All charitable organizations should train their volunteers, Board members and staff on the ethical requirements involved in the solicitation of new restricted gifts. The prospective donor, the charity’s officers and the advisors to the donor must work collaboratively in an effort to refine the donor’s goals and objectives, to set realistic, measurable restrictions on the charity’s use of the donation and to create flexibility for non-judicial changes which may be made over time.
Uniform Prudent Management of Institutional Funds Act
States which have adopted UPMIFA
Alabama, Arizona, Connecticut, Colorado, Delaware, District of Columbia, Georgia, Idaho, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, Nevada, New Hampshire, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and West Virginia
States with pending legislation to adopt UPMIFA
California, Illinois, Maryland, Michigan, Mississippi, New Mexico, Ohio, and Vermont
THIS AGREEMENT is entered into this ______day of ____________, 20__, between ___________________________ (the “Donor”) and _____________________________, a tax exempt, non-profit organization located in ______________, _____________________ (the “Charity”).
WHEREAS, the Donor has delivered to the Charity the property which is set forth on Exhibit A attached hereto [or the Donor has agreed to make payments to the Charity according to the schedule set forth on Exhibit A attached hereto] (the “Gift”); and
WHEREAS, the Charity has accepted the Gift for the purposes and under the considerations set forth in this Gift Agreement;
NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the Donor and the Charity agree as follows:
1. The Donor has made the Gift in order to establish the _______________ Fund (the “Fund”), which is to become an asset of the Charity and shall be governed by the Articles of Incorporation and By-Laws of the Charity and this Gift Agreement.
2. The Gift and any additional gifts to the Charity by the Donor or others which are to be added to the Fund shall be held, invested and reinvested by the Charity in accordance with its standard investment policies and procedures. The assets of the Fund may, in the discretion of the Charity, be pooled with similar assets in order to facilitate a cost effective management of the assets of the Charity, so long as the Charity is able to account separately for the assets of the Fund for purposes of Paragraph 3 of this Gift Agreement.
3. The Charity shall annually withdraw an amount equal to _____ percent (___%) of the fair market value of the Fund, first from net income and, to the extent that is insufficient, from realized net capital gains and, to the extent that is insufficient, from principal of the Fund (the “Withdrawal”). For purposes of this Paragraph 3, the term “fair market value” for the first two years after the date of this agreement shall mean and refer to the fair market value of the Fund on the first business day of the current valuation year; and for the third and subsequent years after the date of this agreement, the term “fair market value” shall mean and refer to an average of (a) the market value of the Fund on the first business day of the current valuation year; (b) the market value of the Fund on the first business day of the valuation year which was one year prior to the current valuation year; and (c) the market value of the Fun on the first business day of the valuation year which was two years prior to the current valuation year.
4. The Charity shall hold, administer and dispose of the Fund in perpetuity in order to accomplish the following purposes of the Fund:_______________________________________.
5. The Charity shall apply the Withdrawal to accomplish the purposes of the Fund as set forth in Paragraph 4 of this Gift Agreement.
6. The Charity shall annually provide a written report on the uses of the Withdrawal to the Donor or, if the Donor is not available, to the spouse and adult living children of the Donor.
7. Despite any provision in Paragraph 12 of this Gift Agreement to the contrary, the Charity may, in its discretion, modify and amend the purposes of the Fund as set forth in Paragraph 4 of this Gift Agreement if (a) the purposes of the Fund have been accomplished or have become impracticable or impossible to achieve economically; or (b) the Board of Directors of the Charity determines that the Charity’s needs for the Withdrawal are greater in other programmatic activities of the Charity; provided, however, before the Charity may take action in accordance with the provisions of this Paragraph, the Charity shall consult with the Donor or, if the Donor is not available, with the spouse and adult living children of the Donor on the proposed action which the Charity seeks to take and shall, to the extent possible, comply with the wishes of the Donor or the Donor’s family in regard to the Charity’s proposed course of action; and provided, finally, no modification or amendment of this Gift Agreement shall be effective if it would result in the Fund being treated as a separate trust or that would affect the status of the Charity as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”).
8. The spouse of the Donor or, if the spouse of the Donor is not available, the oldest living descendant of the Donor from time to time may, in that individual’s sole and absolute discretion, have the legal standing to bring a legal action to enforce the provisions of this Gift Agreement.
9. If the Charity looses its tax-exempt status as an organization described in Code Section 501(c)(3) or otherwise ceases to exist, the Charity shall distribute the Fund to an organization which is described in Code Section 501(c)(3) which is willing to utilize the Fund to accomplish the purposes set forth in Paragraph 4 of this Gift Agreement.
10. Investment funds managed by the Charity are exempt from the requirements of the federal securities laws pursuant to the exemption for collective investment funds maintained by charitable organizations under the Philanthropy Protection Act of 1995 (PL 104062). The Donor acknowledges that information on the investment of those funds has been provided to the Donor.
11. This Gift Agreement constitutes the full and complete agreement by and between the Donor and the Charity and all oral agreements, understandings and discussions between the Donor and the Charity are merged into this Gift Agreement and are null and void to the extent they are inconsistent with the provisions of this Gift Agreement.
12. This Gift Agreement is irrevocable and the Donor acknowledges that the Donor shall have no right or power, either alone or in conjunction with others, to amend or to revoke this Gift Agreement.
13. This Gift Agreement shall be binding upon the Donor, the Charity and their successors and assigns.
14. This Gift Agreement shall be subject to the laws of the state of __________, except for its conflict of laws provisions.
IN TESTIMONY WHEREOF, the Donor and the Charity have executed this agreement as of the date hereinbefore set forth.
 L.B. Research and Education Foundation v. The UCLA Foundation, et al., 29 Cal. Rptr.3d 710 (CA Ct. of App. 2005).
 Jenna Dodge, et al. v. Trustees of Randolph-Macon Woman’s College, 661 S.E.2nd 805 (2008).
 Allen v. Wright, 468 U.S. 737 (1984); Lujan v. Wildlife, 504 U.S. 555 (1992).
 Section 170(a) of the Internal Revenue Code of 1986, as amended (the “Code”).
 Carl J. Herzog Foundation, Inc. v. University of Bridgeport, 699 A.2nd 995 (1997).
 Smithers v. St. Luke’s-Roosevelt Hospital et al., 281 A.D.2d 127 (2001).
 Tennessee Division of the United Daughters of the Confederacy v. Vanderbilt University, 174 S.W.3d 98 (Tenn. Ct. App., 2005).
 UPMIFA, Section 6(a).
 UPMIFA, Section 6(b).
 UPMIFA, Section 6(c).
 UPMIFA, Section 6(d).
 “Disadvantaged children” would have to be a defined term in the gift agreement.
 The Model Standards of Practice for the Charitable Gift Planner can be viewed at the website of the Partnership for Philanthropic Planning (www.pppnet.org). Similar guidelines have been adopted by the American Association of Museums, which can be viewed at its website (www.aam-us.org).
Eric A. Manterfield
Krieg DeVault LLP
949 East Conner
St., Suite 200
Noblesville, IN 46060