Most of us give a little each year to support charitable causes and we are happy to allow the charity to apply those gifts as they see fit without any specific agreement regarding how the funds should be used. But, for a particularly large gift, it is extremely important to have a detailed agreement regarding how the funds should be used.
Many of today’s charitable donors desire to see their gifts used in a specific way or for a specific purpose by the charity. Many times, though, the donor’s desires are not clearly delineated in writing when the gift is made, which often results in hard feelings between the donor and the charity. The donor may be upset because the charity did not use the donated funds exactly as he or she intended and the charity is confused because it did not understand exactly what the donor wanted.
This is why it is usually in the donor’s best interest to have a detailed written agreement describing exactly how the donated funds should be used. In addition, such an agreement often benefits the charity because the charity knows exactly what is expected. Without a detailed agreement, the charity must often guess as to what the donor wanted, and sometimes it guesses wrong. This upsets the donor and makes it much less likely the donor will make additional gifts to the charity. Also, the donor may tell his or her friends about the disappointment, and this could significantly hamper the charity’s ability to raise funds in the future.
In drafting these charitable gift agreements, the following is a list of things to consider:
· Clearly State Restrictions. If the restrictions on how the gift should be used are important to the donor, they should be clearly delineated in the agreement. Do not assume that the charity will execute the gift with the donor’s intent as its first priority. Also, do not assume that the charity even fully understands the donor’s intent. These restrictions should be contained in the agreement and described in as much detail as possible.
· Use Your Leverage While You Have It. Donors will have their most leverage before the gift has been made. Accordingly, it is very important that the agreement be executed prior to the gift. It is very common for donors to come to me after the gift has been made and want to add restrictions. It can be very difficult to get the charity to agree to these restrictions after the fact, and it usually will only agree if there is a promise of future gifts.
· Require Regular and Detailed Reporting. The agreement should require, especially for large gifts, the charity to provide regular and detailed reports about how the donated funds are being used and the status of any project to be completed with the funds. Otherwise, the donor will have no way to monitor whether the restrictions are actually being followed.
· Do Not Make the Restrictions Too Narrow. While it is important to be specific about the restrictions or the donated funds, it is also important that those restrictions not be too narrow or inflexible. Otherwise, a situation can arise where the gift actually causes a detriment to the charity and not a benefit. Under the common law, the only way to have such restrictions removed is through a court proceeding, which can be costly and not always successful. Under more recent statutes, there may be a little more flexibility to change or expand a charitable purposes, but it is still very important to build in a way to change the restrictions on the gift if the restrictions become completely impractical.
· Enforceability of Restrictions. A method of enforcing the restrictions should be included in the agreement. First, the agreement should specifically reserve the right in the donor (or the donor’s heirs) to seek enforcement of the gift. Under the common law, the donor generally does not have standing to enforce a gift (unless he or she specifically reserved the right), and the only person with the authority to sue is the Attorney General. Accordingly, it is critically important to specifically reserve the donor’s right to enforce the restrictions.
In addition, the agreement should specifically state what happens if the charity does not comply with the restrictions. Often, this should be that the funds will be distributed to a different charity. Accordingly, it is prudent to designate a contingent successor charitable beneficiary.
· Don’t Forget About Taxes. A contribution is deductible for federal tax purposes only if it is made “to or for the use of" a charitable organization.” A donor may earmark a contribution to charity for a particular use without jeopardizing the charitable deduction, provided the restriction does not prevent the charity from freely using the transferred assets. The Treasury Regulations provide examples of permissible restrictions, including the contribution of land to a city to be used as a public park, where the city intends to use the land for such purpose at the time of the gift; the creation of an endowment fund for a particular university department; and the donation of funds for the construction of a building sought to be built by an exempt organization.
If the gift is designated or earmarked for a non-charitable purpose, however, or even a charitable purpose that is outside of the donee organization's mission, the gift is not deductible. To ensure deductibility, the donor should utilize a gift agreement that specifically recognizes that the conditions placed upon the gift are in furtherance of, and consistent with, the donee's exempt purpose. For substantial gifts, a board resolution from the donee organization containing a similar acknowledgment might be considered.
When designing conditional gifts, reverter clauses are sometimes used. For example, if the city described in the Treasury Regulations ceased to use the donated property as a public park, the gift agreement or deed of gift could provide that ownership of the land would revert back to the donor’s family. Such reversionary provisions must be used with caution since they will cause the charitable transfer to be nondeductible unless the reversion is “so remote as to be negligible.” In Briggs v. Commissioner, the Tax Court defined “so remote as to be negligible” as a “chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction” and “so highly improbable and remote as to be lacking in reason and substance.”
In Rev. Rul. 2003-28, the donor transferred a patent to a university on the condition that a designated faculty member remain on the faculty during the patent's fifteen-year remaining life. The IRS determined that the possibility the faculty member might not remain on the faculty was not so remote as to be negligible and no charitable deduction was allowed. On the other hand, the city park example above illustrates that where the circumstances at the time of the gift indicate a strong likelihood that there will be no reversion, the charitable deduction will be permitted.
An alternative to reversions (and a much better option) is to provide in the gift agreement that if the primary purpose of the gift cannot be fulfilled, the gift will be used by the charity for an alternate purpose or transferred to another charitable organization.
Some commentators are also concerned that if the donor places too many restrictions on a gift, the IRS will not treat the gift as a contribution to the charity, but rather as the establishment of a separate charitable trust, subject to the private foundation rules. This would create tax headaches for both the donor and donee, due to the deduction limitations, as well as for the ongoing operation of the fund, which would then be subject to the strict restrictions imposed on private foundations. Accordingly, one should be very careful to make sure that the conditions are not too extensive or limiting.
· And One for the Charity – Naming Rights. As stated above, a detailed agreement also benefits he charity. One issue that has received a lot of atttention recently is naming rights. Donors often want to establish lasting memorials by having buildings, scholarship funds and other things named after them. What happens, though, when the donor is involved in a scandal or circumstances otherwise change where the charity does not want to be associated with the donor. Under the common law, the result likely is that the charity must either keep the name or give the money back. Accordingly, the charity should push for the agreement to include procedures where the charity can remove the name and keep the donated funds.
