Major Gifts – Part II: Considerations for Legal Compliance and Avoiding Lawsuits

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An organization that is implementing or revisiting its major gifts program should take advantage of that initiative as an opportunity to weave in best practices and other preventative measures that promote legal compliance and help avoid lawsuits. Some of the considerations should include preventing donor intent disputes and communication problems, seeking the help of experts when appropriate, documenting a gift acceptance policy, and taking appropriate precautionary measures when hosting small or informal major gifts fund raising events. 

Prevent Donor Intent Disputes and Communication Problems

As highlighted in Part I, Tips for Implementing a Major Gifts Program, a major gift is often a very personal gesture – motivated by an individual’s personal relationships, passion about a particular mission or cause, or desire to see a certain result from the use of that money. Thus, it is quite common for donors to have a specific intent or place conditions on giving a major gift to an organization. Although organizations would prefer to receive unrestricted gifts, organizations can and regularly do accept restricted or conditioned gifts. Because of the strings attached to such gifts, there is of course always some risk that some disagreement between the donor and organization may arise in the future. However, organizations can minimize the potential for lawsuits and other costly disagreements posed by this risk by taking preventative steps to avoid the common pitfalls of unsuccessful restricted and conditioned gift agreements.

Restricted gifts. A restricted gift is one that can be used only for a particular purpose, in a particular geographic area, or within a particular time frame. For example, a donor can place restrictions that require the gift to be used for a particular program or to not be used on overhead expenses. When an organization accepts a restricted gift, it accepts the donor’s restriction and must honor that restriction. If the organization uses the gift for other purposes, there’s an obvious problem. However, it is not always so obvious when that misuse occurs, especially when both parties’ understanding of the original restriction is unclear.

Take for example, Princeton University which was sued in 2002 for using money from a $35 million anonymous gift to Princeton in 1961 from Charles and Marie Robertson, heiress to the A&P supermarket fortune, on training students for a broad range of careers rather than for careers in government services as allegedly intended by the donors. Princeton took the position that at the time of the gift, “Princeton made clear that it could not accept the gift without legal certainty that the University would maintain control over the Foundation and receive continuous financial support” for the benefit of Princeton. The Robertson family however believed it was given “to prepare graduate students at Princeton's Woodrow Wilson School of Public and International Affairs for federal government careers, particularly in foreign affairs and international relations.” The dispute settled out of court with Princeton University agreeing to return an unprecedented amount of approximately $100 million to cover the Robertson family's legal fees as well as contribute to a new foundation set up by the Robertson family. (For more information, please read our previous post, "Princeton and Robertson Family Donor-Intent Dispute").

Conditioned gifts. Irrespective of spending restrictions, the actual giving of the gift may be subject to certain conditions (i.e., a conditioned gift). Here, the obstacle lies in having a clear understanding of the conditions, satisfying those conditions, and ensuring proper mechanisms are in place to hold both parties to their end of the bargain. A recent example of a conditioned gift gone sour is the story of Bill Davidson, former Detroit Pistons Owner, whose estate was sued by a charity earlier this year after he passed away. The charity claimed Davidson made a $5 million pledge, $4.8 million of which was still outstanding.  As Jack Siegel of Charity Governance Consulting LLC noted, it was speculated that the $5 million pledge was conditioned on 20 other donors pledging to the charity, and there may have been insufficient documentation to support the pledge. The claim was eventually settled out of court.

Another common example of conditioned gifts is naming opportunities (i.e., when the donor gives money with the condition that their name will appear in some distinguished way such as appearing as the name of a scholarship fund or the name of a building). When done properly, naming opportunities may help fill a unique need and provide an organization with more opportunities for increased fund raising. For example, John MacRae, director of major gifts at Harvard Law School, describes scholarships as "one of [Harvard’s] greatest needs. Two hundred fifty thousand dollars will establish a perpetual scholarship fund with your name on it." However, when naming agreements are in dispute, it can turn what should be a celebration into a media circus of bad publicity. Such was the case in 2006 when St. Bonaventure University was stuck at an impasse with long-time donors to the University, Irene and Paul Bogoni, who had pledged $2M for the construction of a new library addition to be named after the Bogoni family. Although the building project was already underway, the donors intentionally defaulted on their pledge alleging misuse of certain funds and unresponsiveness to information requests about increasing costs, while the University alleged the claims were meritless and that the donors were simply failing to satisfy their pledged amounts. The New York Supreme Court ruled in the University’s favor in 2009; the Bogoni’s were ordered to satisfy the pledge amount; and the addition is officially referred to as the Friedsam Memorial Library rare books addition, not the Paul and Irene Bogoni Rare Books Addition. (For more information, please read Jack Siegel's article, "How to Destory Donor Goodwill: St. Bonaventure Pledge Dispute").

How can organizations minimize the risk of disagreements?

Tips for initial communications with prospective donors:

  • Create checklists of specific topics or phrases that may indicate the donor is thinking about giving a gift with restrictions or conditions (e.g., expressed interest in a very specific program).
  • Set up a method for documenting when certain conversations with prospective donors have taken place on the topics of donor intent, gift restrictions, and gift conditions which will require extra attention moving forward.
  • Train those involved in the major gifts program on the basic concept of restricted and conditioned gifts, and create guidelines for communications with prospective donors (e.g., cannot make promises or assertions on behalf of the organization that the prospective donor may rely on).

Tips for accepting restricted or conditioned gifts:

  • Don’t make promises the organization can’t keep. Kathryn Miree suggests consideration of questions such as: Are there any undue restrictions on the use, display, or sale of the property? Are there any carrying costs for the property (insurance, lease space, maintenance to preserve value, appraisal for sale purposes) and are they unrealistic long-term expenses?
  • Ensure the gift restriction is in line with the organization’s mission. Avoid gifts that already pose potential problems. For example, in 1907, a $3 million bequest was left to Swarthmore College on the condition the school cease all participation in intercollegiate sports. Despite desperately needing funding, Swarthmore turned the gift down.
  • Ensure the gift restriction has a net positive impact on the organization. For example, in 2008, the University of Wisconsin Business School decided not to accept a $50 million gift that would cause it rename the school because it was such a turn off to other donors that it would have likely lost money in the end.

Tips for the written gift agreements:

  • Both parties should understand what they are agreeing to and what the gift agreement says before signing the written agreement.
  • Written gift agreements should reflect any restrictions or conditions and address risks in writing, such as clearly outlining the consequences if one side fails to follow through. If the description of the restriction or condition is too vague or ambiguous, the greater the likelihood of a future conflict.
  • Outline alternative dispute resolution options other than court. Kathryn Miree and Winton Smith suggest options include “1) change of gift terms negotiated with living donors; 2) provision for change pursuant to the gift agreement; 3) relief under the de minimus provisions of the Uniform Prudent Management of Institutional Funds Act; or 4) court approved changes.”
  • Organizations should internally track proper management of restricted and conditioned gifts and periodically reread the written agreements to ensure they are acting in compliance with their terms.

Seek the help of an expert when appropriate

There are various bodies of rules that can be triggered by the receipt and use of charitable donations including the federal tax code, state laws governing nonprofit corporations, and accounting rules. Lucky for an organization, there are experts out there that can help. For example, nonprofits can seek the assistance of:

  • Accountants for help regarding timing and the characterization of the gift on financial records (e.g., Financial Accounting Standards Board (FASB) sections 116 and 117).
  • Estate planners for understanding and accepting a planned gift.
  • Lawyers for drafting the gift instrument, vetting the requested restriction or condition, and/or determining the enforceability of a pledge. 

Document Gift Acceptance Policies

Gift acceptance policies are not required by law. Accordingly, an organization may wonder why a gift acceptance policy should matter. The simple answer is it can provide valuable guidance to persons authorized to accept gifts and protect the organization from undesirable gifts or overly burdensome restrictions or conditions.

The new Form 990 reflects the IRS's increased interest in gift acceptance policies. This is evidenced by Schedule M of the new Form 990, which now asks whether the organization has a gift acceptance policy.  Although it is unlikely that this will become a legal requirement, this increased attention should at least alert a nonprofit to its perceived importance.

Take appropriate precautionary measures even when hosting small or informal events

As highlighted in Part I, smaller or informal events have shown to be effective major gifts fund raising events. Unlike large annual events or galas, smaller or informal events may be pulled together quickly. However, organizations should still take potential event liability just as seriously as any other event hosted by the organization. When hosting fund raising events, important considerations suggested by the Nonprofits’ Insurance Alliance of California (NIAC) and the Alliance for Nonprofits for Insurance Risk Retention Group (ANI-RRG) include:

Food Service: An organization should plan accordingly for special precautions with handling and service to avoid food poisoning and contamination. Important details include:

  • Who is handling the food (e.g., employees/volunteers or vendors/independent contractors).
  • Whether permits are required.
  • Whether adequate preparation, storage, and refrigerator facilities are provided for at the location.

Alcohol: Various states have laws that may hold a social party host or commercial vendor liable for injury caused by an intoxicated guest. Before hosting a party where alcohol will be served, organizations will want to take steps to decrease the likelihood of a guest becoming too intoxicated such as:

  • Establishing a procedure for what to do if a guest becomes intoxicated.
  • Organizing the event so as to lessen the likelihood of a guest driving under the influence (e.g., ending alcohol service a couple hours before the end of the event).
  • Using other controls to avoid underage drinking (e.g., checking IDs).
  • Knowing whether your insurance covers events where alcohol is served and asking for advice on how to mitigate other potential risks.

Risk Management Committee: NIAC and ANI-RRG suggest setting up a risk management procedure prior to an event (e.g., a committee designated to periodically check for potential risks during the event such as food on the floor, trip hazards, etc.). They also suggest that the organization document clean-up procedures should any issue or litigation arise.

Insurance: Depending on the particular policy, commercial general liability generally covers a wide range of negligent acts which result in bodily injury, property damage, personal injury or advertising injury to a third party. NIAC and ANI-RRG suggest getting commercial general liability coverage that is provided on an “occurrence” rather than a “claims made” basis. (For an explanation of occurrence versus claims made insurance, please visit the Nonprofit Risk Management Center article, "Who's Afraid of Claims Made?").

 

Part I of this post on "Tips for Implementing a Major Gifts Program" can be read here.

For more information on donor intent, please view our previous post, “Donor Enforcement of Charitable Gift Restrictions – BASF CLE Program”  and additional considerations raised by Kathryn Miree and Winton Smith in their article, “The Unraveling of Donor Intent: Lawsuits and Lessons.”

An explanation about Form 990 and gift acceptance policies is provided in our previous post,
Gift Acceptance Policies.”

NIAC and ANI-RRG address additional insurance and liability concerns in greater detail in their free handbook, “Sound Advice for Functions and Events.”

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