When a donor makes a restricted gift—whether it’s to construct an animal rescue shelter or purchase iPads for an after-school program—you are legally bound to follow the conditions of the gift.
In fact, if you don’t honor donor intent, you may find yourself saying, “Yes, Your Honor.”
Disgruntled donors routinely take nonprofits to court when they feel their wishes have not been honored. Courts can—and do—order organizations to return a gift and pay additional damages.
In a well-publicized case, country music superstar Garth Brooks was awarded $1 million in 2012 by an Oklahoma jury that found a hospital had defaulted on an oral agreement to construct and name a women’s center after the singer-songwriter’s late mother. Brooks claimed that the hospital’s president suggested the gift be used to construct a women’s center and that he made the donation for the sole purpose of constructing such a center to honor his mother. Even though the agreement was never made in writing, the jury eventually found in favor of Brooks—awarding him punitive damages of $500,000 in addition to the return of the $500,000 donation.
To head off issues involving gift restrictions and donor intent, consider these key steps:
- Educate donors. Impractical restrictions from the donor could cause funds to sit idle if gift restrictions cannot be honored.
Solution: Make sure that donors understand that restricted gifts can have unintended consequences. Encourage the use of nonbinding language in your written gift agreement—language that enables your organization to use the funds for other charitable purposes if it is not possible to apply the funds to the originally intended purpose.
- Get it in writing. Without a written gift agreement, you open yourself to the potential for time-consuming (and expensive) legal “he-said, she-said” arguments.
Solution: Head off issues by documenting all gift agreements. Develop an agreement that spells out a) that the gift is irrevocable, b) the expectations of the parties, and c) any specific restrictions. The document should also designate who is authorized to make changes to the gift purpose, as well as the types of changes that can be made without court or donor approval. If the gift comes with no restrictions, be sure to expressly communicate that in the written agreement, including verbiage to the effect that the gift can be used at the nonprofit’s discretion.
- Account for it. Without an effective accounting system in place, it becomes difficult to ensure that restricted funds are being spent in accordance with the donor’s intent.
Solution: Implement an accounting system for tracking expenditures, as well as internal policies, procedures and controls to ensure proper expenditure of funds.
- Carefully consider changes in use. Perhaps the cost of administering the gift now outweighs its charitable benefit. Or, maybe the gift’s initial purpose no longer supports the organization’s mission. Whatever the case, nonprofits wind up in trouble when they make change-of-use decisions unilaterally through a process that does not involve the donors or their descendants (or the courts).
Solution: Include donors in the discussion—they are often very willing to negotiate the terms of their gifts to adapt to the changing needs of the organization. Another approach is to have donors establish upfront a contingent purpose for their gifts if it’s not possible to apply the funds to the donor’s primary purpose.
- Review current gift agreements. It is almost always easier to work with a living donor to alter the conditions of a restricted gift than struggle with the donor’s heirs over intent.
Solution: Sit down now with existing donors to review and revise any restricted gift agreements.
By following these five guidelines, your nonprofit will be well positioned to avoid issues involving gift restrictions and donor intent—and avoid a court date with an unhappy donor.
September 24, 2014
