In the June 2015 issue of Pieces of the Puzzle, Bridget M. Weiss and Meredith B. Walsh discussed the advantages and pitfalls of donor advised funds and private foundations for long-term charitable planning. In this issue of Pieces of the Puzzle, the authors outline the key considerations when partnering with a charity to implement a specific project or creating an endowed fund.

Many donors can realize their charitable goals through a simple donation to the public charity of their choice. However, once the donor issues such a “blank check” to a charity, the charitable organization has the freedom to direct the funds as it sees fit, without any consideration for the donor’s goals or long-term vision. Creating an endowed fund or funding a specific project at a charitable organization, governed by a clear gift agreement, allows a donor to shape and direct the organization’s work and mission by restricting the funds for a specific use by the charity.

These types of restricted gifts are ideal for donors who have a clear goal and recipient in mind. For example, would the donor like to establish an endowed Chair to support the salary of a professor at the donor’s alma mater? Or does the donor wish to fund a museum’s acquisition of a major piece of artwork and provide an endowment to pay for the continued care and maintenance of the piece? Is the donor interested in funding research to combat a disease that has affected the donor’s family? Gifting opportunities exist for every avenue of philanthropy.

While such gifts are most often ultimately a positive transaction for both the donor and the recipient, a well-negotiated gift agreement is a necessary tool to ensure that both parties understand the donor’s goals and that the charity will implement the gift in a manner that respects the donor’s intent and legacy.

Importance of the Gift Agreement

Through the gift agreement, the donor establishes the conditions that will be imposed on the charity’s use of the funds, and the charity’s responsibilities with respect to the gift. Among the key elements of the agreements are the following: „

  • Program description: The agreement should contain a detailed description of the charitable program that the funds will be used for and specify how much discretion the charity has in implementing the program—and even where the charity has discretion, the agreement may still empower the donor to serve in a non-binding consultative capacity (such on an advisory committee) with respect to the operation of that program (for example, advising on the selection criteria or number of awards for a scholarship program). In the event of changed circumstances – for example, the program is no longer consistent with the charity’s mission or becomes impractical – the agreement should specify how the funds will be directed (e.g. to another use by the charity or to another charity altogether) and whether the donor or the donor’s heirs should be consulted before the funds are redirected. If the agreement does not specify how a change in circumstance should be addressed, the appropriate state’s Attorney General or court would have the authority to determine whether or how the funds should be redirected. „
  • Payment terms: If the donor wishes to make a substantial gift over a number of years, the agreement should specify the payment schedule and may even tie future installments to achievement of program objectives (for example, construction milestone in the case of a donation to fund construction of a sports facility). „
  • Naming rights and publicity: A donor may wish to receive public recognition for his or her donation or may wish to honor a loved one with a gift. Charities will often agree to grant naming rights or other public recognition when a significant gift is made (such as for the funding of a new building or the establishment of a scholarship at a university). The gift agreement will govern the terms of the naming rights – for example, whether the donor’s naming rights will continue in perpetuity or expire after a term of years. Conversely, if a donor desires anonymity, public disclosure is not required (though the gift will be reported to the IRS on the charity’s tax return).
  • Investment: Where the gift is substantial enough to create an endowment for the long-term support of a program, the gift agreement should specify the annual payout requirement, how the funds will be invested and whether, or under what conditions, the principal can be invaded. Such clauses enhance the likelihood that the gift will be deployed exactly as the donor intends.
  • Enforcement: The gift agreement can contain “teeth” to ensure that the charity does not divert the funds for another purpose; the charity can be required to provide regular programmatic and financial reports, be subject to audit by the donor, and, if the charity does not live up to its requirements, the donor can cease making any remaining gift installments and even redirect the funds to another charity. The gift agreement can even provide the donor or the donor’s heirs with legal standing to enforce the terms of the agreement in court or with the state attorney general (though state laws differ).

Tax Benefits

Gifting to public charities provides a very high tax benefit per charitable dollar.1 Donors may deduct the full, fair market value of long-term capital assets given to a public charity – against up to 30% of his or her adjusted gross income. Donations of short-term capital assets are only deductible to the extent of a donor’s basis in the asset (the amount paid for the asset) – however, along with cash, short term capital assets are deductible against up to 50% of the donor’s adjusted gross income. The balance of the gift may be carried forward and used as a deduction for up to five years.

Start Up and Administration Costs

A donor may expend legal or other fees in connection with negotiating or enforcing a gift to an existing charity, but such a gift otherwise involves minimal start up or administrative costs on the part of the donor. The charity will be responsible for any reporting and compliance requirements triggered by the gift, in addition to whatever operational or administrative costs required to implement the gift.

The creation of a gift to a public charity to fund a specific project or for an endowed fund is ideal for:

  • Donors with specific charitable goals;
  • Donors with an established relationship with a charitable organization;
  • Donors seeking to control the publicity or anonymity of a charitable gift; or
  • Donors seeking maximum tax benefits and low start-up, administrative and oversight costs.