The Pension Protection Act of 2006 resulted in new attention to a long tradition of charitable giving coupled with an appropriate measure of donor input – the use of “donor advised funds.” In deciding a dispute about administration of a donor advised fund, a recent case of first impression extended the idea of “completed gift” (the legal concept that a donor gives up the right to control donated funds) to a principle that could allow charities to misapply contributions with some measure of impunity.
In Styles v. Friends of Fiji, No. 51642 (Nev. 2011) (unpublished opinion), the Nevada Supreme Court upheld a district court ruling that a donor did not suffer damage, and therefore could not maintain a contract action, even after Friends of Fiji (FOF) breached the implied covenant of good faith and fair dealing by failing to attempt “in any way” (the Court’s words, not mine) to satisfy the donor’s charitable goals. The Court explained that the donor gave up any interest in the donated funds under the parties’ donor advised fund agreement, and therefore the donor did not have the right to control the use or expenditure of the funds.
Taken to an extreme, the analysis in this case might close the door to any donor enforcement of gift terms and conditions in a donor advised fund or in other contexts, leaving that job to the states’ attorneys general. Donors and charities should resist the temptation to plan around that extreme, however, and should work together in a spirit of mutual trust and cooperation to accomplish the proper charitable goals of both parties. The correct balance of the law is that donors don’t get the right to call the shots (especially in Nevada), but at the same time charities should not get a free pass to abdicate proper stewardship of donated funds.