When can charities be required to return restricted gifts to donors? While a gift is considered complete when accepted, there are times when donors can not only enforce restrictions but also have their gifts returned from noncompliant charities.
On January 24, 2012, an Oklahoma jury awarded country singer Garth Brooks $1 million in a lawsuit in which Brooks claimed that a hospital defaulted on an oral agreement to construct and name a women’s center after his late mother in exchange for a $500,000 donation. Brooks had several meetings with the hospital’s president in which they discussed the donation. The hospital claimed that the gift was unrestricted and that only after the donation was made did Brooks state that he wanted the funds used to construct a women’s center in honor of his mother. Brooks claimed that the hospital’s president suggested the gift be used to construct a women’s center and that Brooks made the donation for the sole purpose of constructing such a center. The agreement between the parties was never committed to writing, and 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.
That same day, a former board member of The Second Mile, a charity founded by former Penn State assistant coach Jerry Sandusky, filed suit against the charity, demanding the return of a $250,000 donation. The former board member claimed that the donated funds should be returned to him since, due to the recent scandal surrounding Penn State and the charity, the charity would not be able to use the funds for the intended purpose – the construction of a youth center. The former board member further claimed that the charity had agreed to return the donation pending approval from the state attorney general, but that no such refund had occurred as of the date the complaint was filed. Subsequently, the former board member withdrew his lawsuit, deciding it was best to delay litigating the matter while The Second Mile was in the process of determining how best to honor donative intent reflected in the former board member’s gift agreement and similar agreements with other donors.
This article looks at restricted gifts, charities’ responsibilities and some object lessons from these recent cases to which charities will want to pay attention.
What are donor-restricted gifts, and how do they pose challenges to nonprofits?
A donor-restricted gift is a gift whereby the donor has designated or “restricted” the use of the donated funds or property to a particular purpose or project. Examples include a gift to a scholarship fund at a university and a gift to be used for the construction of a new building at a school. However, these gifts can be as simple as handing a CEO or a pastor a check on which the donor has spelled out a restriction – such as for a school endowment or new asset purchase. Charities should consider that specific solicitations can also result in restricted gifts – such as when a hospital engages in fundraising for a new emergency room. And sometimes, as the Brooks case illustrates, donors initiate the conversation and expect that agreeable recipients will honor enforceable restrictions.
When a donor makes a restricted gift, the nonprofit recipient is legally bound to adhere to the gift restrictions absent consent by the donor to alter the restrictions or a cy près judgment by a court. The cy près doctrine empowers courts to modify or release donor restrictions when compliance with those restrictions becomes sufficiently problematic. While the cy près doctrine can provide an avenue to circumvent certain gift restrictions, it is applied only under very limited circumstances as, for example, when the terms of a charitable trust or a charitable gift under a will become impossible, impracticable or illegal to honor after the donor’s death, due to evolving societal needs.
Assuming a donor does not consent to changing a gift’s restrictions and a cy près judgment is not rendered, a nonprofit can be compelled to return a gift and pay additional damages to the donor if the nonprofit does not use the funds for the purposes set forth by the donor.
How can nonprofits address the challenges posed by donor-restricted gifts?
Put it in writing! Whether a gift is “restricted” is ultimately a factual determination for the jury, which may be likely to connect with, and possibly favor, a high-profile donor who is endeavoring to do something generous in the name of a deceased loved one. As detailed above, in the recent Garth Brooks case, where there was no written agreement, the hospital argued that Brooks gave it unrestricted access to the funds, while Brooks argued that the donated funds were to be used specifically for the construction of a building in honor of his late mother. Written gift agreements can protect nonprofits from such “he said-she said” scenarios left in the hands of emotionally charged juries.
Written gift agreements should state that the gift is irrevocable; detail the expectations of the parties (if any); state consideration; and be signed by both parties. If the gift is restricted, the specific restrictions should be expressly and clearly provided for in the written agreement. If the gift is not restricted, the written agreement should expressly provide that there are no restrictions and that the donation can be used at the nonprofit’s discretion.
Nonprofits should also develop ways in which to educate donors about the unintended consequences of restricted gifts. Specifically, a nonprofit should inform donors that it may not be possible to honor certain gift restrictions and that when such restrictions cannot be honored, the donated funds can sit unused for an indefinite period of time. Nonprofits should also inform donors that if unrestricted gifts are made, the nonprofits may be able to avoid proceedings to modify impracticable restrictions and use funds that would otherwise be spent on legal fees for charitable purposes.
If a donor is committed to connecting his or her gift to a specific purpose, nonprofits should encourage the use of nonbinding language in documenting the donor’s written intent. The nonprofit should explain that such “precatory” language will enable the nonprofit to apply the funds to the intended purpose, if possible. If it is not possible to apply the funds to the intended purpose, the nonprofit then has the flexibility to use the funds for other charitable purposes without a court proceeding.
Nonprofits should also inform donors that they have the ability to direct that their funds be applied to a contingent purpose in the event that it is not possible to apply the funds to the donor’s primary purpose. Nonprofits can include a section in their standard gift agreements inviting donors to provide for such instructions. In the recent lawsuit brought by the former board member of The Second Mile, the purported written commitment directs that the donation be used for the construction of a specific building under a specific charity campaign. Had the former board member been encouraged to consider other charitable purposes, there could still be a viable charitable project to which to apply the funds.
Finally, if a nonprofit is presented with a donor-restricted gift arrangement setting forth stringent parameters that are either not possible or impracticable, or do not fit within the mission or objectives of the nonprofit, the nonprofit should not accept the gift. The acceptance of such gifts could result in costly court proceedings and create liability for the nonprofit down the road that would otherwise be avoidable.
Donor-restricted gifts can undoubtedly cause problems for nonprofits. However, nonprofits can proactively address these problems by documenting all gift agreements in detailed writings, educating donors on the consequences of restricted gifts and providing donors with alternatives to restricted gifts. In addition, while nonprofits certainly benefit from donations, these organizations must be able to adapt to changing circumstances over time and thus should not accept gifts with stringent restrictions that will hinder the objectives of the nonprofit. Flexibility in gift agreements will better ensure that both the donor’s intent and the nonprofit’s objectives are furthered in the long term.
Tara M. Walsh focuses her practice in the areas of tax, estate and business planning, as well as trust and estate administration and fiduciary litigation. Ms. Walsh works with high-net-worth individuals, owners of closely held businesses and executives in their estate and personal planning. Prior to joining Stradley Ronon, Ms. Walsh served as a law clerk to the Hon. J. Wesley Oler in the Cumberland County Court of Common Pleas in Carlisle, PA.
John C. Hook provides estate planning and tax advice to high-net-worth individuals, executives, entrepreneurs and owners of closely held businesses. The goal of such planning is to reduce or eliminate estate and gift taxes for clients. He also counsels clients in the area of asset protection and the creation of offshore asset-protection vehicles – vital components of estate planning for high-net-worth individuals, executives and entrepreneurs.
Russell J. Ressler represents and counsels high- net-worth individuals, owners of closely held businesses, and numerous financial and nonprofit/charitable organizations in areas including estate, business and tax planning; asset protection; trust and estates administration; and fiduciary litigation. Mr. Ressler's estate, tax and business planning practice includes advising clients concerning all aspects of wealth transfer strategies, asset protection and business succession. His fiduciary litigation practice includes all forms of estate disputes, trust disputes, will contests, objections to accounts, surcharge actions, removal actions, governance and administration of nonprofit charitable organizations, cy pres proceedings and guardianship proceedings.