Charitable Gift Agreements

Charitable bequests at death are commonly found in wills and trusts. They are used to implement the decedent’s philanthropic objectives and used, at times, to reduce, or minimize, the decedent’s estate’s exposure to federal estate taxes.

Often charitably inclined individuals make charitable gifts, or bequests with some expectation that accompanies the gift or bequest that the property will be used for a specific purpose. An example that periodically appears in the press is when a large charitable gift is made to a university as part of an endowment that will carry the donor’s family name. The question, then, is what happens when future circumstances change the use of that charitable gift or bequest. This is when a charitable gift agreement is useful to carry out the donor’s intent.

Depending on the size of the charitable gift there may be restrictions that allow the donor, or decedent’s estate, limited control over the future use of the gift, or that the gifted asset to be held by the charity will be invested or disbursed pursuant to certain agreed upon terms. Yet another provision often tied to the size of the charitable gift is the gift to the charity will result in naming a building or a project after the donor, or the donor’s family. However, at times future events may prompt the donor (or the donor’s descendants) to ask that the donor’s name be removed from the facility or the fund. Or, a restriction imposed on the gift or bequest is too narrow, so that the charity may not be able to use the funds for their intended purpose indefinitely.

This frustration of purpose can be addressed with a contract provision that states that if the gift or bequest later becomes impracticable, impossible, or no longer in alignment with the charity’s mission, the charity may use the gift as closely to the donor’s intent as possible, without the need to obtain the donor’s consent, or if the donor is deceased, the donor’s descendants’ consent. Equally important is that no third party can be given the authority or power to revoke the charitable bequest, which is required in order to preserve the estate tax charitable deduction while also avoiding litigation costs when the gifted funds are diverted to a different use or purpose.

From the charity’s perspective, a required gift agreement as a condition of the gift will prompt it to ask significant questions of itself whether it can manage the proposed gift restrictions in a cost-effective manner remaining consistent with the charity’s mission.

Large charitable gifts that are often accompanied by a charitable gift agreement will include options for anticipated changes in circumstances that may cause the charity to divert the gift to other purposes. Media examples sometimes report these clashes between the charity and the donor, or the donor’s family members, when the donor’s expectations for the gift was made do not materialize, or the donor’s intent is frustrated by the charity’s use of funds in a different manner than was initially anticipated. That is why it is important to discuss the donor’s expectations and clearly express them in a comprehensive gift agreement with the charity. In doing so, the donor, or his or her estate, will then realize, even in the context of creating an endowment fund for the charity, that the donor is relinquishing considerable control over the donated funds.

Donors must also keep in mind that retaining too much control over the charitable gift will invalidate a charitable tax deduction, either for income taxes or estate taxes. Accordingly, while the use of conditions and restrictions is understandable, if the effect of those restrictions or conditions is that the donor indirectly retains control over the gifted funds, no tax deduction will be available.

Several topics or principles should be addressed in every gift agreement.

Transfer of the Gifted Property: The gift agreement should be clear on how the gift, cash or property will be delivered to the charity.

Legal Standing: If the charity departs from the donor’s expectation of the use of his or her charitable gift, or the donor’s intended purpose for the gift, the donor, or the donor’s descendants, should reserve legal standing to challenge the charity’s use of the gifted funds in court. Having legal standing to challenge in court the charity’s impermissible use of the gifted funds is not always a given. A few states give the donor, or his or her descendants, legal standing to enforce the charitable gift agreement, while in other states no legal standing is conferred on the donor or his or her family, and only the state’s Attorney General possesses the authority to challenge the charity’s use of the funds.

Conditional Charities: If there is a condition that must be met for the charitable gift to be received by the specified charity, it makes sense for the donor to identify in the gift agreement a contingent charity which would then receive the charitable gift if the contingency were not met. For example, assume that the donor wishes to make a matching gift to a university to add a wing to the university hospital, offering a $5 million gift to be matched by the hospital within five years. If the university is unable to match those funds, the portion of the gift which is unmatched would then go into the donor’s donor-advised fund sponsored by the donor’s local community foundation. By using such a gift agreement, there is a clear contingency, a clear timeline in which the contingency must be met by the charity, and an alternate charity identified, so everyone (donor, the donor’s descendants, and the charity) all know where the gift money will go if the conditions are not met.

No Side Agreements: A donor must realize that a gift agreement with the charity is a contract. Consequently, there must be other provisions usually found in contracts to make the agreement enforceable and binding. These contract boilerplate provisions are at times as important as the other provisions of the gift agreement.

Investments: Sometimes the gift agreement will specify how the gifted funds will be invested by the charity, or who will make the investment decisions;

Endowments: If an endowment is to be established for the charity with a gift, the agreement should address whether the assets may be merged or pooled for investment and investment management purposes with the charity’s general endowment or other assets of the charity, managed, and reported to the donor.

Other Contract Provisions: Additional contract provisions that need to be included in the gift agreement include:

Parties- the agreement needs to clearly identify the parties, both the donor and the donee-recipient e.g., whether it is the donor’s personal funds, the donor’s donor advised fund, or the donor’s trust;

Situs- it is important to identify which court has jurisdiction to interpret and enforce the contract;

Governing Law- the donor and the charity may be in different states, so it will be important to identify in the contract which state’s laws will be used to interpret, or enforce, the contract;

Merger- the donor and the charity both need to understand that there are no side-agreements that can be used to interpret the contract and that anything that was discussed but not part of the written agreement will not be available to explain the donor’s understanding or purpose for the gift;

Counterparts- both the charity and the donor will have copies of the agreement, so it will be important to adopt the principle that each of the copies is a counterpart of the same agreement;

Amendment- a provision should identify if the gift agreement can be amended or modified in the future. If so, those changes will need to be in writing and signed by both the charity and the donor, or the donor’s designated agent (or descendants).

For a charitable bequest, the creator of the will or trust will need to direct the fiduciary in charge of their estate or their trust to require a gift agreement with the charity before the assets or funds can be distributed to the charity. That directive in the will or trust will then specify what terms and conditions that decedent imposes on the charitable bequest and also what other contract terms the gift agreement must have.

To ensure that a charitable gift accomplishes what the donor intends, it is important to make sure that a thoughtful charitable gift agreement is used, that the agreement is written, and that it contains all the specific requirements or conditions for the gift. This will eliminate confusion and avoid future legal disputes over the use of the gifted funds to better assure the donor that his or her philanthropic wishes will be carried out by the charity.