By Kurth Brashear, RL Nonprofit & Tax Exempt Organizations
The most impactful gift a donor can make to an exempt organization they support is an unrestricted current gift. Period, full stop. The charity will either use it to cover its current operating costs or, if it is having a strong fundraising year, may use it for a new effort it has been wanting to launch in furtherance of its mission. Either of those outcomes is a win and they don’t require a great deal of thought.
Every other gift to an organization – whether a restricted current gift or a planned gift to be received in the future – requires more conversation, discussion, and thoughtfulness to ensure the donor’s objectives are met and the organization is positively impacted. This edition explores some of the considerations that the donor and the organization both need to take into account.
Temporarily Restricted Current Gift
A current gift that will be restricted for a limited amount of time or a specific purpose already has a fairly strong understanding. Gifts for capital projects are perhaps the most frequent example of these gifts, with the funds held until the capital project is underway, or completed, and then used to pay for it. When solicited, a specific capital project – a new athletic facility, renovated science labs, a fellowship hall addition – is most often the basis for asking for and making the gift so there isn’t a lot of clarification needed, other than perhaps the payment schedule for the gift if it is pledged.
Alternatively, if it is to provide operating funding, it is most often for one-time expenditures rather than repeatable expenses – supporting the class trip to Europe, using memorial funds to provide a one-time scholarship, enabling an organization to host a regional convention. In these instances, so long as the organization wants to do what is proposed, there are no issues.
What an organization needs to give thought to is a situation where a donor wants to provide one-time “startup” funding for a specific initiative, with the expectation that the organization will find other funders going forward or will build it into its operating budget after the startup period is completed. Unless there’s a multi-year lead time, an organization needs to know its supporters community well enough to know who else it would approach for the second phase of funding.
Permanently Restricted Current Gift
Here is where both the donor and organization need to spend time talking through the details, as the donor will be providing perpetual, ongoing funding and the organization will be limited in how it can use it in the future, whether that is 5, 50, or 100 years from now.
If the permanent restriction is solely that the principal of the gift cannot be spent, but that the earnings and income on it can be used as the organization deems best, the main consideration for the organization is whether there are restrictions on how the principal is invested to generate those earnings. For instance, a gift of farmland in Nebraska can be a tremendous gift, but if it comes with the restriction that the organization can never sell it, serious deliberation would be needed.
If the donor restriction also addresses what the earnings can be used for, how specific is that restriction? An endowment gift that provides scholarships to students at the university likely doesn’t need much deliberation on whether to accept it. The same gift to provide scholarships only to students from a specified rural county who are minoring in Chinese literature should involve a great deal more consideration.
The difficulties that often arise with permanently restricted gifts is that an organization either agrees to a specific type of investment that eventually no longer conforms to its investment policies as they are updated or the restriction on use is so specific that it effectively cannot be used. While the donor can certainly be asked to consider modifying those during their lifetime, once they have passed, unless the restriction provides means of relief, court action would be required. It is critical, then, for both the donor and the organization to think through and discuss possible scenarios while a permanently restricted gift is being solicited.
Planned Gift
During my time as a fundraising professional, few events brought more surprising joy than learning that our organization had been named as a beneficiary of an estate or trust that we had no prior knowledge of. Unfortunately, sometimes, that joy turned a bit more dour when we read the restriction the individual had placed in their will or trust agreement and knew it would have very limited use or, even worse, we would need to decline the gift because we could not fulfill it.
If a planned gift is unrestricted, there will be no issues so long as the organization is in existence at the time of the triggering event. However, before restricting a planned gift in any way, donors, or their representatives, are best served by talking with the organization they intend to benefit with their generosity. That conversation does not need to disclose how much will be provided through the planned gift, but it certainly should include any restrictions the donor is contemplating.
As always, thanks for reading.
This newsletter is for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.
