Armanino Blog

What about Donor Restrictions?

by Tom Schulte
March 23, 2014

Recently, an issue arose in the nonprofit world that brought the issue of donor restrictions into the spotlight.

Many years ago, a well-known Midwest field museum received a major gift with the restriction that the gift was to be used solely to capture and categorize all species and sub-species of a certain moth.

The problem the museum faced was that after an exhaustive census and a thorough categorization of this moth had been completed, there was absolutely nothing else to be done—and there was still a large amount of temporarily restricted net assets available. Like all other exempt organizations, there was no shortage of alternative uses the museum’s Executive Director thought could benefit from the remaining “insect funds.”

Many charities take matters into their own hands and attempt to release the funds from the obligation. They use rationalizations like, “there was ‘wiggle room’ in the charitable intent,” or “the gift was made long ago and the need no longer exists” to justify their actions.

The biggest problem donors (or more often donor heirs) have with these lawsuits is that many courts have taken the position that donors lack “standing” to bring the lawsuit. Courts in many states (including California) have concluded that donors (and thus, their heirs) relinquish all rights once a gift is made.

Even for the donor heir who decides to move forward with a “donor intent” case, there would need to be some deep pockets attached to that fervor. In this case, the charities oftentimes have the upper hand. However, the charity must then decide if the financial drain and possible negative PR attached to a donor intent lawsuit is worth the effort.

What’s An Organization To Do?
If your organization finds itself in a situation like the field museum did, a good place to start is by contacting the donor heirs. Yes, they may lack standing, but if the heirs are on your side, there are very few others who would likely raise an issue. If the original donor is alive and willing to support your cause, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) can be invoked which allows for a renegotiation of a long-term gift.

Organization’s without a living donor can also seek relief under UPMIFA. In California this would generally involves the Attorney General, which can be expensive.

The best way to reduce donor restriction issues would be to create written gift agreements with flexibility included within. Gifts should be accompanied by a written agreement that clearly states what should be done with extra funds should the intent of the funds be fulfilled and a balance remains in the account. This will ensure that there is no doubt as to the donor’s intent.

These flexible agreements should be written with the overarching philosophy that organizational needs change over time and accordingly, restrictions should also change. Flexibility can be defined to indicate under what circumstances these changes can occur, what secondary restrictions might be considered, and who can permit such changes.

As with anything involving donor restrictions, decisions should not be made in isolation. Accounting and legal nonprofit specialists should absolutely be consulted. Clearly it in the best interests of nonprofits that they be able to completely utilize the financial resources available to them but balance that with the desires of their donors.

This is always a delicate balance to be certain but, with proper planning, it is achievable.

Tax Reform Update: Nonprofits

  • An election could be made to make deductible charitable donations for a tax year up to the due date of the tax return in the following year.
  • Individual charitable deductions would have to be in excess of the 2% of AGI limitation as several other Schedule A deductions are now.
  • The valuation of charitable items given would generally be the taxpayer’s tax basis in the item, except for certain items such as publically traded stock, property related to the NFP’s exempt purse, research property, or publically traded stock.

UBIT and other penalties on NFPs would be increased.

March 23, 2014

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