Thursday March 28, 2024

1.9.1 Donor Intent and Gift Restrictions

Donor Intent and Gift Restrictions

Overview:  It is not uncommon for a Donor to place certain restrictions on gifts to charity. Gifts made with donor restrictions are known as "restricted gifts" as contrasted with "unrestricted gifts".

Impact of Restrictions on Charitable Deduction:  Charities, donors and professional advisors should use careful planning when considering gift restrictions.

Ethical Obligations to Honor Donor Intent  Gift restrictions, particularly use restrictions, evidence donor intent. Charities and fundraising professionals have an ethical and professional obligation to respect the intent of their donors.

Donor Education About Restrictions:  While charities and fundraising professionals have an ethical obligation to honor donor intent, there is nothing wrong with a charity approaching a living donor to request that the donor waive or modify a gift restriction for an already completed gift.

Prohibitions Against Self Dealing:  If a donor has made a legally-binding pledge to a charity, the DAF may not fulfill that pledge on behalf of donor.

Sample Pledge Agreement:  You can find a sample pledge agreement here.

Overview


It is not uncommon for a Donor to place certain restrictions on gifts to charity. Gifts made with donor restrictions are known as "restricted gifts" as contrasted with "unrestricted gifts". The nature of a gift's restriction can take a variety of different forms. The most common restrictions limit the way charity can utilize the gift (a purpose restriction) or the time by which the gift must be utilized (a time restriction).

Impact of Restrictions on Charitable Deduction


Charities, donors and professional advisors should use careful planning when considering gift restrictions. A charity needs to consider whether it will be able to make use of the gift in light of any restriction. Donors and advisors need to take care to ensure that any restrictions are not so burdensome as to jeopardize the donor's charitable deduction.

According to Treasury Regulations, donors are not permitted to take a deduction in cases where a gift is conditioned upon the occurrence of an event precedent unless the condition "is so remote as to be negligible." Treas. Reg. § 1.170A-1(e).

Likewise, gifts that could be defeated upon the occurrence of an event, such as a gift subject to a "reverter" clause, are not deductible unless the possibility of the occurrence is so remote as to be negligible.

Example 1.9.1A

Billy Naire owns acres of undeveloped, prime real estate in the center of town. He made a gift of 10 acres to the city with a stipulation that the land be used as a public park. The city council had been considering expanding its parks and, at the time of the gift, planned to use the land for a park. Despite the restriction, the possibility that the city would not use the land as a public park is so remote as to render the restriction negligible. As such, Billy would be entitled to a deduction under Section 170 for his gift.

Any gift restriction must be imposed at the time of the gift. If a donor retains the right to place conditions on a gift at a later date, this could render the gift incomplete, thus denying the donor a charitable deduction. The prohibition against future conditions, however, does not apply in cases where the donor has retained the right to make non-binding recommendations of future distributions out of previously contributed property, as in the case of a Donor Advised Fund.

Ethical Obligations to Honor Donor Intent


Gift restrictions, particularly use restrictions, evidence donor intent. Charities and fundraising professionals have an ethical and professional obligation to respect the intent of their donors. In order to foster donor confidence, various fundraising organizations have adopted the Donor Bill of Rights which state, in part, that donors have the right to "be informed of the organization's mission, of the way the organization intends to use donated resources, and of [the organization's] capacity to use donations effectively for their intended purposes" and "to be assured their gifts will be used for the purpose for which they were given."

Donor Education About Restrictions


While charities and fundraising professionals have an ethical obligation to honor donor intent, there is nothing wrong with a charity approaching a living donor to request that the donor waive or modify a gift restriction for an already completed gift. The donor may be quite willing to consider modifying a prior restriction if asked.

Example 1.9.1B

Ten years ago, Portia Ferrari made a $5 million restricted gift to the university. The restriction required that the funds by used to complete construction of a new building to house the Endo Ferrari Laboratory, named after Portia's husband, that the engineering school would use to study automobile safety. Since the time of the gift, university has decided to renovate several existing buildings rather than build the new building. University approached Portia to ask if she would modify her restriction and allow the funds to be used for renovations. Portia agreed so she asked her lawyers to draft an amendment to her original gift agreement permitting the university to use the funds for renovation.
It is also permissible for a charity or gift planner to educate donors about the problems related to gift restrictions. There are a number of successful strategies charities can use with the hopes donors will avoid more difficult restrictions. These strategies include:

  • Educating donors about the most pressing needs of your organization. While donors may have a specific cause that moves them, in their hearts, they want to make a difference. Try being very up front and direct with a donor about how the donor can give and make the greatest impact.
  • Suggesting the donor add language to a gift or pledge agreement that sunsets any restrictions after a stated period of time. This sunset language would allow the charity to use the restricted funds for another purpose if the funds remain unexpended after a stated period of time.
  • Suggesting the donor add language to a gift or pledge agreement that allows the charity's board to repurpose the gift if the original purpose is no longer practical. This language might give the charity's board the ability to waive the condition if the board decides the purpose cannot be met but would provide that the board must use the funds in a manner most consistent with the intent of the donor.

Prohibitions Against Self Dealing


If a donor has made a legally-binding pledge to a charity, the DAF may not fulfill that pledge on behalf of donor. The payment by a DAF of a pledge will constitute a "more than incidental benefit" to the donor and is not permitted. Sec. 4966(a). See also GiftLaw Pro Chapter 7.1.8. Sample Pledge Agreement

Sample Pledge Agreement


This Pledge Agreement ("Pledge") is entered into as of the ___ day of ____, 20__, by and between ________, whose address is _______________ ("Donor") and ___________, a nonprofit corporation with a principal address of _________________________ ("Charity") for the purposes set forth herein and agreed to by Donor and Charity (collectively the "Parties").

NOW THEREFORE, in consideration of the mutual agreements set forth herein, in reliance upon those agreements and for other good and valuable consideration the sufficiency of which is hereby acknowledged by the Parties, the Parties agree as follows:

  1. Donor Pledge. Donor hereby irrevocably agrees to give to Charity the amount of _________ Dollars ($_______.00) (the "Pledge"). Donor agrees to make _____ separate installment payments of $_______ in satisfaction of the Pledge in Donor's discretion, however, Donor agrees that the first installment of $___________ will be paid no later than December 31, 20___ and that the unpaid balance of the Pledge, if any, will be paid not later than December 31, 20___.
  2. Payment Method. The Parties agree that Donor may, at Donor's discretion, satisfy the Pledge obligations contained herein by making payments in cash, in marketable securities, or a combination of cash and marketable securities. In the event securities are used to satisfy the Pledge, the value of the securities shall be determined by averaging the high and the low prices for the securities on the date of transfer to Charity.
  3. Consideration. In consideration of Donor's Pledge, Charity agrees to recognize Donor by way of the following actions: ___[i.e., Naming Rights]___________________. Donor acknowledges that Charity has relied on the Pledge and the promises of Donor contained herein including by refraining from soliciting other funds from other Donors including by being unable to offer similar rights or recognition to other donors and prospective donors. Accordingly, this Pledge is irrevocable and a binding and enforceable claim against Donor.
  4. Use of Pledge. Charity agrees to use the Pledge and all proceeds there from as described herein and only for charitable purposes as defined by Section 501(c)(3) of the Internal Revenue Code of 1986, as amended ("IRC").
  5. Unsatisfied Pledge. Donor acknowledges and agrees that the Pledge is a personal liability of Donor and that to the extent there is an unpaid balance of the Pledge, Charity shall have a valid and enforceable claim against Donor, Donor's assets, estate, heirs, successors and assigns, and as against the assets in any revocable trust Donor that has or may establish for the benefit of himself or any third party.
  6. Source of Pledge Funds. Donor acknowledges that the Pledge may not be satisfied in whole or in part with the use of any funds held by, contained within or previously contributed to a private foundation or a charitable remainder trust if such use would constitute a violation of the provisions of Section 4941 of the IRC (dealing with self-dealing).
  7. Restrictions & Limitations on Restrictions. (OPTIONAL)
    1. 7.1    Restrictions. Charity shall use the funds pledged hereunder only for the following purpose: _______________________________________________ (the "Restricted Purpose").
    2. 7.2    Limitation on Restrictions. Notwithstanding the Restricted Purpose set forth in Section 7.1, the parties agree that if either: (1) the Restricted Purpose has not been completed within 20 years after the date of this Pledge; or (2) Charity's Board of Directors ("Board") shall determine, by an affirmative vote of a majority of the Board, that Charity is unable to use the Pledge to fulfill the Restricted Purpose, then Charity may use the Pledge for such purposes as Board shall determine is most consistent and in furtherance of the Donor's intent as contained in this Pledge.


    WHEREFORE, the parties have executed this Pledge as of the date first set forth above.

    CHARITY

    Name of Charity: ____________________________

    By (Signature of Officer): ______________________

    Name (Print Name of Officer): __________________

    Its (Officer's Title): ___________________________


    DONOR

    (Signature of Donor): _________________________

    Name (Print Name of Donor): __________________

Private Letter Rulings

PLR 200207028 No Self-Dealing Where Disqualified Person Purchases LLC Interests From Charitable Lead Trusts:   H and W created a trust during their lifetimes. Upon H's death, the trust was divided into a survivor's trust and a decedent's trust. The decedent's trust was primarily to benefit W's children and grandchildren. However, the survivor's trust was to benefit an individual during W's lifetime, but at W's death would fund a charitable lead unitrust (CLUT) and a charitable lead annuity trust (CLAT). Both charitable lead trusts (CLTs) were designed to benefit W's private foundation, with the eventual remainder to W's family.


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