Restricted Gifts: What You Can And Can’t Do

March 31, 2017       Andy Segedin      

There is much public and media interest in from where organizations are receiving their charitable gifts. It runs from allegations of pay-to-play relating to presidential nominee Hillary Clinton’s foundation to questions about who was donating to President Donald Trump’s foundation to instances of organizations naming fixtures after donors only to regret it later.

Organizational leaders can easily see what sorts of precarious situations they might find themselves in.

With these risks in mind, Venable LLP, a Washington, D.C.-based law firm hosted a seminar on March 30 to discuss the dos and don’ts of receiving charitable gifts. It was moderated by Jeffrey S. Tenenbaum, partner and chair of the firm’s nonprofit organization practice, and conducted by Robert L. Waldman, partner and chair of the firm’s business division, and Rebecca Rothey, vice president, development and senior development advisor for The Community Foundation for the National Capital Region. It focused on permissible and impermissible restrictive gifts and how organizational policies can be used to avoid and remedy difficult situations.

A general guideline when considering restrictive gifts, according to Waldman, is to decipher whether the restriction benefits the donor more than the gift benefits the recipient and whether, if the restriction were made public, it would cause embarrassment for the organization. Rothey offered an example of a health center that accepted a gift during the 1960s to construct a building, however the restriction was that it was to be used for white patients only. A high-profile court case ensued and, while the matter ended up being resolved with no such restriction required, the public relations damage was done.

Permissible restrictions include a specified purpose consistent with the charity’s mission and needs, a reasonable holding period, and an incidental benefit to the donor. For example, a donor’s mother is in the hospital and, impressed with the care that she has received, the donor makes a gift to the hospital. While the gift might indirectly benefit the mother, the gift is still legitimate to receive, Waldman said.

On the other hand, if the donor attempts to donate non-disposable assets, provides a gift subject to conditions such as a family member serving as administrator of the gift, retains use of a gift such as a donation of property subject to a family member being able to live there for the rest of his or her life, or seeks a commercial benefit such as a gift to a hospital subject to referrals, the gift is not acceptable. Additional red flags to consider include an unknown donor seeking to make a large gift at the very end of the year and restrictions inconsistent with the organization’s charitable purpose. Engaging in activity outside the organization’s charitable purpose jeopardizes the organization’s tax exemption, said Waldman.

When issues do slip through the cracks, organizational leaders have essentially three options, according to Waldman:

* Distance themselves from the situation: Sometimes asserting that the organization is innocent and that the issue is the donor’s business is the right answer. That might not go far in the realm of public opinion;

*  Leaders might consider returning a gift. This is not easy, as organizations are readily able to just return assets and such an action might set precedent – making past donors feel as though they can seek donations back; and,

* Waldman’s preference is to help craft a solution. If a facility was named after an individual that has since come under scrutiny, change the name and get out in front of the issue by crafting a solution.

Other considerations discussed during the seminar include:

* Respect donor privacy. Means of achieving this might include having staff sign a confidentiality agreement. Another method, according to Rothey, is to follow the lead of organizations such as the National WWII Museum in New Orleans, which has a written commitment to donors to protect their privacy;

* Develop a gift acceptance policy. Policies include the organizational mission, purpose, and how gifts are processed. They might also set up thresholds for gifts large enough to come under the authority of a gift acceptance committee or, in some cases, the organization’s board. Policies can also be used to politely decline gifts that would not be in the organization’s interest to accept. Another example of policies in action are “dean’s taxes” that require 15 percent of any gift to go to operating expenses as opposed to a restricted use; and,  

* Protect yourself. Simple Google searches can be an effective step toward due diligence. Insurance and indemnification agreements are other means of safeguarding an organization.

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