Ethical Issues And The Planned Giving Donor

Most of the things Mike Patterson sees in his position as associate vice president of planned giving for the Arthritis Foundation in San Antonio, Texas, are pretty straightforward. Any ethical dilemmas he encounters might only be hypothetical.     

“That’s not to say that the planned giving community doesn’t occasionally run into these issues,” Patterson said.     

For example, one hypothetical situation might be: should you accept a planned gift from someone who you know received or raised the money illegally?


Educating potential donors about what they can or cannot do in terms of a gift is important. “Obviously, with everything we do in planned giving, that’s our job,” he said.     

People in planned giving meet with those who are interested in making a gift to determine, and help achieve, their goals by working with the organization, Patterson said. Potential donors might have questions about how to make a gift, he said, and it’s up to planned giving professionals to listen and take them step by step, explaining why they can or cannot do something, and “try to find a way to make it work.”     

“Ninety-nine percent of the people who are out there are straight shooters, they want to do the right thing,” Patterson said. “Ninety-nine percent of the charities are composed of good people trying to do it the right way. Like any industry, you have one or two bad apples out there, but they are very, very few and far between.”     

The overriding issue in planned giving is to make sure the donor is fully aware of the implications of the gift on their own estate planning, according to Alexander “Sandy” Macnab, president of Alexander Macnab & Co., a Chicago-based fundraising and development consulting firm. He cited an example of Covenant Trust, a planned giving arm of North Park University, where planned giving officers must be able to show that a donor has at least $100,000 in liquid assets outside of their planned gift.     

“They’re making it very clear to anyone involved in their program, that of course they want to secure the gift, but they also want to ensure they’re not putting the donor in any adverse situation,” Macnab said. That’s the difference between philanthropic planners and insurance or financial salespeople, he said. “They’re selling product, they get compensated on a percentage of what they sell. Someone selling for a church or hospital are paid salary and not driven by sales commission.”     

Macnab said the planned giving field is complicated by professional advisors who are for-profit and might be driven by commission, whereas charitable organizations are asking for contributions toward things like scholarships and research grants.     

“If someone wanted to use your organization to purposely get around tax laws…a lot of the nonprofits shun those types of gifts,” Patterson said. “That to me is an example” of the potential ethical dilemmas that planned giving professionals must avoid. “To the credit of most nonprofits, they really didn’t want to get into those.”     

Some individuals and organizations promote themselves as nonprofits when they really are not doing charitable work, Patterson said.

There were a few types of products marketed by financial institutions and insurance companies “that would to me really push the ethical boundaries,” Patterson said. These products would be used to set up charitable gifts that were benefiting individuals more than they were benefiting charities, he said, “so they were using the charity’s nonprofit status to make these happen.”     

Arrangements set up to benefit a donor and a company, using a charity in the middle, are inappropriate if in the end the charity isn’t getting much money, Macnab said.     

“Charitable giving is not about ‘getting a good deal.’ It’s something we do because of the causes we believe in,” Macnab said. “It’s not something we do to find tax loopholes. People who do that sooner or later get caught, or legislation comes in to stop it.”     

As an example, he said the Internal Revenue Service (IRS) in recent years has instituted new rules on how much donors can deduct when they donate a used car to a charity.     

“These kinds of legislative reactions come about when people attempt to use charity as a way to circumvent the tax code,” Macnab said. In many cases, a questionable planned gift is just that and might not rise to the level of being illegal. But is it ethical?     

Macnab noted an Arizona foundation that attracted a lot of charitable giving through gift annuities which he described as “a classic pyramid marketing scheme,” that eventually went bankrupt and cost a lot of people a lot of money. The foundation had been paying an advisor commissions to bring in gifts and offering higher rates than other charities would pay. “They got away with it because there are people out there who don’t check, and were getting commissions,” he said. “Charities don’t do that. If a donor wants to help our organization, he’ll come to us.”     

Those are generally not charitable kinds of deals, Macnab said, but usually attempts to use charitable vehicles to avoid tax laws. And charities must be on the lookout because what might be an “egregious example of avarice” may not necessarily rise to the point of being illegal, he said.

Macnab recommends that any planned gift first must pass the mom test. “It’s kind of simplistic, but think about it. If you’re not comfortable explaining it to an elderly mom or dad, it probably won’t pass the ethical test,” he said.     

The financial situation of a donor also might come into play: Are people being realistic about their potential future financial needs, the size of the gift, or how much money is being tied up relative to other free assets? Reynolds Cafferata, a partner in the Los Angeles law firm of Rodriguez, Horii & Choi, said there’s always the risk of litigation, either from a donor or someone on their behalf, claiming they should have been advised against making the gift.     

Cafferata, who has experience with planned giving of personal estates as well as on the charity’s end, said the question that tries to be answered is, “Is this the right size for this donor?” One might not always have the complete financial information of a donor’s liabilities and assets, he said, and what seems reasonable today could be different if circumstances change. And of course, what’s reasonable to one person might not be considered reasonable to another.     

With the law on disclosure and advice not well defined, Cafferata tells clients by and large to follow one rule: Do the right thing by the donor. “That in most instances will keep you out of trouble,” he said. State regulations that do exist focus more on disclosure and ensuring a charity is being transparent. “There’s not much consumer protection statutes for that,” Cafferata said. “So, you’re kind of looking by analogy to what seems appropriate for financial planners, but charities are in a different role than a person’s lawyers or a for-profit financial planner.”     

Cafferata remembers another situation when a father had contacted him about an unusual asset and wanted it structured as a gift, expecting to create a charitable annuity trust. There was just one problem: he already had given the property to his children. Still, he encouraged Cafferata to put together the trust, promising he’d have his children sign it.     

There are other instances when there might be questions as to whether a donor is mentally competent to make a gift. “The really bad cases are obvious,” Cafferata said, “but some in between are tough. There are some cases where we’re not comfortable with a person’s capacity.”     

Many nonprofits have committees of their board to serve as a gift acceptance policy committee, and Macnab often recommends a gift acceptance manual as well. “That way you get a lot of people looking at and talking about these things,” he said.