What About Donor Restrictions?

Recently an issue arose in the nonprofit world where a well known Midwest museum had long ago received a major gift with the restriction that the gift was to be […]

Recently an issue arose in the nonprofit world where a well known Midwest museum had long ago 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 worm. The problem the museum faced was that, after an exhaustive census of the species and a thorough categorization had been completed, there was absolutely nothing else to be done—and there was still a large amount of temporarily restricted net assets available. And like all other exempt organizations, there was no shortage of alternative uses the Executive Director of the museum thought could benefit from the unused “worm funds.”

I appreciate worms as much as the next guy (unless the next guy happens to be this specific donor). Having said that, I have not run into this exact situation, but I have seen many organizations with purpose restricted funds where the balance hasn’t moved since the Carter administration. Here are some reasons why:

Substantial Compliance

Like the example above, the organization substantially complied with the gift and there were no other conceivable ways to spend the money within the donor’s intent.

Terms Are No Longer Appropriate

Look no further than to Vanderbilt University’s fight with the Daughters of the Confederacy to change the name of its Confederate Memorial Hall dormitory. Yes—they understood the DOC had every right to require the naming of the hall but is this name appropriate any longer?

Often, when charities take action into their own hands, litigation ensues. The charity’s rationalization is:

  • There was “wiggle room” in the charitable intent
  • There were greater needs than those in the intent
  • The gift was made long ago and the need no longer exists
  • The costs to administer the gift are too great (think Hearst Castle or even more locally, Will Roger’s State Park)

[To read more of Thomas J. Schulte’s thought leadership click here]

What’s an Organization to Do?

The biggest problem donors (or more often, the donor’s heirs) have had with these lawsuits is that many courts have taken the position that they lack “standing” to bring forth the lawsuit against the charities. Courts in many states (including California) have concluded that donors (and thus, their heirs) relinquish all rights once a gift is made. And 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. The charities oftentimes have the upper hand in these cases. What charity needs the financial and time drain and the resulting bad PR attached to a donor intent lawsuit?

If your organization is in a situation similar to the Midwest museum, a good place to start is by contacting the donor heirs. They may lack standing but with the heirs agreeing with you, there are very few others that would likely raise an issue. If the original donor is alive that is even better as the Uniform Prudent Management of Institutional Funds Act (UPMIFA) allows for a renegotiation of a long-term gift. However, the above option by itself is not enough. An organization with no living donor should also seek relief under UPMIFA. In California this generally calls for the Attorney General. Involved? Yes. Expensive? Maybe. Better option? Yes!

Written gift agreements with flexibility are included within. All gifts should be accompanied by a written agreement so there is no doubt as to the donor’s intent. These agreements should be written with the overarching philosophy that organizational needs change over time and accordingly, restrictions should also change. However, this flexibility can be constrained to indicate under what circumstances these changes can occur, what secondary restrictions might be considered, and who can permit such changes Thus, a much defined flexibility.

As with anything requiring donor restrictions, decisions should not be made in isolation and accounting and legal nonprofit specialists should absolutely be consulted.

[For more on Armanino’s approach to Nonprofit click here]