Good Documentation Makes for Good Donors

So many donors, even sophisticated ones, want to avoid documentation as it is often viewed as getting “lawyered up.” They choose instead to rely on a verbal agreement or handshake. But what happens when the person with whom you had the agreement leaves the organization or simply forgets?

by Robert I. Evans and Laura Solomon, Esq.

We have all heard the phrase “good fences make good neighbors.” That time-worn saying applies even more so today in donor relationships because good documentation – including gift acknowledgment letters, agreements, and gift acceptance policies – make for good and generous donors!

The Importance of Documenting Intent

Donor intent is the purpose, expressed publicly or privately, for which a philanthropist intends his/her charitable gift or bequest to be used. Whenever possible, donor intent should always be expressed by the donor making the gift, and specifically documented in writing to the recipient nonprofit. The nonprofit’s gift agreement with the donor(s) is a legally-binding formal agreement that sets forth the parameters pursuant to which the gift will be utilized, stewarded, and acknowledged. By accepting a philanthropic gift, the nonprofit agrees to honor the wishes and intent of the donor(s).

A charity is required by law to honor donor intentions – but only if the charity knows (or reasonably should know) the donor’s intent. Otherwise, the charity can use the contribution for any charitable purpose in furtherance of its mission. Donors, therefore, need to protect themselves by articulating their intentions, in writing, even if the charity doesn’t take the lead by proposing a formalized gift agreement. Donors should think specifically about documenting exactly how they want their gifts used. For example, donors may want to restrict their gift for support of a particular program, and also direct if the funds should be used during or within a particular time period.

In the case of endowment or other funds that will be held and invested over time, donors should specify their intentions about the investment and management of the funds, use of either the income (i.e., interest and dividends) only or both income and capital appreciation. Importantly, donors should also specify what they would want to happen if the initial intended use becomes impractical. For example, a hospital might struggle to determine donor intent with respect to a gift made for the purpose of treating or researching a specific medical condition if such condition is finally cured. If a donor in the early 1900s gave dollars to endow a polio clinic, what happened when polio was essentially eradicated? For this reason, we encourage that donors specify an  alternative use or request that the charity circle back to get input from the donors, their families, or their executors or personal representatives, as the case may be.

Likewise, charitable organizations must also be careful and thorough when documenting donor intent. Because nonprofit organizations are required by Federal tax law to formally and properly acknowledge gifts, the failure to do so can result in significant fines, an unwelcome line item in any organization’s budget! Charities are also required by state charitable solicitation and nonprofit corporate statutes to honor donor intent. Failure to do that can result in fines, penalties, and even criminal prosecution.

Common Misperceptions

So many donors, even sophisticated ones, want to avoid documentation as it is often viewed as getting “lawyered up.” They choose instead to rely on a verbal agreement or handshake. But what happens when the person with whom you had the agreement leaves the organization or simply forgets? Many donors assume that the charity “knows their wishes.” Often, though, when a donor and charity sit down to memorialize a gift, their lawyers discover that there is no meeting of the minds, and that each party has a different idea of the intended use, investment, or management of the gift!

All donors need to ask themselves what they would do if the charity doesn’t honor their intent. They can start by asking Garth Brooks, the Robertson Family, or The Ray Charles Foundation, all of whom filed lawsuits (against Integris Rural Health, Princeton University, and Albany State University, respectively) over disputes about donor intent. When donors document their intent in writing and the charity doesn’t honor it, they have a much better chance of successfully establishing a cause of action for violation of donor intent. When donors don’t document their intent, they are forced to rely on the kindness of strangers, typically “strangers” in their state’s Attorney General’s Office, Charities Bureau, or at the IRS, after filing a whistleblower complaint.

Most nonprofits assume that their donors – especially leading donors or major donors – have financial advisors who craft gift packages that address their personal situations. However, this is not always the case! Philanthropic individuals who are willing and able to give gifts of significance do not always have “good counsel,” and are not always knowledgeable about the variety of planned giving strategies that may be available to them and the respective charitable, financial, tax and estate planning benefits of such strategies. Therefore, by learning valuable information about the many different planned giving vehicles and strategies, nonprofits can become “thought leaders” in the donors’ eyes, allowing the nonprofit to communicate more effectively with its potential donors.

Acknowledging Donors with Gratitude

Donors at all levels and from all walks of life want to feel appreciated and be assured that their contributions are making an impact, yet many nonprofits are so excited to receive a multi-year pledge that they neglect to properly acknowledge and recognize such gifts. Creating a well-defined, Board-approved donor recognition policy will ensure that donors’ expectations regarding payment and acknowledgment of pledges are well- understood. For example, at EHL Consulting, we generally suggest that at least 65% of a pledge be paid prior to names being unveiled on donor walls.

Some donors prefer to be thanked privately and to remain anonymous publicly, while other donors have very specific requirements for their public acknowledgements, including the naming of buildings, endowments, or long-term fellowships/scholarships. Representatives of the recipient nonprofit must know what specific donors prefer and be prepared to discuss various options with the donor.

Good Documentation Makes for Good Donors

We urge all nonprofits to take the time to establish clear and accountable donor documentation policies. Laziness or confusion in documenting donor intent often comes to the fore during tax time, when the tax preparer or auditor asks for documentation of donor intent to assure that funds are properly classified for accounting and tax purposes as unrestricted, temporarily restricted (including Board-restricted) or endowment funds…but by that time, it may be too late!

Most importantly, nonprofits that do not establish these important policies put themselves at significant reputational risk. If a charity develops a reputation for disregarding donor intent, you can be sure that future donors will be reluctant to give to that charity and will eventually stop giving altogether. However, if a charity establishes a reputation for being a thoughtful steward of financial gifts, honoring donor intent, and working well with their donors to achieve their philanthropic vision, then that nonprofit is well on its way to creating a “culture of giving” that will return the investment many times over.

Robert I. Evans is the founder and managing director of The EHL Consulting Group, a fundraising consulting firm located in suburban Philadelphia. He is a frequent contributor to eJewishPhilanthropy.com. The EHL Consulting Group is one of only 38 member firms of The Giving Institute. EHL Consulting works with dozens of nonprofits on fundraising, strategic planning, and nonprofit business practices and strategies. Learn more at ehlconsulting.com

Laura Solomon, Esq. is the founder of Laura Solomon Esq. & Associates, a law firm devoted to the representation of charitable, educational, religious and other tax-exempt organizations. LS&A lawyers provide corporate, tax, finance, trusts and estates, and employment law advice to hundreds of nonprofits. Clients include charities and foundations, “friends of” organizations, museums, hospitals, schools, religious, animal welfare, and sports organizations, and range from start-ups to multi-national charities. Find more information about LS&A and helpful links to nonprofit resources: LauraSolomonEsq.com.

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