Gifting through a foundation offers naming rights advantages
For individuals and families with private foundations, the first rule of operation they learn is: “Thou shalt not personally profit from your relationship with the foundation.” Because of the strict self-dealing rules of section 4941 of the Internal Revenue Code, almost any financial benefit to a donor or insider from a private foundation’s activities, whether that benefit is direct or indirect, is forbidden.
So how is it that private foundations can make grants to nonprofit organizations and receive naming rights on behalf of an individual such as their founder or CEO? And why do it through a private foundation at all, rather than from one’s own resources?
A “Merely Incidental” Benefit
While it’s true that private foundations are generally not allowed to provide benefits to donors, the tax rules mainly treat public recognition, including naming rights, as a benefit that is “merely incidental” to the charitable purposes served by the grant. This seems counterintuitive. Staples paid almost $120 million in 1999 to have its name on the Los Angeles arena now known as the Staples Center for a 20-year period. Surely, naming rights have real monetary value, and having a private foundation pay for those naming rights to benefit an individual or corporation affiliated with the foundation certainly seems like a self-dealing transaction. However, perhaps out of recognition of the importance of facilitating naming gifts for public charities that generate a lot of revenue this way, IRS rulings have generally blessed the use of foundations to make grants in exchange for naming rights.
This does not mean that there is no risk, and much may depend on how the distribution is framed. However, if done correctly via thoughtful negotiation and a carefully drafted gift agreement, using a private foundation to secure naming rights has a long-accepted track record of success, and should not present tax risks.
Advantage Over Individual Gifting
Using a foundation to make such a gift may have some benefits when compared to gifting individually. Many donors use their foundations to help ensure that there is a party to the naming rights agreement that will endure beyond the donor’s death. Heirs are typically denied the right to enforce naming rights agreements entered into by individuals. A private foundation, however, can endure indefinitely, ensuring that there is a party in existence to monitor the grantee’s compliance with the agreement. Additionally, should a breach occur, it’s much easier to negotiate for return of funds when the donor is a private foundation than when the donor is an individual.
There may also be tax benefits to using a foundation. For example, if the grantee is not a U.S. charity, the donor will almost certainly be better off using a foundation, as an individual generally cannot get a tax deduction for a gift to a non-U.S. charity.
Naming Through a Private Foundation
Let’s say you’re a donor who has a private foundation. Once you have decided to make your gift, you will need to negotiate an agreement in writing with your chosen charity to secure your desired naming rights. The written gift agreement should include many or all of the following elements:
- Parties to the agreement. Usually these will be the foundation making the grant and the charity receiving the grant. There may be instances where the grant may go to an affiliate of the charity, such as a supporting organization, while the naming will occur on a building directly owned by the charity.
- Amount and timing of the grant. Some grants will be made in a lump sum at the time of signing the gift agreement. In other situations, grant installments may be more desirable and might be conditioned on meeting certain milestones to keep the grantee incentivized and to limit a donor’s downside if the project to which the naming rights will attach dies on the vine. In addition, the agreement may provide that installments may come in from other sources, including individual donations, donor-advised fund grants, or gifts from other family members.
- The name. You, of course, will want to specify how the name will read. There is no need to mention your foundation if you don’t want to; even if the funds are coming from a private foundation, it’s okay to honor the name of an individual. With a corporate name or logo, the company will have to give permission for their use.
- How the name will be displayed. This can be very specific, such as requiring that the name appear in a particular location on a building in letters in a certain font and size. Attaching renderings to show how the name should look may help avoid later disputes.
- To what the name attaches. Charities will want flexibility to offer other naming opportunities in and around the building. The agreement should be clear on the extent to which these other opportunities will be offered, and in particular should ensure that no other naming opportunity will be afforded more prominent treatment.
- Destruction. What happens if the building or space that is named is destroyed and not rebuilt during the term of the naming right? Can the name be transferred to another building or space? Who has to approve a transfer? Can it be done unilaterally by the charity or must the original donor agree?
- Publicity. Must all publicity regarding events at the building use the full name of the building? Must the name be used in the formal postal address for the building? Will the building be formally opened with a ceremony at which the person for whom it’s named will have the right to speak or attend? To what extent will the foundation or others have the right to pre-approve promotional materials involving the name?
- Time Limits and Morality Clauses. More and more, charities are seeking to put time limits on naming rights, and to ensure that they have a way out if circumstances change – in particular, if the name on the building becomes a source of concern or embarrassment. These provisions are highly sensitive and are carefully negotiated between the donor and/or the foundation and the recipient charity. It’s important in these negotiations to be sensitive not only to the donor’s wishes but also to the needs of the charity to protect its reputation and charitable mission. Compromises may include time limits and objective standards for determining whether to take naming rights away.
- Remedies for Violation of the Agreement. In many jurisdictions, a donor may not enforce the terms of a charitable gift unless the agreement expressly provides as much. Accordingly, if you want to impose consequences for a breach, you must do so clearly in the agreement. Remedies may include reversion of funds; “gift over” provisions, whereby breach of the agreement results in transfer of funds to another charity; or coordinated alternative solutions.
When all parties to a naming agreement respect the needs and imperatives of the other, with appreciation for both the donor and the mission of the charity, naming rights agreements can align both sets of goals, providing much needed resources to the charity and cementing the donor’s philanthropic legacy for years to come.
Jeffrey Haskell, J.D., LL.M. is chief legal officer and Jennifer E. Bruckman is deputy legal officer for Foundation Source, which provides comprehensive support services for private foundations. The firm works in partnership with financial and legal advisors as well as directly with individuals and families.
Foundation Source acknowledges the assistance of Brad Bedingfield of Hemenway & Barnes, LLP, in preparing this article.
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