In our last article, we discussed the basics of charitable gift agreements – the general information included in such a document and circumstances when one would be appropriate for the donor and recipient organization. This time, we will delve a little deeper into the elements of gift agreements and what donors should pay attention to when negotiating one with the charities they wish to support.
Purpose of a Gift Agreement: A Refresher
Like any agreement or contract, a gift agreement is intended to document the terms that two or more parties agree to in relationship with each other. Considering the nature of this exchange – a donor giving something of value to a charity so that it can be put to work for the charity’s mission, the document also helps to clarify expectations of the two parties.
First, the donor should be confident that the contribution will be used for the purposes intended. She should also understand and anticipate specific actions of the charity related to her gift.
For their purposes, the charity wants to be certain about the nature and timing of the gift and any restrictions on the gift that they must honor. They should also be careful to only make promises that they are able to fulfill.
Elements of a Gift Agreement: Another Refresher
Last time, we provided this list of the elements of most gift agreements.
- Name of the donor
- Amount of the gift or pledge
- Timing of gift payments
- Form of payment (cash, marketable securities, other property)
- Purpose/use of gift
- Whether the gift is fully expendable or restricted for endowment (See our August 7, 2023 post on this topic.)
- Party at the charity responsible for decisions on spending the gift according to its designated purpose
- Other expectations and/or conditions, such as
- Donor recognition
- Reports on use of the gift
- Under what circumstances terms can change
Most of these are self-explanatory. Some, however, are more nuanced than you might think and deserve a little more attention.
Legal Name of Donor
Why do we emphasize “legal” name? Because the donor named in the agreement should be the donor who will make the contribution of money or property. That is the person or organization obligated to the terms of the document.
Let’s say that Homer and Marge Simpson want to make a $100,000 gift to Springfield USA College’s new building project. The president of the College is thrilled and ready to name a room in that building in the Simpsons’ name.
In addition, Homer and Marge own Cowabunga Manufacturing, Inc., a prominent company based in Springfield, and two years ago, they established the Simpson Family Foundation.
Who’s the donor
Are Homer and Marge contributing money or property they own personally? Maybe they want Cowabunga Manufacturing to make the gift, or perhaps they plan to grant the funds from their private foundation. The donor named in the gift agreement should be the same legal entity (individuals, corporation, or foundation) that will be making the payments.
This is particularly important if the funds will come from the Simpsons’ private foundation. According to IRS rules, a private foundation cannot fulfill the obligations of its donors or officers. That means that if Homer and Marge personally make a pledge to Springfield USA College to pay $100,000, the Simpson Family Foundation cannot pay on that pledge. (The same holds true if they had a donor advised fund, a charitable tool we will discuss in a future article.)
Form of Payment
Language regarding form of payment is most relevant if the donor might pay with something other than cash. Most charitable organizations will accept marketable securities, such as shares of stock or mutual funds. They may not, however, be willing to accept other property, such as real estate, private business interests, collectibles, or cryptocurrency. In some cases, the organization will have legitimate reasons to not accept a particular type of property for a particular purpose, due to liquidity, valuation, or risk.
Discussing the donor’s intentions and the organization’s gift acceptance policies up front makes for a much smoother process, and documenting these intentions at the outset ensures that the parties won’t need to rely solely on memories of those conversations in the future.
If the donor wishes for their gift to serve as endowment, meaning that it is to be held in perpetuity with only distributions resulting from investment returns used for the stated purpose, this must be explicit in the gift agreement.
Purpose or Use of Gift
It is important that both parties be on the same page as to whether the gift is unrestricted for the general purposes of the organization or if it must be used for a specific purpose. The purpose might be restricted to a particular program (i.e., food-mobile operations at a food bank), population (i.e., students majoring in history at a university) or project (i.e., building renovation), for instance.
Expendable or Endowment
This is a critical distinction. If the donor wishes for their gift to serve as endowment, meaning that it is to be held in perpetuity with only distributions resulting from investment returns used for the stated purpose, this must be explicit in the gift agreement. The agreement should then indicate how the amount and timing of distributions from the endowment will be determined, i.e., “amounts distributed from the Fund will be made according to the organization’s Endowment Spending Policy in effect at time of distribution.”
Other Expectations or Conditions
If there are other conditions that are important to the donor and/or the charity, it is worth memorializing them in the gift agreement. Here are a few that come to mind.
Donor Recognition
If the donor will be honored for this gift, perhaps in the naming of a program, an award, or a physical space, that should be detailed in the document, with both parties agreeing to the specifics of that recognition. Conversely, if the donor wishes to remain anonymous for publicity purposes, that should be noted in the gift agreement.
Reports on Use of the Gift
It is a best practice to include the type and frequency of reports that the charity will provide to the donor. Typically, the organization will report on the use of the contribution and, in the case of a named endowment, the value of the fund and amount of its distributions. Specificity about these communications helps manage the donor’s expectations and hold the charity to its commitments.
Under What Circumstances Terms Can Change
Is the agreement legally binding? What happens if the total amount contributed does not reach the entire amount pledged? If this is an endowment fund and lasts forever, what if the purpose of the gift is not practical for the organization in the future? While not every eventuality can be accounted for in a basic gift agreement, these are potential concerns that should be addressed.
Negotiating or Reviewing a Gift Agreement
The Donor’s Perspective
These key elements of a gift agreement, the ones we spent a little more space with above, are the sections to pay special attention to and discuss productively. If you are the donor, you want to know that your gift will be used for the purpose intended, what you can reasonably expect in terms of communication and recognition, and what happens if circumstances change for you or for the organization.
An additional term that may be included in the document is whether the organization charges, or may charge, a related fee. Some charitable organizations help cover their fundraising and fund management costs through fees charged to private donations. Some charge a one-time gift fee when the contribution is made. Others charge an annual administrative fee to endowment funds. As a donor, you will want to know whether to expect those fees as well as how they will be determined.
The Charity’s Perspective
If you represent the charity, you want to understand what is important to the donor in relation to their gift and the impact they want to have on your mission. Sometimes, you will need to ask the donor to think differently so that their dollars can be used effectively for their purposes and explain why you may not include terms exactly as they are requesting. You owe it to donors and to your organization to accept gifts that can be used well in fulfillment of its mission without undue administrative burden.
Ultimately, the development and execution of a good gift agreement is a collaboration, and it should be an enjoyable one. After all, the shared goal is to memorialize a donor’s generosity and intentions and the charity’s commitment to steward those resources well to do its good work.
Disclaimer: This information is not intended as legal, tax, or financial planning advice. Readers should consult with their own professional advisors before making any charitable gift.