Interesting PGDC Article on Gift Restriction Law Suits

I highly recommend this piece from the Planned Giving Design Center for some background and perspective on donor restricted gifts. I heard one of the authors (Winston Smith) speak on this topic at a previous NCPG conference.

http://www.pgdc.com/pgdc/the-unraveling-donor-intent-lawsuits-and-lessons

My rough guess is that 99.999% of the time, charities that veer from their donors' intent on restricted gifts are never held accountable. Of course, it is really painful when your organization gets embroiled in one of this problems. Trust me, charities never win these things.

My advice: Fundraisers and non-profit executives need to be cognizant of these issues when accepting restricted gifts. You might actually enjoy the article, too!

Endowments and Naming Opps Written in Stone?

A really good question came to me through a client situation. It involved a big naming opportunity on an existing building. The donor was solicited for close to a 7 figure gift, and he was ready to make the commitment. Problem came up - the board started having second thoughts about permanently naming this building for the price asked (make sure your board officially approves your naming opps list BEFORE making the asks). My colleague's job was to help save the gift - if you go back to the donor, after the ask was already done, what do think he is going to do? Not a good scenario.

My role was to finesse some language that could give the board the confidence that they could change the name on this building at some point in the future without disrupting the donor and the gift.

The answer came to me pretty quickly. Variance Power. This is the important clause that community foundations in particular use in their permanent gift agreements. It gives the non-profit the ability to change purposes of a fund or other donor agreement should circumstances change. Otherwise, technically you might be required to seek attorney general approval and/or a Cy Pres action in court to make the change. Of course, if a donor is still alive, it always makes sense to ask the donor to consent to a change.

Here the are samples I came up with (based on old samples I had in my old files from my days working with Jewish Federations):

Variance Provision (long version)

While it is absolute aim and obligation of the Board of XYZ to fulfill the intentions of all written pledges and designated gifts to the ABC campaign, in the event of changed conditions, laws or other circumstances in the future, whereby any gift’s purpose may no longer exist or may be impossible to continue or perform, the Board of XYZ requires that this Variance Provision be included in every gift agreement. This provision permits the Board of Trustees to vary, when necessary, from the donor’s original stated purpose or naming opportunity to a similar new purpose or naming opportunity. Any new purpose or naming opportunity shall be as closely aligned to the donor’s original intent as possible. The Board of XYZ will notify any donors and/or surviving family members of the donor if this provision is ever exercised.

Shortened Version for Pledge Agreements

All pledges and commitments to the campaign are subject to the Variance Policy of the Board of Directors. This policy allows the Board to vary, when required to due to changed circumstances, from the original stated purpose from a gift or pledge agreement to one that is as closely aligned to the donor’s original intent as possible.

Shortest Version for Pledge Agreements

Should the purposes and/or intent of this pledge be impossible or impractical to perform/maintain, the Board of XYZ reserves the power to vary the use or naming opportunity created by this pledge to one as closely aligned to the donor’s original intent as possible.

After going through this exercise, it dawned on me that use of this type of clause in all gift agreements, especially ones that involve permanent naming opportunities, is a really good idea.

Harvard Not Going Under - Massachusetts Passes UPMIFA!

Not that anyone from Massachusetts is reading this blog but the following innocuous piece in the Boston Globe is actually major news for places like Harvard:

http://www.boston.com/business/articles/2009/07/03/nonprofits_get_relief_from_endowment_law/

One of the most prominent attorneys in the planned giving world told me several months ago that Harvard was literally teetering over their endowment woes - I can't confirm if they had consulted this particular attorney but it sounded like he had first hand info.

Here is a Wall Street Journal article talking about Harvard's endowment losses at the end of 2008: http://online.wsj.com/article/SB122832139322576023.html. What the article doesn't detail is how much less cash the university would have had as a result of the "freezing" of most of their endowments. To put it in context, a $39 billion dollar endowment could have spun off close to $2 billion a year in various scholarships, program funds, endowed professorships, etc... $2 billion is a lot to make up for, even for Harvard.

Well, the storm is over, Mass has UPMIFA! Those who have been dealing with underwater endowments will understand what I mean.

See previous discussions about this law on this blog for more info.

I wonder when New York will fall in line - at least 34 states now have ENACTED UPMIFA, and only three remain that have not even proposed it. But, in New York, common sense doesn't seem to prevail when it comes to legislation.

Underwater endowments in New York and other places

Anyone following a really important issue for non-profits with permanent endowments, particularly in New York? Assuming you have "underwater" permanent endowment funds - which are effectively frozen - haven't you been wondering if there will be a change in the law to open up distributions?

Well, over 30 states have already enacted UPMIFA, the updated version of UMIFA (the law that originally let you use a spending rate irrespective of principal for permanent "income only" funds as long as your fund principal was over its original gift amount). This was the "modern" approach started in the 1970s but that last caveat reared is ugly head this past year in a big way. Currently, only three states have not even proposed UPMIFA - so with more than 30 on board, and up to 47 states potentially enacting, this new law should be the standard (see below for more about it).

What about New York? Well, not yet! It was proposed for the first time this past April but passing laws in NY is not that simple. Bottom line, these things usually take a few goes around and anything effecting charities needs the AG to support it. And, they break by July 4th weekend for the year! Not looking good for this year.

The new law though adds the letter P - for Prudent to UMIFA. In other words, underwater/frozen endowments will be a thing of the past - Prudent decisions will reign and let's hope charities learn how to be prudent.

Here is a short summary of UPMIFA. Annual distributions from permanent funds should be based a series of “prudent” factors: 1. the duration and preservation of the endowment fund; 2. the purposes of the institution and the endowment fund; 3. general economic conditions; 4. the possible effect of inflation or deflation; 5. the expected total returns of investments; 6. other resources of the institution; and 7. the investment policy of the institution.

For more information or to confirm if your state has enacted this important law, go to: http://www.upmifa.org/DesktopDefault.aspx.