AMBIDEXTROUS GIFT POLICIES:. Getting the Right and Left ... · The organization should consult...
Transcript of AMBIDEXTROUS GIFT POLICIES:. Getting the Right and Left ... · The organization should consult...
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AMBIDEXTROUS GIFT POLICIES:.
Getting the Right and Left Hands to Work Together.
by.
ROBERT E. HARDING and SHERYL G. MORRISON.
GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.
500 IDS Center, 80 South 8th
Street.
Minneapolis, MN 55402.
Robert Harding – Phone: (612) 632-3091 Fax: (612) 632-4091
Sheryl Morrison – Phone: (612) 632-3376 Fax: (612) 632-4376
www.gpmlaw.com.
November 4, 2014.
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I. Overview.
A. Participants in Development Program.
1. Governing Board/Committees.
a. Approves policies.
b. Reviews and adjusts endowment spending rate.
c. Reviews particular gifts if required by Gift Acceptance Policies.
2. Development Department.
a. Promotes gifts to prospective donors in person, at presentations,
and via written materials.
b. Interacts with donor, donor’s counsel, Treasurer’s Office and
organization’s counsel to plan gifts.
c. Coordinates with same group of players to implement gifts.
3. Treasurer’s Office (Business Office).
a. Makes recommendations to board regarding endowment spending
rate.
b. Oversees management of investment assets.
i. Endowment funds.
ii. CGA pool.
iii. CRT and CLT assets where organization is trustee.
iv. Restricted non-endowment (“demand”) funds
4. Operations.
Consists of the programs conducted by the organization, on which its
Section 501(c)(3) exemption is based.
B. Policies and Procedures.
1. Gift acceptance policies.
2. Endowment Fund policies.
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3. Procedures for compliance with restricted gifts.
4. Planned gift administration policies.
5. Investment policies. We will not be addressing these policies in this
presentation.
C. Need for Coordination Among Participants and Policies.
1. Establishing, reviewing, and revising various policies.
2. Handling particular gifts.
II. Gift Acceptance Policy.
A. Purposes and Benefits.
1. Focus fundraising efforts.
Drafting gift acceptance policies forces the Board, Development
Department, Treasurer’s Office and Operations to focus on the kinds of
proposed gifts the organization may encounter and the way it wishes to
handle those proposals:
a. Gifts it wishes to pursue actively;
b. Gifts it will not pursue actively but which it wishes to be ready to
accept if offered; and
c. Gifts it is simply not equipped to deal with at this time.
Once the organization makes these decisions, members of the
Development Department can focus their energies appropriately.
2. Avoid liabilities, risks, unwanted gifts and disputes.
Establishing a policy as to what information to request regarding a
proposed gift and how to evaluate that information and come to a decision
helps the organization avoid financial risks associated with certain types of
gifts and avoid disputes with difficult and potentially litigious donors.
3. Promote donor relations.
Gift acceptance policies allow a Development Officer to project
confidence and competence to a prospective donor: the Development
Officer can promptly tell the donor whether the type of gift in question is
acceptable, if so, what information the organization will need to evaluate
the proposed gift, and how long the review process will probably take.
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B. Decision-making Authority.
The policies should delineate what types of gifts require what level of review and
by what persons.
1. Governing board.
a. The board can reserve for itself whatever decisions it deems
appropriate. In addition, it can give to the other decision makers
the discretion to refer particular cases to it for a decision. Further,
the board will usually review and ratify all actions taken by the gift
acceptance committee between regular board meetings.
b. The board will commonly wish to review the most complex gifts
and gifts that create significant potential liability for the
organization or have significant risks associated with the property
or the arrangement. For example, review at this level might
include gifts that require the organization to conduct a major
program, capital project or other activity it would not otherwise
undertake and gifts that require the organization to enter into
obligations which involve unusually large financial commitments.
2. Gift acceptance committee.
a. Typically composed of the VP for Development, someone from the
Treasurer’s Office, and members of the board who have particular
expertise.
b. Reviews gifts that present intermediate complexity and liability
exposure or risks. These commonly include:
i. Gifts of real estate.
ii. Gifts of restricted securities.
iii. Gifts of closely held business interests.
iv. Gifts of tangible personal property that require the
institution to incur substantial costs.
v. CRTs and CLTs where the institution will act as trustee,
co-trustee or successor trustee.
vi. CGAs, CRTs and CLTs that involve property other than
cash and unrestricted publicly traded securities.
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vii. Gifts that involve contracts or other documents under
which the institution assumes a legally binding obligation
or other liability.
viii. Transactions with potential conflict of interest, self-dealing
or private benefit concerns that could give rise to IRS
sanctions and penalties.
ix. Gifts that will generate unrelated business taxable income
(UBTI) for the institution.
x. Gifts that present any special risk of liability.
xi. Restricted gifts.
xii. Gifts referred to the committee by the VP for
Development.
c. The committee can refer more complex gifts to the board for
review.
3. VP for Development.
a. The VP would typically review more routine types of gifts such as
cash, unrestricted publicly traded securities and CGAs and CRTs
funded with these types of assets and that fit within the gift
acceptance policy parameters.
b. The VP would normally also have the power to refer proposed
gifts to the gift acceptance committee.
4. Legal counsel.
The organization should consult legal counsel about more complex gifts
and their implications for the organization. The gift acceptance policies
might require that counsel is involved where the gift involves one or more
of the following issues:
a. CGAs, CRTs and CLTs funded with assets other than cash and
unrestricted publicly traded securities.
b. Any asset with restrictions on sale or transfer or other restrictions.
c. All CRTs and CLTs where the institution will act as trustee.
d. Any gifts identified as “problem” gifts under the screening
procedures discussed below.
e. Gifts of closely held business interests.
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f. Large or complex gifts of tangible personal property.
g. Funding of testamentary CRTs with retirement account assets.
C. Types of Gifts.
1. For each type of gift the organization will generally accept, the gift
acceptance policies should cover three components:
a. Information gathering.
b. Criteria for acceptance.
c. Procedures for implementation.
i. Receipt.
ii. Liquidation/holding.
iii. Prearranged sale concerns.
2. In crafting the policies for each type of asset, there are a number of
considerations that the organization will have to take into account:
a. The feasibility and complexity of liquidating the asset.
b. The expense of managing the asset while it is held.
c. Liabilities associated with the asset, including environmental
liability, premises liability and financial liability.
d. The human resources of the organization needed to manage and/or
dispose of the asset.
e. The potential for UBTI.
f. The potential for self-dealing or private benefit concerns.
3. An example: Proposed gift of real estate.
a. Information gathering.
i. Evidence of title.
ii. Confirmation of any debt.
iii. Contracts, options or restrictions affecting the property.
iv. Valuation.
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v. Rent and other income to be anticipated.
vi. Expenses (taxes, insurance, etc.) to be anticipated.
vii. Leases.
viii. Potential market for sale.
ix. Environmental review.
b. Criteria for acceptance.
i. Minimum acceptable value should be defined in the
policies after consultation with Treasurer’s Office and
board.
ii. Other factors that must be considered:
(a) What factors support a decision to hold as opposed
to a decision to sell and re-invest the net sale
proceeds in another type of asset?
(b) How marketable is the property?
(c) Are there any restrictions, reservations, easements
or other limitations with respect to the use of the
property?
(d) How will carrying costs for the property be paid?
(e) Is the property subject to a lease or similar
arrangement that will generate UBTI?
(f) Does the property present any special risk of
liability, including premises and environmental?
iii. Leases and sales to members of the donor’s family must be
for fair value but transfers of real estate to charitable trusts
and donor advised funds are subject to restrictions
regarding self-dealing and private benefit.
c. Implementation
i. Title search and title policy.
ii. Form of deed.
iii. Liability insurance.
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iv. Delivery and recording of deed.
v. The charity must pay all carrying costs for the property
from the time it receives the gift until it is sold. Donors
may be encouraged to make cash gifts to assist in paying
such carrying costs.
vi. If the property is of a type where management and
disposition are not within the capabilities of the
organization, then an outside manager may need to be
hired.
D. The Perfect Storm.
1. The situation.
a. Proposed gift structure:
i. Two-life flip CRUT
ii. Life of donor then life of child.
iii. Charitable remainder beneficiary is trustee.
b. Funding asset. Large parcel of real estate located at intersection on
the edge of a growing city.
c. Coordination of policies and personnel.
i. Pre-acceptance evaluation: prospects for sale.
ii. Problem gift guidelines: inheritance for child.
iii. Planned gift administration: capacity to handle sale.
E. Restricted Gifts.
The materials in Section IV below can be included in gift acceptance policies or
adopted as a separate, free-standing set of policies.
F. Screening for Problem Gifts.
1. The gift acceptance policy should contain guidelines for screening
problem gifts that are designed to help the organization sniff out:
a. Donors with unrealistic expectations about tax or financial results.
b. Donors who have unrealistic expectations about retaining control
over the organization’s use of a gift.
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c. Donors whose behavior indicates that they will be difficult to deal
with and may create problems.
d. Gifts that constitute part of the family members’ inheritance but to
which they are opposed.
e. Donors who do not have any relationship to the institution.
f. Gifts involving marital or community property (such as AZ, TX,
CA, WI) or title questions.
2. The board should define in the gift acceptance policy the estimated dollar
amount threshold for problem gift review.
G. Pledges.
1. The gift acceptance policies should provide guidelines about how pledges
will be recognized and counted in campaigns, as well as whether and how
they will be made binding on the donor, if desired.
2. Legally binding pledges should not be satisfied with payments from an
entity (e.g. private foundation, CRT, or donor-advised fund) that is
prohibited from self-dealing.
H. Gift Implementation.
1. Donor’s counsel.
a. Avoid appearance of undue influence.
b. Gift property located in state other than where the organization’s
counsel does business.
c. Avoid tax or legal advice to donor.
2. Organization’s counsel.
a. Separate from donor’s counsel.
b. Drafting or reviewing legal documents governing or implementing
the gift.
c. Avoid tax or legal advice to donor.
3. Fees.
a. Legal – paid by party engaging counsel.
b. Qualified Appraiser – paid by donor.
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c. Environmental Review – paid by organization.
4. Receipts and tax reporting.
5. Reporting to donor.
a. Recognition.
b. Accounting.
c. Other.
I. The Gift that Eats.
1. The situation.
a. Donor proposes to give a university a large collection of paintings.
b. The paintings are of varying quality and educational interest.
c. The donor wishes the university to put the collection to an
educational use to maximize the donor’s income tax deduction.
d. Insuring, storing, maintaining and displaying the collection will be
expensive.
2. Coordination of policies and personnel.
a. Sale of less important paintings to create endowment fund that will
pay costs of maintaining the collection?
b. Discussion with donor of implications of sale of some items for
donor’s income tax deduction.
c. Operations: confirm with art department that it can use and
display the portion of the collection that the university will keep.
d. Coordinate sale with endowment spending policies to generate
sufficient endowment.
III. Endowment Fund Policies and Procedures.
A. Types.
1. An institution owns an endowment fund in its own capacity, not as trustee.
Typically, the fund will be segregated for accounting and investment
purposes.
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2. True endowment funds have a restriction imposed by the donor in the gift
instrument that established the fund which legally binds the institution to
operate the fund as an endowment under applicable state law, typically
UPMIFA.
3. A quasi-endowment fund is legally unrestricted as to current spending, but
the institution has elected to operate it as if it were a true endowment; the
institution holds the fund and withdraws an annual spendable amount
computed under its endowment fund spending policy.
B. Spending (Distribution) Policy.
1. Policy established by governing board.
a. UPMIFA standard.
Unless the gift instrument specifies otherwise, an institution may
spend from an endowment each year an amount the institution
determines an ordinarily prudent person would spend from the
endowment in question. The institution must take into account:
(a) the duration and preservation of the endowment fund;
(b) the purposes of the institution and the endowment fund;
(c) general economic conditions;
(d) the possible effect of inflation or deflation;
(e) the expected total return from income and the appreciation
of investments;
(f) other resources of the institution; and
(g) the investment policy of the institution.
2. The gift instrument can say that the organization will appropriate
according to its endowment spending policy, but even with such a
statement it is wise to follow UPMIFA’s standard of care.
C. Management of funds under UPMIFA.
1. Standard.
a. The organization must manage and invest the endowment with the
care of an ordinarily prudent person in a similar position.
b. A person who has or claims to have special skills or expertise has a
duty to use that expertise in managing an endowment.
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c. Except as otherwise provided by a gift instrument, investment
decisions must be made not in isolation but rather in the context of
the endowment’s portfolio as a part of an appropriate overall
investment strategy.
2. Factors.
In making investments, the institution must consider:
a. general economic conditions;
b. inflation and deflation;
c. expected tax consequences;
d. the role of each investment in the portfolio of the fund;
e. the expected total return;
f. other resources of the institution;
g. the needs of the institution and the fund to make distributions and
to preserve capital; and
h. the asset’s special relationship, if any, to the charitable purposes of
the institution.
3. Diversification.
a. Unless provided by the donor in a gift instrument, an institution
must diversify the investments of an endowment unless because of
special circumstances, the purposes of the fund are better served
without diversification.
b. Within a reasonable time after receiving property, an institution
must decide whether to retain or sell the property.
D. Minimum Size.
Because endowment funds involve some expense and administrative time, most
charitable organizations determine a minimum size to establish and administer an
endowment fund. To be flexible, however, many charities also give donors other
options for reaching the minimum size endowment fund.
1. Accumulation.
The agreement may provide that the organization will not withdraw and
expend any amounts from the fund until it has reached the minimum size
and in the meantime the return on the fund’s investments is accumulated.
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2. Pledge.
Many organizations allow the donor to satisfy the minimum amount
requirement by making an initial gift and pledging to make additional gifts
over a specified period which will bring the aggregate contributions to the
fund to the required minimum amount. The gift agreement typically
provides that if the donor does not complete the pledge payments by the
required time, the organization need not administer the fund as an
endowment but can spend from it as a non-endowment fund.
E. Purposes/Recognition.
1. Example: Endowed chair.
2. Minimum amount related to the purpose.
3. Recognition policy.
4. Changes in Purpose.
a. UPMIFA offers an institution two ways to release a restriction on
an endowment fund.
i. The donor may consent.
ii. The institution may obtain a court order releasing the
restriction upon a showing that it is obsolete, inappropriate
or impractical. The court order may not, however, convert
an endowment fund into a nonendowment fund.
iii. Expedited procedure for “small, old” funds.
b. Cy Pres and Equitable Deviation.
The cy pres doctrine allows an institution to petition a court for
modification of a gift restriction if a change in circumstances has
made literal compliance with the original restriction impossible or
impractical. Equitable deviation allows a court to modify the way
the fund is administered, e.g., investment and spending policies.
F. Gift Instrument.
The “gift instrument”, as defined by UPMIFA, refers to the written document or
documents in which the donor specifies how the institution will use his or her gift
including memoranda, letters and other communications.
1. UPMIFA definition is broad and includes all files and communications.
2. Drafting a gift instrument.
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a. Clear statement of use and purpose and restrictions.
b. Organization has discretion to modify use.`
c. Disclaimers.
i. Not a trust.
ii. Not conditional.
d. Document constitutes entire gift instrument.
G. Enormous Changes at the Last Minute.
1. The situation.
a. Donor proposes to make gift of his interest in a closely held
business to establish an endowment fund at a health care
organization.
b. The endowment fund will support a new research program.
c. The donor insists on substantial name recognition in connection
with the gift.
d. The donor insists that the endowment fund be managed by an
investment manager designated by the donor.
2. Coordination of policies and personnel.
a. Is value of gift asset sufficient to create endowment large enough
to support the designated purpose?
b. How much control over management of the endowment
investments does the organization wish to maintain?
c. What happens with respect to operation of the program and/or
recognition if:
i. The sale price is substantially lower than expected.
ii. The investment manager selected by the donor has poor
results or is fraudulent.
IV. Restricted Gifts.
A. Legal Rules.
1. Restrictions placed on a gift by the donor are binding.
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2. Procedure for release or modification.
a. Donor consent.
b. Court proceeding.
c. Under Minnesota law if a donor, the trustee and the beneficiaries
all consent, the trust may be modified. For charitable trusts, there is
a required contingent provision for payment to alternate charities if
the named charitable beneficiaries are not qualified charities or no
longer exist. This may present an obstacle to modifying a trust by
consent of all the parties.
B. Standing to Enforce Restriction.
1. Attorney General – yes.
2. Donor – maybe.
3. Donor’s family members – probably not
4. However, some doubt may be cast on the proposition that the donor’s
family does not have standing where the Attorney General declines to act.
C. Gift Instrument.
1. Clear statement of use and purpose.
2. Organization has discretion to modify use.
3. Disclaimers.
a. Not a trust.
b. Not conditional.
c. Entire gift instrument.
D. Internal Due Diligence – Consultation with Operations and board.
1. Is compliance with the restriction feasible?
2. Is compliance with the restriction desirable?
3. Guidelines.
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The policy should clearly state that the institution will not accept gifts
subject to restrictions that:
a. Impose an undue administrative burden on the institution.
b. Involve unlawful discrimination of any kind.
c. Otherwise violate any applicable federal or state law.
d. Are inconsistent with the institution’s mission and/or ethical
standards.
e. Would prevent or impede the institution from seeking other gifts.
f. Are likely to generate adverse publicity for the institution.
4. Pre-acceptance procedure.
An officer of the institution (preferably an officer not affiliated with the
development department) should be designated to consult with relevant
personnel to determine that the institution can and will use the gift for the
designated purpose. That officer should report to the gift acceptance
committee.
5. For restricted endowment funds, it is also important to ask whether the
proposed fund will be adequate to carry out the designated purpose.
E. Mourning Violins (Not as much fun as Dueling Banjos)
1. The situation.
a. Testamentary gift of instruments in poor condition.
b. Required to be used for music program and students but no such
program exists.
2. Operations can attest that the gift cannot be used for the stated purpose.
3. Legal counsel can attest that an action to change the restriction and allow
sale of the instruments would be costly.
4. Treasurer’s Office can confirm that repairing the violins to saleable
condition would incur more cost that probably sales price.
5. Policies could allow institution to not accept the gift in such
circumstances.
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II. Planned Gift Administration.
A. Types of Gifts.
1. Charitable gift annuities.
2. Charitable remainder trusts.
3. Charitable lead trusts.
B. Establish Policies.
1. Development department should have a dialog with the Treasurer’s Office
to determine the organization’s policies.
2. For CGAs.
a. Minimum size.
b. Minimum age.
c. Rate.
d. Funding assets.
i. Cash and unrestricted publicly traded securities.
ii. Other assets: adjust annuity rate and/or defer payment to
account for unknown sale price?
e. CGA reserves?
3. For CRTs.
An organization will usually accept gifts of remainders in CRTs but the
question is whether it will serve as a trustee.
a. Criteria for acceptance of trusteeship.
i. The value of the assets with which the CRT will be funded.
ii. The number and ages of the beneficiaries.
iii. The institution should be designated as the irrevocable
remainder beneficiary of at least some specified percentage.
iv. The institution should establish a minimum present value
for the remainder interest, as computed under IRS tables.
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v. Funding assets.
(a) Will the institution accept initial trusteeship of a
CRT funded with nonliquid assets, e.g., real estate
or closely held business interests?
(b) Some institutions will not accept initial trusteeship,
but will agree to be successor trustee after the
nonliquid asset is sold for cash.
(c) The institution should have the trust agreement
reviewed by its legal counsel to be sure that the
document satisfies the governing instrument
requirements for a CRT and gives the institution
the right to review all trust records before
accepting the successor trusteeship.
vi. Factors to consider include:
(a) The identity of any co-trustee and the likelihood
that the trustees will be able to cooperate.
(b) Any provision that gives the co-trustees unequal
power, authority and/or responsibilities.
(c) The inclusion in the trust agreement of a provision
that exonerates one co-trustee from liability for
actions taken by the other co-trustee in which the
first co-trustee did not participate or acquiesce.
(d) A provision allowing the institution to resign its
trusteeship simply by giving notice to the other co-
trustee without the need for a court hearing.
b. Implementation.
i. Because the donor and the institution as trustee are both
parties to the document, whose legal counsel should draft it
(and by implication who should pay for the drafting)? Even
in cases where the donor’s legal counsel will draft, the gift
acceptance policy should require that the institution’s
attorney will review the trust agreement before execution.
ii. The donor should not transfer the funding asset to the
institution/trustee until both parties have executed the trust
agreement.
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iii. Before the trust agreement is executed, the institution
should put in place any necessary accounts or other
mechanisms to receive the funding asset, e.g., a temporary
brokerage account at the donor’s brokerage firm in cases
where the trust will be funded with marketable securities.
4. Similarly, the question for CLTs is whether the institution will serve as a
trustee.
a. Organizations want to be the beneficiary of CLTs because they are
akin to a term endowment. The question is whether to act as
trustee.
b. Criteria for acceptance of trusteeship.
i. Who are the remainder beneficiaries? They will experience
the impact of the trust’s investment performance (good or
bad) when the trust terminates. Typically, the remainder
beneficiaries will be the donor’s children or grandchildren.
What does the institution know about their attitude toward
it and toward the CLT arrangement?
ii. How long is the trust term? A shorter term gives the
children or grandchildren less time to become impatient to
receive their distribution, but it also gives the trustee less
time to recoup any losses from bad market years.
iii. Is the CLT to be funded during the donor’s life or at death?
If during life, low basis assets limit the trustee’s ability to
diversify the trust’s portfolio.
iv. Sometimes donors propose to fund CLTs with nonliquid
assets such as real estate or closely held stock. An
institution should agree to accept trusteeship in this type of
case only after very careful review and consultation with its
legal counsel.
c. Implementation procedures are the same as those for CRTs
discussed above.
d. Example of considerations
i. Proposed testamentary gift via CLT for 2 charitable
beneficiaries for 20 year term
ii. Funding asset is income-producing mineral and oil/gas
interests in producing properties
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19.
iii. At end of term, payout to fairly distant relatives (grand-
nieces and grand-nephews) which is taxable for GST tax
purposes
iv. Trust funding dependent on actions of prior other
fiduciaries in administration of estate
v. Development officer should discuss the above
considerations and also the following additional concerns
with the Treasurer’s Office and others knowledgeable at the
organization
(a) Significant tax liability at end of term and question
as to whether there will be liquidity of asset to pay
liability payable by trust
(b) Institution’s internal ability in managing the assets
(c) Possible changes in the asset’s ability to produce
income to the charities
C. General Administration.
1. Accounting.
2. Tax reporting.
3. Annual payment calculation.
D. Investment Management.
1. Oversight of investment managers.
2. Delegation to outside managers.
3. Investment strategy.
a. CGA pool.
b. CRTs and CLTs.
4. Diversification.
E. Avoiding Self-Dealing.
1. In-house expertise.
2. Outside legal counsel.
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20.
This outline is based on the law in effect on the date it was completed: October 1, 2014. It is
only a summary of the subject matter it addresses, and it is intended to provide information of
a general nature only. It should not be construed as a comprehensive treatment or as legal
advice or legal opinion on any specified facts or circumstances. Readers are urged to consult
with an attorney concerning their own situations and any specific legal questions they may
have.
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