by David L. Wilkinson
The private sector of philanthropy is facing huge challenges today, at a time unfortunately when government resources to assist those in need are shrinking. The assets of charitable foundations in the USA declined by 28% in 2008 according to a study by The Chronicle of Philanthropy. See Daniel J. Popeo, Op-Ed., Freedom of Philanthropy?, N.Y. Times, Feb. 23, 2009, available at http://acreform.com/files/pdf/Freedom_of_Philanthropy.pdf. This was the biggest drop of the past four decades. The loss to the nonprofit organizations they fund and to society was actually much greater due to the multiplying effect of the charitable dollar. A study by The Philanthropic Collaborative calculated that the $43 billion foundations distributed in 2007 generated identifiable social and economic benefits of $368 billion. See id.
The decline in the value of assets of American charitable foundations is only part of the picture. Recently released IRS figures show that charitable giving declined some 20% in 2008-09. See Editorial, Protecting Charitable giving, Deseret News, June 26, 2011.
Charities have come under fire in the eyes of Americans who count the most – those who contribute. Those Americans who contribute include 65% of all households with family incomes below $100,000. A 2007 survey showed that 59% of over 3000 respondents were more concerned than they had been a decade earlier that their charitable donations were not getting to the people who need it the most; 46% said they are more worried today about charity fraud or theft of funds or services. See William Robertson, Donor Intent Revisited, The Washington Times, September 28, 2008, available at http://www.washingtontimes.com/news/2008/sep/28/donor-intent-revisited/?page=1.
A front-burner issue is that the charitable deduction in the tax code has been under fire from President Obama and members of Congress who are looking to find ways to shrink the nation’s growing deficit. See Lisa Chiu and Suzanne Perry, Charitable Deduction Could Be Under Threat in Coming Deficit-Panel Talks, The Chronicle of Higher Education, Aug. 2, 2011, available at http://chronicle.com/article/Charitable-Deduction-Could-Be/128480/. Among those submitting testimony against the possible impairment of the charitable deduction was Elder Dallin H. Oaks representing Utah’s largest, and one of America’s largest, charities, the Church of Jesus Christ of Latter-day Saints. Quoting from his testimony: “Some also assert that reductions in the charitable deduction would not cause charitable organizations to suffer financial losses from decreased private gifts since the government would make up some of these losses by additional appropriations.” Testimony Submitted by Elder Dallin H. Oaks, Senate Finance Committee Hearing, Oct. 18, 2011, available at http://www.finance.senate.gov/imo/media/doc/Oaks%20Testimony1.pdf. He then concludes: “[M]ost Americans would not have us relinquish the freedom and diversity of our vigorous private sector of charities in exchange for the assurance that the government would select and manage their functions.” Id.
Donor Intent in Jeopardy
Many scholars believe a more serious threat to the health of charitable giving than the tax code is the widespread and growing disregard for donor intent by recipient charities. One law professor begins a leading law review article on the subject:
The cat is out of the bag: Donors are fast discovering what was once a well-kept secret in the philanthropic sector – that a gift to public charity donated for a specific purpose and restricted to that purpose is often used by the charity for its general operations or applied to other uses not intended by the donor.
Iris J. Goodwin, Donor Standing to Enforce Charitable Gifts: Civil Society vs. Donor Empowerment, 58 Vanderbilt Law Review 1093, 1094 (2005).
The reason many administrators ignore donor intent lies not in their inability to understand the donor’s intent but in their knowing there is no real mechanism to enforce that intent – so they can’t get caught. In most states, the Attorney General is the only person recognized as having standing to enforce restricted charitable gifts. But in a majority of those states, including Utah, there is no reporting law which allows the Attorney General to monitor how each charity administers its restricted gifts. Additionally, the Attorney General gives low priority to charitable gift enforcement, leaving the charities on the honor system. The Uniform Trust Code, adopted in twenty-three states, including Utah, does give the settlor (donor) standing to enforce the restrictions on his or her own charitable gift; but that does not help if the settlor dies before the charity wants to divert the gift to another purpose. Courts are moving in the direction of recognizing standing to sue in the executor of a deceased donor or in one of the heirs. A major recent case permitted standing to a distant heir of a long-since deceased donor to challenge the decision of the administrators of Tulane University to discontinue the operation of Newcomb College as a coordinate women’s college. See Henderson v. Admins. of Tulane Univ. of Lousiana, 426 So.2d 291 (La. App. 4 Cir. 1983), (a continuation of Howard v. Tulane, 970 So.2d 21 (La. App. Ct. 2007), vacated, 986 So.2d 47 (La. 2008)). Earlier, the New York Court of Appeals allowed the executrix of her deceased husband’s estate to sue to enforce his gift. See Smithers v. St. Luke’s-Roosevelt Hosp. Ctr., 723 N.Y.S.2d 426 (N.Y. App. Div. 2001). But those cases are the exception.
In Howard v. Tulane, 970 So.2d 21 (La. App. Ct. 2007), vacated, 986 So.2d 47 (La. 2008), Judge Max Tobias, dissenting from the majority’s holding that an heir does not have the right to sue for injunctive relief pursuant to the cy pres doctrine, succinctly states the case for a more liberal rule governing standing:
Finally, I note that [by agreeing with the Tulane Board we set] a very bad precedent that if allowed to stand would discourage future donations to all charitable entities.… if a donor cannot rely upon…the charitable institution to honor in perpetuity the conditions of a donation, why would one make a donation in the first place? To assume the good faith of a charity that does not want to proceed under the cy pres doctrine to be relieved of the condition of a donation works fine in theory; in practice, I think someone ought to be able to state a cause of action and a right of action to make the charity live up to its obligation when it so graciously accepted the conditional donation in the first place
Id. at 36 (Tobias, J., dissenting).
Legal Diversion – The Cy Pres Doctrine
Where the honor system fails is when the charity wishes to change the original purpose for the gift, giving as its reason that conditions have changed since the date of the donation. The law provides a way for the charity to do this legally, but only where pursuit of the original purpose has become “unlawful, impracticable, impossible to achieve, or wasteful.” Utah Code Ann. § 75-7-413(1) (Supp. 2011). Only a court can sanction a change and must hold a hearing to which all interested parties, including the Attorney General, are to be invited. If the original purpose of the gift is found to no longer fit the new circumstances by the narrow definition, a new purpose may be ordered which is “as near as possible” – “cy pres” in French – to the original.
A Diversion from the Donor’s Intent Only to Facilitate the Administration of the Gift is Not Authorized by the Cy Pres Doctrine
Administrators of restricted gifts frequently change the purpose of a charitable gift simply to make it easier for them to administer the gift. As an example, the Utah-based manager of a gift for student loans to be made only to foreign students for study in their own countries converted it to be available only to foreign students who had emigrated to the United States, knowing that it would be easier to collect from them than from students abroad. The manager did not seek court approval for this radical thwarting of donor intent. Astonishingly, counsel for the manager justified this turning of the donor’s intent on its head as being within the manager’s discretion.
The Failure of the Honor Code
If the charity believes that there will be no objection to whatever new purpose it has in mind, the temptation is great to forget about petitioning a court and going through what could be a time-consuming process. It is much easier to just make the change. The charity is on its honor to go through the prescribed legal channels, but often does not do it.
In preparing this article, the author attempted to ascertain informally how frequently a petition to change the purpose of a charitable gift is filed. In the Fourth District Court, neither the current nor the immediate past probate clerk could remember one such motion, going back over a decade.
Robertson v. Princeton University
That donors are more aware today of what is being done with charitable gifts than they were previously is seen in the rash of lawsuits brought in the last decade. The most publicized recent case is Robertson v. Princeton University, the suit brought against Princeton University by the children of Charles and Marie Robertson, heirs to the A&P grocery fortune. See id., Docket No. C-99-02 (N.J. Chancery Div., Mercer Cnty., 2002). Filed in 2002 and settled several weeks before the scheduled trial date in early 2009, the case amassed almost a half million pages of internal documents in the court file and each side reportedly spent roughly $40 million in legal fees before the prospect of spending millions more in a trial led the parties to settle.
The Robertson case validates the claim by a philanthropy scholar that “no two words in the philanthropic and nonprofit world stir up more passions on all sides of the issue than the words, ‘Donor Intent.’” Presentation by Curtis W. Meadows, Jr., Waldemar A. Nielsen Issues in Philanthropy Seminar Series, Georgetown University, Philanthropic Choice and Donor Intent: Freedom, Responsibility and Public Interest, http://cpnl.georgetown.edu/doc-pool/Nielsen0205meadows.pdf.
Surge in Donor Intent Cases
Other major institutions caught up in recent donor-intent controversies – all of them involving the alleged misuse of donated funds – include Brandeis University, Florida State, the University of New Mexico, the University of South Dakota, Randolph College in Virginia (formerly Randolph-Macon Woman’s College), Trinity College (of Connecticut), Vanderbilt University, Fiske University, St. Olaf College, UCLA, USC, and the Metropolitan Opera.
Two philanthropy scholars note that “While gift restrictions are not new, the increasing number of lawsuits filed by donors and their families to enforce gift intent represent an alarming recent trend.” Kathryn Miree and Winton Smith, The Unraveling of Donor Intent: Lawsuits and Lessons, Planned Giving Design Center (Nov. 12, 2009), available at http://www.pgdc.com/pgdc/unraveling-donor-intent-lawsuits-and-lessons.
Donor Intent and Ponzi Schemes
One gains an understanding of the result of gifts going awry from reading the many horror stories where innocent donors feel cheated or shortchanged in some way in their attempts to have their donations managed as they intended. “Perhaps the most common and emotionally painful risk that philanthropists face,” according to one author on the subject, “is the violation of donor intent.… When donor intent is flagrantly violated it is something akin to a total loss for the ‘philanthropic investor.’” Frederic J. Fransen, Managing Wealth for Philanthropic Risk, Western Wealth Management Business, Oct. 2008, Vol. 1, Issue 9, available at http://www.donoradvising.com/pdf/WealthManagementBusiness.pdf. The emotional impact on the donor is like that on an individual who, having invested in what turns out to be a ponzi scheme, learns that one has lost most of or all of the money invested. In Utah especially, this as well as investment-related cheating too commonly occurs within the community of a church. In the words of Diane Smart, a Salt Lake City victim of a ponzi schemer who lost $200,000, “He was in our church. We trusted him.” Bob Carden, Investment Fraud Isn’t Relegated to Wall Street: Beware the Ponzi Schemer Next door, The Washington Post (May 7, 2011).
Just as Elder Oaks observed that donors do not like the government to make their philanthropic decisions for them, so they also do not like to have the administrators of their gifts unilaterally make decisions changing the purpose for which their gifts are intended.
Essential to Hire a Lawyer and Perhaps Other Professionals
In studying the burgeoning body of literature on donor intent, one notices a common characteristic. Every article assumes that the donor will be represented by counsel. It is inconceivable to the veteran practitioners and academics that author this literature that a donor would consider making a six-figure or more gift to charity without seeking continuing help from experienced philanthropy professionals. It is sad but true that it costs money to give money away safely.
Beware of Charity’s Counsel and Accountants
It is understandable that a donor, having warm feelings toward the charity to begin with, would also view with favor the lawyers and accountants working for the charity. The donor might be excused for thinking that the charity’s counsel and accountants would always be looking to correct mistakes made by the charity, among other things. It cannot be assumed, however, that the charity, through its lawyers and accountants, will be neutral in seeing that its administrators of gifts observe donor intent. They are being paid to support the administrators of the gift, not to protect the donor even if he or she is not represented.
It is also a mistake to believe that a state attorney general will become involved on the side of donor intent. Although the attorney general has a common-law duty to police charitable gifts, other interests will usually take precedence. Also, most attorneys general do not want to take on a respected charity so long as money is not being stolen.
Need for Professional Advice Besides a Lawyer
For a restricted gift which will require accounting by the gift’s administrator, a donor may need the advice of an accountant, both in planning and executing the restricted gift and, in monitoring the periodic accounting statements provided by the charity. The annual accounting of a loan fund and a separate fund for the benefit of schools, which was provided by a major Utah charity to members of the donor’s family, was so opaque that a CPA who reviewed it concluded that its numbers were “unauditable.”
Protecting One’s Gift From Future Diversion
First and foremost it is essential that the donor and charity freely communicate with each other at all phases of a restricted gift and that both understand what the expectations of the other are. It is crucial that the parties agree to any restrictions before the instrument is drafted. And the charity should understand what the donor wishes to do with the gift if the circumstances existing at the time of the donation appreciably change.
One traditional way to prevent the charity from diverting the gift away from the purpose stated is to write into the deed instrument a reverter clause, providing that if the charity no longer applies the gift as the donor intended, the gift reverts to another charity, or is to be used for another purpose chosen by the donor. There are other ways to achieve this result which an experienced trust lawyer can recommend.
The donor traditionally wishes to have the gift be “in perpetuity.” But that is the feature of restricted gifts most galling to charities. As John D. Rockefeller said, “Perpetuity is a long time.” And charities lose patience with gifts which can never be changed. More and more scholars advise donors to refrain from making perpetual gifts except for those to museums. They accept as reality that donor intent inevitably erodes over time.
Warren Buffet and Bill Gates do not provide that their gifts be in perpetuity. Instead they select a duration such as seventy-five years, which they calculate will be long enough to accomplish their philanthropic goal and at the same time weaken any petition to a court seeking a substituted purpose. They reason that a judge is less likely to find that the original purpose of a gift is no longer viable if he or she knows that the gift’s purpose is already scheduled to end on a date certain. They thus ensure that the fund they created will be used in the way they will have set forth in the gift instrument.
Not all charities, of course, are as intent on pursuing their own agenda as the above text may suggest. But enough are so that a donor wishing to have his money used according to his wishes, after engaging professional assistance, should interact with every charity at arms length and plan the gift so as to retain control of it after his death. This is particularly true of gifts to higher education, a chronic violator of donor intent. Meanwhile, state legislatures need to address the woeful lack of enforcement mechanisms, a situation which currently encourages charities to further mock the broken-down honor system.