Good Giving from the Grave

How donors and charities can plan wisely to avoid posthumous punch-ups

Though “giving while living” is a growing trend in the United States, many donors still extend their philanthropy beyond the time of their deaths. And charities that intend to be in business far into the future often secure present-day gift commitments that won’t be realized for many years. Givers and receivers alike must take measures to ensure that these time-release contributions are executed in ways that respect the donor’s values and the charity’s needs.

Many legal battles illustrate the risks of ignoring the original terms of a gift. Earlier in this issue (see “What’s in a Name?”) we read about the misfire of a proposed $20 million gift to Paul Smith’s College from Joan Weill due to a failure to recognize that the original benefaction to the college would not allow a renaming. A judge ruled that “Mrs. Weill’s money did not give the college license to violate a provision in its founder’s will that enshrined his father’s name on the college in perpetuity.”

Different donor language produced a different outcome in the related case of Newcomb College. The will of Josephine Newcomb established Sophie Newcomb College in honor of her daughter, and to elevate women’s education. Amid financial difficulties and damage after Hurricane Katrina, the board of directors voted to establish a new, co-educational entity, Newcomb-Tulane College. Family descendants claimed that this would violate Josephine’s will, but the college countered that the language of Newcomb’s gift did not forbid them from making this change. After a contentious battle, the Louisiana Supreme Court agreed with the university in 2011.

In both cases, the donors established bequests. Because the charities accepted the money, they also accepted the terms of the gifts.

If a charity makes a promise when accepting a gift, the courts and public opinion take it seriously. If there is something important that is not spelled out, however, future adjudicators will decide as they wish. Any long-term contribution that has specific aims should have those goals, and any necessary restrictions, made clear.

The celebratory feeling after a large charitable gift has been made is special. The donor receives the satisfaction of investing in a cause close to his or her heart. The charity’s staff feels ratified and reinforced in its work to make the world a better place.

But it doesn’t end there. Too many organizations learn belatedly that the real work begins the moment the gift is made. Stewarding a gift is far more important than cultivating one. Staff and board members at charities need to realize that when an organization enters into a gift agreement, an obligation that extends into the future—sometimes far beyond current lifetimes—is being accepted.

The phrase “in perpetuity,” all too common in charitable agreements, often presents unanticipated challenges and should generally be avoided, as neither donors nor charities can predict the future. But even where the snare of “forever” is avoided, gift agreements need to carefully align donor desires, the ability of the charity to honor commitments, and reasonable periods of time.

Take buildings. Gift agreements connected to structures should be directly connected to refer to their useful lifetime. Whether they require only maintenance for generations, or periodically need enough substantial renovation, or become outdated enough to need replacement, all buildings will need future outlays, and therefore patrons. Raising funds for that can be difficult, so when naming opportunities are offered to those who invest in a building, care should be taken not to overpromise.

Causes can be more long-lived than even the most enduring buildings. Charities need to be cautious when accepting gifts related to current causes, crusades, and policies—as these can change and even be mooted entirely by new events, evolving technology, and changing social conditions. Charities need to be bound by their contracts and their promises as much as businesses and governments are. Indeed, charities could be considered to have heightened obligations to respect the intentions and wishes of benefactors.

Donors also need to be realistic about their expectations. Neither givers nor receivers of charitable gifts can be certain of conditions in the far future.

Conditions “inevitably change; hence, no wise man will bind trustees forever to certain paths, causes or institutions,” wrote Andrew Carnegie.

Not every philanthropist feels that way, though. Most want to perpetuate a set of values into the future, even if the expression of those values might evolve. In 1961 Charles and Marie Robertson donated $35 million in A&P stock for the sole benefit of Princeton University to endow the graduate program at the Woodrow Wilson School of Public and International Affairs. Forty years later, in 2002, the Robertsons’ children sued Princeton because they thought the university had not been doing a good job following their parents’ wishes—wishes Princeton agreed to. The research for my book about this lawsuit (see “Benefits of a Gift Gone Wrong,” Summer 2014) showed me that there are steps both charities and donors should take to improve the odds that the aspirations behind a gift are honored.

Six steps for philanthropists

Honestly consider whether the gift’s purpose is enduring, and aligned with the organization’s long-term mission. Does the animal shelter need another building or does it really need operating money to care for more animals? While a new building would be nice and provide a naming opportunity, the current structure might be adequate, and the real need is for more skilled personnel to care for the animals. The shelter may succumb to a generous offer but find it hard to stick to the result over the long run. 

Consider an “escape clause” in the gift agreement in the event that circumstances change strongly over time. Legal battles between a donor’s descendants and charities are traumatic. If a charity can be given a little wiggle room within basic guidelines, that might be avoided. What if cancer is cured one day and there is no need for endowed programming addressing that affliction? Could the charity’s trustees be permitted to re-designate the income to another disease in need of treatment?

If a donation is an endowed gift, assess—ask and follow up—whether its income adds to the budget for the intended purpose, such as a scholarship or a professorship, or whether it merely replaces other budgeted income that can now be used elsewhere. Most donors don’t ask this question, and that’s fine if they don’t care and only want their name associated with the purpose, but donors who want to increase the organization’s capacity in a particular area should be sure to make certain that is happening, and that the gift income is not providing a cushion for the costs of other operations.
 
Designate someone to have standing in court in the event a legal action becomes necessary in the years after your death. The requirement to honor your wishes should be backed up by a tangible forewarning that your heirs have the ability to pursue legal action if they feel it necessary. If the donor is concerned about the heirs’ commitment past the first generation, he or she should seek legal counsel, as it may be possible that a funded trust—say for 50 years, or whatever the state maximum is to comply with the applicable state’s rule against perpetuity—can be established. In the end, however, as happened in the Sophie Newcomb case, the more distant a donor’s death, the less likely it will be that the court will be able to find anyone with standing to make a claim, and it will be perhaps equally unlikely that anyone would be able or willing to pay to pursue the claim. And the attorney general’s office, which has standing, may not be willing to get involved. The Robertsons were fortunate to have access to funds to pay for their lawsuit.

Be specific. Even those with opposing perspectives in the Robertson lawsuit agreed that specificity is crucial to reducing potential conflicts after a gift is made. In that case, the agreement called for Princeton to place “particular emphasis” on sending graduates of the Woodrow Wilson School into international-relations careers in the federal government. A percentage or number of students might have made that less fuzzy. If that kind of stipulation is too restrictive or specific, a provision in the agreement could require ongoing person-to-person reporting to ensure the donor’s heirs are satisfied.

Require reports and other communications. Donors—or if they are deceased, their representatives—should hold the charity accountable for providing relevant information in a timely manner. It’s reasonable to expect financial and narrative reports that track the progress and impact of a substantial gift.

Six steps for charities

Involve the board.Require board members to approve the terms of endowed gifts that will create obligations over a long period of time.

Resist perpetuity. Try to avoid the phrase “in perpetuity” in gift agreements. Its meaning is far different in different kinds of charitable work, and conditions, missions, target populations, programs, and buildings can change over time.

Keep previously agreed obligations in clear sight. Just because a restricted gift was made before current board members began their service doesn’t mean they can be ignorant or unconcerned about the duties of that transfer. Cost, practice, and fiduciary responsibilities need to be reviewed regularly.

Don’t forget overhead. Every gift meant to support or create a program should designate a portion of the funds for administration. Good charities need good infrastructure to operate effectively. The board needs to establish a policy—say, 20 percent to keep the program operating—and the staff soliciting gifts needs to communicate that. If a professor’s position is to be endowed at, say, $100,000 per year—while the gift would need to be $2 million, assuming a 5 percent endowment spending rate—an additional $400,000 probably needs to be set aside for office space, administrative support, and other costs.

Have an effective and fair whistle-blower policy. If an employee discovers that something is amiss with the accounting of a gift, he or she should be protected for reporting this.

Develop a comprehensive stewarding policy. Donors should not be forgotten or marginalized after the gift is made. This is true for any gift, but it is particularly necessary for those who have made an endowed gift. In addition to clear, regular reporting of finances and results, charities should foster ongoing communication with donors.

There is no ironclad legal language to guarantee that donors, their descendants, and recipient charities will remain aligned in all future executions of charitable work. So in addition to good policies, donors and charities need to establish open communication, cooperative attitudes, good faith, and as much trust as possible, both in advance of gifts and after they are made. Those can be fragile qualities, but are much likelier to exist and endure when long-term gifts are founded on respect for the donor, the donor’s family, and the donor’s wishes.

Doug White is the author of Abusing Donor Intent: The Robertson Family’s Epic Lawsuit Against Princeton.

 

As Time Moves On

Forever is a long time, they say. That can definitely be true of charitable bequests. So what do courts and trustees do when faced with a perpetual gift that has outlived its usefulness, or even its connection to reality?

Today’s most common legal solution is to apply the ancient legal doctrine of cy pres (“as close as possible,” pronounced “sigh-pray”). Under cy pres, a bequest or charitable gift can be “reformed” by a court when strict adherence to the donor’s original intent is no longer practically or legally possible. Judges have permitted trustees to use funds in ways that deviate from the donor’s specific instructions while hewing as near as they can to the spirit of the original gift.

One of the oldest examples of cy pres is the case of Attorney General v. Earl of Craven. In 1687, on the heels of a plague outbreak, a public-spirited English earl endowed the “Pest House Field” near London to build and maintain in perpetuity a facility for quarantining and caring for any of the local poor who “as should thereafter, at any time, happen to be visited with the plague.” By 1856, it had been 180 years since the last plague outbreak, and the earl’s descendants (who served as trustees) were keeping the grounds and funds for their personal use. The British government sued, arguing that reformation of the gift was necessary “to carry into effect the objects of the founder” by devoting it to “some charitable purpose which falls within the general charitable intention.” The court directed the fund to be used to found a hospital where sufferers could be treated for infectious diseases such as smallpox and cholera, and other maladies.

Earl of Craven was an easy case. It was fair to assume that the earl would prefer his money be used to treat contemporary plagues rather than to line the pockets of ne’er-do-well relations. In more mixed circumstances, courts have historically been hesitant to apply cy pres, since it conflicts with the fundamental precept of trust law that a person can dispose of his assets as he sees fit. Those arguing for redirecting trusts typically had to offer convincing evidence that there was no part of the original bequest that was legal or practically feasible, and that the proposed reformation itself did not run afoul of some other deeply held belief of the donor. Courts preferred to let a gift revert to heirs or to the general treasury rather than go to a purpose that violated donor intent.

The reluctance of courts to reform gifts reached its apotheosis in the American case of Thatcher v. Lewis. Bryan Mullanphy, an Irish immigrant who made a fortune as a merchant and later was mayor of St. Louis, left a substantial fund to “furnish relief to all poor immigrants and travelers coming to St. Louis…to settle in the West.” By 1902, with such travelers down to mere dozens per year, it was clear that the fund had far outlived the need, and the Missouri attorney general commenced litigation to reform the gift. But not for another three decades did the court apply cy pres and alter the terms of the trust. Even then, the court insisted that though modern-day “poor travelers may be outfitted in ‘Model T Fords’ rather than ‘Prairie Schooners,’ there still must be poor travelers who need assistance.” The court would thus only permit funds to be used for “the relief and assistance of other poor immigrants and travelers,” and on condition that any voyager passing through St. Louis on their way West be helped first.

Contemporary courts have adopted a looser—some say, too loose—view of the cy pres doctrine that permits reformation of gifts that have become merely constraining, as opposed to impossible or infeasible. The protracted fight over Philadelphia’s Barnes Foundation is the most famous example. Self-made pharmaceutical magnate Dr. Albert Barnes was a man of unflinching will. When he endowed an art school and museum to house his remarkable art collection in 1925, he constructed the gallery to exact specifications that included the precise placement of individual paintings, in accordance with his eccentric pedagogical theories. And Barnes decreed that the collection could never be moved from its location in suburban Lower Merion, Pennsylvania. He placed stringent restrictions on investments of the trust money, and appointment of new trustees.

By the 1990s, these restrictions had caused the endowment of the Barnes Foundation to decline substantially. The trustees sued to reform the foundation to permit the collection to move to a new facility in downtown Philadelphia, permit traveling shows, and diversify the endowment. Though the trustees lost in the lower courts, the Pennsylvania Supreme Court eventually concluded that while “the sanctity of the donor’s intent should be honored and upheld whenever possible,” in this case the donor’s intent had become so out of step with contemporary economic and artistic imperatives that the foundation needed relief in order to achieve Albert Barnes’s larger charitable intent.

Many observers were worried by the court’s breezy hat-tip to donor intent “whenever possible.” Most judges, however, remain rightly wary of rewriting perpetual gifts in order to suit current trustees. Cy pres is a doctrine that will always allow some subjectivity, but within limits—which is all the more reason for donors to be crisp in the instructions they leave with their long-term gifts.

Contributing editor Justin Torres is an attorney in Washington, D.C.