Perfecting Donor Intent: Legal Lessons and Practical Advice

1. Perfecting Donor Intent:Legal Lessons and Practical Advice KATHRYN W. MIREE & ASSOCIATES, INC. 1 North Carolina Planned Giving Council Gift Planning in a Fluid Environment

2. The Intent Illusion 2 • More and more often, donors direct the use of their planned gifts • Indeed, as planners, we’ve learned that the better the donor understands the impact: • The larger the gift • The more likely the institution is to close that gift

3. The Intent Illusion 3 • Is it practical to restrict a perpetual gift? • What happens when the gift is no longer needed or appropriate? • What happens if the charity has critical operating needs – far more important than the purposes for which the gift is designated? • What happens if the gift generates more revenue than needed to cover the specified purpose?

4. The Objectives of the Session 4 • Define donor intent • Look at cautionary tales – taken from the courts • Identify the issues • Consider the options to ensure donor intent from the perspectives of the charity, the advisor, and the donor • Walk through the gift planning and gift documentation process focused on donor intent

5. What is Donor Intent? 5 • Intent is a malleable concept • Easy to define when closing the gift – difficult to resurrect several years down the road • Broad definition: the donor’s expectation’s of the gift’s use and impact • Donors tend to think more narrowly • Success by Six • Rather than early childhood education/preparedness

6. The Parties Who Define Intent 6 • The donor • The donor’s advisor • The charity • The state Attorney General • The courts

7. What Could Possibly Go Wrong? 7 • The Barnes Foundation • 1922 - Dr. Albert C. Barnes established Foundation to house collection and educate the working class about art – modest building, Dr. Barnes designed curriculum • 1951 – Dr. Barnes died • 1991 – Trustees went to court the first time – wanted to sell or loan the paintings (prohibited under by-laws) – judge allowed exhibition to tour ($16 million)

8. What Could Possibly Go Wrong? 8 • The Barnes Foundation • September 2002 – trustees filed suit again to move collection to downtown Philadelphia and to increase trustees from 5 to 15 • Pew Foundation and Lenfest Foundation agreed to help and fund operations • Early 2004 – court increased number of trustees; December 2004 approved the move

9. What Could Possibly Go Wrong? 9 • The Robertson Foundation Lawsuit Against Princeton • 1961 - Charles and Marie Robertson contributed $35 million to Princeton • To fund Woodrow Wilson School of Public and International Affairs • “Where men and women dedicated to public service may prepare themselves for government service…..[with particular emphasis on international relations and affairs]” • 1972 – Mr. Robertson complained to Princeton in writing

10. What Could Possibly Go Wrong? 10 • The Robertson Foundation Lawsuit Against Princeton • 1972 – Mrs. Robertson died • 1981 – Mr. Robertson died • July 2002 – Son William and daughters Katherine Ernst and Anne Meier and cousin Robert Halligan – filed to direct funds to other universities that could honor donor intent • Princeton settled in December 2008: $90 million restored to foundation; $40 million in costs

11. What Could Possibly Go Wrong? 11 • Howard v. Administrators of the Tulane Educational Fund • 1886 to 1901, Josephine Newcomb contributed over $3.6 million to establish a college for women on Tulane’s campus • After Katrina, Tulane merged Newcomb into Tulane, absorbed its endowment, and created a women’s studies program. • Heirs sued to enforce donor intent • Originally dismissed because of lack of standing; Supreme Court vacated the dismissal and remanded to the trial court

12. What Could Possibly Go Wrong? 12 • Howard v. Administrators of the Tulane Educational Fund • Another heir with stronger ties to Ms. Newcomb, Susan Henderson Montgomery, filed suit to enforce the terms of the gift. • Ms. Montgomery filed for summary judgment • Trial court denied and Ms. Montgomery filed an appeal • October 2010, the 4th Circuit Court of Appeals in a 3-2 decision denied the appeal finding Ms. Newcomb’s will created an “unconditional bequest”

13. What Could Possibly Go Wrong? 13 • Tennessee Division of the United Daughters of the Confederacy v. Vanderbilt University • 1913 a series of gift agreements with Peabody and contributed $50,000 to build a dormitory - rent free housing for students of Confederate ancestry • Key restriction - Confederate Memorial Hall • 2002, President decided to rename the building • Trial court supported Vanderbilt • Appeals court reversed - abide by the agreement, or return the funds (present value)

14. What Could Possibly Go Wrong? 14 • Fisk University v. Georgia O’Keeffe Foundation • 1949, George O’Keeffe (widow of Alfred Stieglitz, executrix) transferred the Alfred Stieglitz collection of 97 photographs and paintings to Fisk • Condition - could not sell or exchange • Ms. O’Keeffe contributed additional pieces which she owned • 2005, Fisk asked court to allow sale of 2 paintings under cy pres doctrine - cost to maintain the collection high

15. What Could Possibly Go Wrong? 15 • Fisk University v. Georgia O’Keeffe Foundation • Georgia O’Keeffe Foundation filed to block the action • Georgia O’Keeffe Museum filed petition to substitute for the Foundation alleging it was the successor in interest. • Attorney General got involved • Multiple settlement offers were rejected • This fall, Tennessee AG suggested the collection be removed until such time as Fisk could properly care for it

16. The Issues of Donor Intent – Standing to Sue 16 • Standing to sue – plaintiff must have a nexus to action or stake in outcome • 3 requirements • Actual or imminent injury • Injury must be caused by person or entity against whom suit is filed • Court must have ability to redress • The IRS requirements for gift deduction • Intent to “absolutely and irrevocable • Completed transfer

17. The Issues of Donor Intent – the IRS Requirements 17 • The IRS requirements for a completed gift • Intent to “absolutely and irrevocably divest himself of title, dominion, and control” of the property • Irrevocable, complete transfer of the property to charity • Other requirements: donor competency, qualified charity, delivery, acceptance

18. Issues of Donor Intent - The Court’s Perspective 18 • For many years, courts held donors released all rights and had no standing to sue • Carl J. Herzog Foundation, Inc. vs. University of Bridgeport • At common law, a donor who has made a completed charitable contribution had no standing to sue • The general rule…..the purposes are enforceable at the instance of the Attorney General

19. Issues of Donor Intent - The Court’s Perspective 19 • Now, courts seem to be reconsidering • Estate of Sybil B. Harrington – gift to endowment to fund traditional opera – allowed to proceed • Brinkley Smithers and gift to St. Luke’s-Roosevelt Hospital Center – Alcoholism research and treatment facility – hospital settled, transferring $6 to another institution and restore funds to endowment • Vanderbilt and the Confederate Memorial Hall • L.B. Research and Education Foundation grant to the UCLA Foundation – specific criteria for chair with gift over if terms not met – allowed to proceed – donor had “special interest” – AG’s right not exclusive

20. Issues of Donor Intent – Who Can Sue (Successfully)? 20 • Answer – Anyone can file a suit – the real question is: Who has the right to advance a lawsuit? • Laws/rulings differ from state to state

21. UMIFA 21 • The 1972 UMIFA • Restrictions released with written consent of donor • Court of appropriate jurisdiction can release if restriction is “obsolete, inappropriate, or impracticable” • Release cannot convert to non-charitable purpose • Court always has cy pres powers • Ohio has UMIFA at last check.

22. UMIFA 22 • The 2006 UMIFA Revision • Donor release through consent • Doctrine of deviation • If modification will enhance • If restriction is “impracticable, wasteful and impairs the management – can ask a court to modify – notify AG • Doctrine of cy pres • If restriction becomes unlawful, impracticable, impossible to achieve, or wasteful – court may use cy pres doctrine to modify – notify AG • Small funds – less than $25,000 in place more than 20 years – notify AG, wait 60 days

23. Perspectives in Planning – The Donor 23 • Donor generally focused on particular program, specific result • Donor not likely to anticipate long-term social or cultural change impact need or gift terms • Donors sometimes express gifts in manner that’s illegal or unconstitutional • Donors are reasonable – respond well to education on issues

24. Perspectives in Planning – The Planner 24 • Responsibilities • Clarify donor’s goals and objectives • Express gift goals in gift and provide flexibility • Select gift form • Select best gift timing • Select best asset • Create effective gift (one that can be properly administered and executed)

25. Perspectives in Planning – The Charity 25 • Establish standards and evaluation process • Are the goals achievable (short-term and long-term)? • Do the goals fit the charity’s mission? • How will the charity measure the gift’s success? • What potential impact on purpose might occur over the next 100 years? • Can the charity comply? • Is management cost effective? • Is there potential for wasting?

26. Perspectives in Planning – The Charity 26 • Educate the board • Aggressive ambassadors – without knowledge of policies, they may encourage the wrong type of gift • Help them understand their fiduciary role – and liability • Educate the staff • Training – beyond the development staff • Encourage development staff to review and suggest changes

27. Perspectives in Planning – The Charity 27 • Keep good records • The gift document • Will • Revocable trust with testamentary provisions • Beneficiary designations with restrictions • Endowment agreement • Gift agreement • Court orders affecting the gift • Probate • Administrative orders • Court judgments, settlements

28. Executing the Plan Through the Gift Agreement 28 • The goals of the gift agreement • Ensure the gift’s goals and donor’s intent are clear • Provide flexibility in use of funds over time • Provide non-judicial roadmap/process for change • Specify parameters/decision elements for change

29. Key Elements of the Gift Agreement 29 • Fund name • Amount/asset to be contributed (now and instructions for later) • Donor goals • Directives on gift use • Recognition (if any) • Type • Minimum • Timing and alternatives if you don’t reach funding level

30. Key Elements of the Gift Agreement 30 • Accounting (separate or pooled) • Directives on reporting (type, recipients, time required) • Publicity • Investments (allow pooling, PPA, investment guidelines, spending policy)

31. Key Elements of the Gift Agreement 31 • Flexibility to make non-judicial changes (Plan “B” and Plan “C”) • State gift goals clearly, but broadly • Encourage the donor to think about the changes in your charity over the last 100 years – the last 20 years! • Alternate program area • Gift over • Institutional discretion • Designate who makes decisions

32. Key Elements of the Gift Agreement 32 • Standing to Sue • Your charity may not want it – but the donor may • Check state law – get advice of counsel • Ensure the donor’s reservation doesn’t constitute retention of ownership rights • Termination • Upon completion of gift purposes • Upon reaching de minimis level

33. Sharing the Document with Advisors 33 • Encourage review and input • Provide checklist • Educate advisors on the importance of a written, flexible gift document

34. Lessons Learned: The 10 Planning Rules 34 • Change is inevitable – so plan for change. • Long-term gifts require long-term planning. • Revel in the charitable vision – but design the gift to outlive the vision. • Engage the donor’s advisor in the process.

35. Lessons Learned: The 10 Planning Rules 35 • You must have gift acceptance policies that determine the standards you will apply to long-term gifts. • Always reduce the gift terms to writing. • Include options in the event the donor’s original goals are met (Plans A, B, and C). • Keep the documents in a safe place.

36. Lessons Learned: The 10 Planning Rules 36 • Engage in regular communication with gift donors and their families. • Avoid crisis management by addressing problems early.

37. Final Thoughts 37 • Good gifts are a matter of planning. • Donors need to carefully think through their objectives • Advisors need to encourage this exploration, framing the issues • Charities need to evaluate their role and document the agreement in writing – then honor the agreement or seek change