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Keep Donations Flexible Now to Avoid Conflict

May 2, 2009
Wealth Matters
By Paul Sullivan

Like many people, I pay attention when I hear news about my alma mater. I enjoyed college — I went to Trinity College in Connecticut — and still like to know what is going on there. But last week, I spotted something about Trinity that made me think about a growing problem between donors and recipients: a clash over how to use a long-ago gift.

The story in Trinity’s case is a common one for these rifts. An economics professor (whom I don’t know) complained to the Connecticut attorney general’s office that money meant to support his endowed position was being misused. What had been $750,000 some 30 years ago had grown to $9 million. That was far more than was needed to pay one professor, so the college proposed using some of the excess income to pay for scholarships. The professor cried foul.

What was interesting about my alma mater’s problems, first reported in The Wall Street Journal, was not the amount of money or how it was being redirected (for scholarships). It was that battles between dead donors and nonprofits are increasing as the economy worsens.

“The colleges are getting the publicity, but it happens all the time,” said Hank Goldstein, principal of the Oram Group, an adviser to charities.

When the donor is alive, redirecting funds is simple: a charity asks and the donor agrees or disagrees. The battles ensue when the donor is dead and the meaning of the legacy is up for debate.

The university may decide that financing something additional is still following the intent of the original gift, but the heirs may disagree. Yet if the university presses on, the heirs have little recourse beyond the court of public opinion. State attorneys general are responsible for regulating nonprofits, but they often do not have the time or desire to get involved.

“Generally, the donor’s recourse is to not make future gifts,” said William Woodson, managing director at Credit Suisse. “And obviously that hurts the charity because you want to cultivate a donor base.”

The good news is both donors and recipients have become much more pragmatic about gifts.

“Now, institutions have to have the uncomfortable conversation of saying, ‘If you get arrested and convicted of a crime, we’re taking your name off the building,’ ” said Melissa Berman, president and chief executive of Rockefeller Philanthropy Advisers. “And the donor has to say, ‘If you go under or don’t use the funds the right way, you have to return the funds.’ ”

Still, most people who give with strings attached do so because they have a vision that they want carried out. For those of you considering donations, here are some of the pros and cons when imposing restrictions on your gift.

Checkbook Philanthropy
The easiest way to have an immediate impact is to write a check and trust the charity to use it wisely. Another, particularly in a recession, is to be understanding.

“With a multiyear gift to a nonprofit, people have been flexible with moving the payments up, if another fund-raising campaign came up short,” said Lisa Philp, managing director at J.P. Morgan Private Bank.

But even when the economic crisis passes, institutions appreciate unrestricted donations. Your bequest may go toward keeping the lights on or paying salaries in the development office, which are not as glamorous as a building or an endowed chair. But they are practical and necessary.

Lifetime Guidance
There are several ways for a donor to give and still have a say.

A popular method is a donor-advised fund. Think of it as a charitable mutual fund: you put in money when you want, take a tax deduction as if you were donating to a public charity and have the firm running the fund manage the money. When it comes time to make a donation, you can direct it to the charity of your choice.

Since it is an “advised” fund, the firm does not have to follow your wishes, but, practically speaking, that rarely happens. The two best-known donor-advised funds are operated by Fidelity and Schwab, but there are dozens of community foundations that offer them as well. The New York Community Trust is one of the largest, with 1,100 donor-advised funds (out of some 2,000 bequests it oversees) directed at interests in New York City.

“People don’t set up a donor-advised fund with a narrow interest,” said Lorie Slutsky, its president. “Someone with $5 million may care about his alma mater, his church, the ballet but he also wants to do something about hunger and homelessness.”

The New York Community Trust, founded in 1924, does its best to adhere to a donor’s wishes, but Ms. Slutsky said the agreements for the funds they managed in perpetuity explicitly granted them discretion.

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