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Most charities have gift acceptance policies (GAPs). I’ve never seen a GAP I liked.
What’s a GAP?
Conceptually, a GAP deals with matters pertaining to a charity’s acceptance of gifts, involving money, credit cards, tangible personal property, marketable securities, life insurance, real property and so on.
In practice, the typical GAP prattles on about the charity’s mission, the charity’s adherence to ethical principles, how various gift arrangements work, a description (usually flawed) of date-of-gift rules and other matters irrelevant to gift acceptance.
Purpose of a GAP
A GAP has one purpose, which is to keep the charity and its development officers (DOs) out of trouble in the charity’s dealing with donors.
What sort of trouble? Well, for example, the Dean of the Music School negotiates a gift of a musical instrument without the knowledge of the development office and without any regard to gift receipt requirements or the federal income tax rules pertaining to gifts of tangible personal property.
To avoid this sort of trouble, a GAP needs to be board approved. This way, the head of the athletic department can’t work out some special gift arrangement with some wealthy alum that violates various tax rules. Oh, the head of the athletic department can make some such deal, but then he can be compelled to conform, and the deal can be undone, if a proper GAP is in place.
To craft a good GAP, you need to be able to anticipate problems and know how to avoid them.
Elements of a Good GAP
In no particular order, a good GAP should deal with these matters (among others):
• Who has authority to negotiate gift arrangements?
• Who has the authority to accept gifts on behalf of the charity?
• What sorts of gifts will be accepted?
• What sorts of gifts won’t be accepted?
• How should pledges be handled?
• How should gift agreements be handled?
• How should gift receipts be handled?
• How should donor-obtained appraisals be handled?
• Should the charity issue gift annuities and, if so, according to what practices?
• Should the charity act as the trustee of a charitable remainder trust (CRT) and, if so, according to what practices?
• Should a DO accept a personal gift from a donor?
Let’s look at each of these elements.
The Matters of Authority
There’s no reason to prohibit the Dean of the Music School or the head of the athletic department from negotiating gifts. The development office, however, should review and approve all such negotiations before the gifts are brought into play.
Who has authority to accept gifts is a deeper matter of law. A GAP should be explicit as to who has authority to accept from a donor a gift of cash, a gift of tangible personal property and perhaps gifts of other sorts of assets. A GAP also should allow some officer—usually the vice president (VP) for Development—to confer on some third person authority to accept a particular gift.
For example, say a charity in New York has a donor in Los Angeles who wants to complete a gift of art before year end. The VP for Development can confer written authority on a board member or volunteer who lives in Los Angeles to accept the gift of the art on behalf of the charity.1
Potentially Harmful Gifts
Most tendered gifts to charity are beneficial. Some are potentially harmful.
A complete list of potentially harmful gifts is beyond the scope of this article, but examples include gifts:
• of partnership or limited liability company units.
• of mortgaged or environmentally damaged real estate.
• of an asset that throws off unrelated business income.
• from an infamous individual.
• that are tendered with too many strings attached.
A GAP should state how potentially harmful gifts will be handled. The usual way is the vetting by a gift acceptance committee (GAC). The real question then is, who will comprise the GAC?
At the very least, the GAC usually should include:
• a competent tax lawyer,
• a CPA,
• a fee-for-service financial planner,
• a real estate developer, and
• an experienced business executive having excellent common sense.
An outside gift planning expert should be on call to assist the GAC if need be.
Pledges
Pledges can be tricky and can cause serious tax problems for the pledgor and the charity.
The potential problems are associated with enforceable pledges. Only the pledgor or the pledgor’s spouse may safely pay an enforceable pledge.2 Payment of an enforceable pledge by the pledgor’s private foundation is a prohibited act of self-dealing.3
There are two fundamental problems here: (1) usually, neither the pledgor nor the charity’s officer negotiating the pledge will know the tax rules applicable to pledges; and (2) usually, neither the pledgor nor the charity’s officer negotiating the pledge will have any appreciation of the fact that the pledge is enforceable. These two problems are especially likely to arise if the pledge is for a large amount and is being negotiated by the charity’s president.
Whether a pledge is enforceable depends on the state law applicable to the pledge.4 For this reason, every written pledge agreement should contain a governing law provision.
A GAP should require that:
• Every pledge agreement be vetted by the development office.
• Every pledgor state up-front in writing the source or sources of assets that will be used to make payment on the pledge.
• Every pledge agreement state how non-cash assets are to be valued by the charity for purposes of making payment on the pledge.
Gift Agreements
A gift agreement is a written agreement between a donor and a charity that spells out how the charity shall use the donated funds.5 Quite often, a pledge agreement and a gift agreement are combined into a single document.
A GAP should require that the development office create a gift agreement template that’s reviewed and approved by expert legal counsel.
Gift Receipts
Gift receipts are tax law documents.6 They should be to the point, concise and complete. They should be separate from thank you letters, which aren’t tax law documents.7 They should be vetted periodically, especially following enactment of a major federal income tax law, by expert tax counsel.8
A GAP should spell out all of this.
Donor Appraisals
To substantiate a claimed federal income tax charitable deduction of more than $5,000 for a gift of an asset that’s neither cash nor publicly traded securities, the donor must obtain a “qualified appraisal” as defined in Internal Revenue Code Section 170 and the corresponding Treasury regulations.9
The qualified appraisal rules first took effect Jan. 1, 1985. The rules were substantially modified effective Jan. 1, 2019. In the more than 34 years the rules have been in effect, I’ve reviewed hundreds of donor appraisals that charities have asked me to review. I haven’t reviewed one appraisal that meets the definition of a “qualified appraisal.”
From my perspective, there’s 100% non-compliance with the qualified appraisal rules. This puts charities at a high degree of risk.
Reason: A charity typically receives copies of its donors’ appraisals. If a donor is found on audit not to have a qualified appraisal, the donor’s claimed federal income tax charitable deduction for the subject gift will be disallowed, and the donor will then turn in anger to the charity. Anger because the donor’s attitude will be, why didn’t the charity give me a head’s up that my appraisal was no good for tax purposes—they’re supposed to be experts at this stuff.
A charity’s GAP needs to address this matter. The GAP should impose two requirements:
1. If for any reason, any individual in the charity receives a copy of a donor’s appraisal, said copy shall be forwarded immediately to the chief development officer (CDO).
2. The CDO shall promptly send a letter to the donor stating that the charity can’t advise the donor as to whether his appraisal is a qualified appraisal for federal income tax purposes and that as to this matter, the donor should consult with his own tax advisor.
This is a simple way to avoid potentially huge problems.
Gift Annuities and CRTs
The GAP should address the authority to issue gift annuities or to act as the trustee of a CRT.
The GAP or a separate policy should state provisions as to funding asset requirements (for example, type, valuation, minimum amount) and minimum age requirements for the annuitants.10 Ditto as to CRTs as to which the charity will act as trustee. In my opinion, it’s generally unwise for a charity to serve as trustee of a CRT unless it has a vested interest in the entire trust remainder.11
DO Accepting Personal Gift
For some DOs in some charities, there’s the very real possibility a donor may offer a gift to the DO. The charity’s GAP should prohibit a DO from accepting a gift of money or valuable personal property (such as valuable jewelry or a car) or anything else that has substantial value. The prohibition should extend to both lifetime gifts and gifts made by will.12
This prohibition needn’t extend to token gifts, to situations in which the donor wants to pay for lunch or dinner or for invitations to attend events, for example, when the donor invites the DO to go to the opera. These types of gifts, in and of themselves, generally don’t raise the specter of undue influence.13
In this area, the GAP begins to intrude into what I call a “code of conduct” for DOs. The charity may need a separate code of conduct depending on its mission and its donor constituency. The waters run fairly deep here.14
Other Factors to Consider
There may be other factors to consider in crafting a GAP, including that the GAP may need to address the situation in which:
• a DO working with a donor believes the donor may lack capacity to make a gift.
• the donor dangles a very large gift but wants a gift agreement that in some way would violate the GAP.
In any event, an outside gift planning expert should review the GAP before it’s submitted to the board of trustees. The outside gift planning expert also should review any substantive changes the board wants to make.
Make it Available
The GAP shouldn’t be merely an internal document. It should be made freely available to prospective donors and should be available to download from the charity’s website.
Fear Not
I know of at least one very prominent charity whose board of trustees prohibits the charity from having a GAP. (As a result, the charity’s planned giving officer has lost some valuable gifts and has gotten into trouble more than a few times.) The board fears a GAP will make representations that both donors and the Internal Revenue Service will use against the charity. This unfounded fear stems from the fact that the board members don’t understand what a GAP properly is. The fear would be founded, of course, if the GAP prattled on about the tax law consequences of various gift arrangements.
Endnotes
1. The board member or volunteer can come to the meeting with the donor armed with two forms of written agreement. The first to be executed is the charity’s acceptance of the tendered gift. The second is an agreement whereby the charity requests that the donor hold the donated asset on the charity’s behalf until the charity can arrange to take physical possession, and the donor agrees to abide by the charity’s request. See John L. Greer, 70 T.C. 294 (1978).
2. See Revenue Ruling 81-110.
3. See Internal Revenue Code Section 4941 and the corresponding Treasury regulations.
4. State laws vary considerably as to whether a pledge is enforceable. For some of the state law rules on enforceable pledges, see Jonathan G. Tidd, “Crafting Charitable Pledges,” Trusts & Estates (October 2014).
5. For state law rules as to charitable gift agreements, see your state’s version of the Uniform Prudent Management of Institutional Funds Act.
6. Under IRC Section 170 and the corresponding Treasury regulations, a charitable deduction claim can be disallowed on audit if the donor doesn’t have the proper form of gift receipt. Furthermore, Section 170 places the entire burden of obtaining a correct gift receipt on the donor.
7. In my opinion, documents of legal significance shouldn’t be combined with documents having no legal significance. Such a practice paves the way for errors on the part of both the sender and the receiver.
8. For example, the Treasury regulations regarding gift receipts were largely rewritten as of July 28, 2018. See Jonathan G. Tidd, “Coming to Grips with the New Charitable Gift Substantiation Regs,” Trusts & Estates (February 2019).
9. Ibid.
10. The minimum age requirements for a gift annuity are often set way too low. Consider, for example, that a gift annuity issued to a healthy American woman aged 70 may run for 30 years or more. The value of such an annuity transaction to the issuing organization may be nil.
11. If a charity serves as trustee of a charitable remainder trust (CRT), and other charities share in the CRT remainder, the trustee-charity is putting itself at risk that one or more of the other charities will claim the trustee-charity has failed to invest the CRT assets properly. Given the 100% accuracy of hindsight, this risk is far from negligible.
12. The core concerns here are the appearance of impropriety and undue influence.
13. On the other hand, if the token gifts are just part of an overall picture of questionable behavior on the development officer’s (DO) part, they may become part of an undue influence complaint filed against the charity.
14. For example, a DO may genuinely become romantically involved with a donor. This would cause the DO to be in a conflict of interest.