Is your institution’s gift acceptance policy (GAP) ready for a stress test? It will need to be, especially when a negotiation for a “transformational gift”1 is imminent, whether donor-initiated or solicited by the institution. The following case study represents an aggregation of facts culled from my files of practice as a lawyer, senior development executive and donor. The primary intent of my review is to raise critical issues, none of which come with ready-made solutions, but perhaps rebuttable presumptions of how to begin thinking through the issues. Hopefully, an institution’s discipline of analyzing a possible range of solutions yields “a transformational gift” that doesn’t eat its unrestricted funds, and, in fact, advances the impact of an institution’s mission while delighting the donor.
Ernie: Alumnus, Altruistic and Involved
An alumnus of Old Ivy’s engineering school and its graduate school of business, Ernie (age 54), is the CEO of a publicly traded company (Publico). Publico creates artificial software for the diagnosis of many forms of cancer.
Filings with the Securities and Exchange Commission show he’s vested in $300 million in Publico’s stock through a decade of timely Internal Revenue Code Section 83(b) elections and exercise of incentive stock options.
Over the last 15 years, Ernie has funded $1 million in endowed scholarships for engineering undergraduates and $10 million in endowed business professorships in data mining and computer science. Those gifts were unsolicited as Ernie has strong opinions about what it takes to make Old Ivy’s engineering “#1 in the world.” Ernie also serves as a volunteer interviewer for Old Ivy’s School of Engineering.
He’s declined several times over the last 10 years the invitation to join the board of trustees, citing the demands of his position. Recently, a serious health scare has prompted the longtime Old Ivy president to retire. During a lunch with the newly appointed president and long-serving chief development officer (CDO), Ernie offers to contribute $200 million during the quiet phase of Old Ivy’s $5 billion campaign. He “hopes” the engineering school will be named after him. Without much discussion but plenty of celebratory toasts, the president “accepts the offer.” Delighted, Ernie promises them his legal counsel will be sending a detailed gift agreement within 10 days. During the return flight back to campus, the president calls the chairman of the board, Wanda Wary, Esq., who asks, “How much do we know about Ernie?” Irked by being second-guessed and sensitive to his lack of experience with 8-figure donors, the president says, “He’s loaded, loves us and wants to name our engineering school. I don’t need a lawyer to kill this gift. End of discussion!” Wanda invites the CEO to a 6:30 a.m. breakfast at her office to continue the discussion.
The Gift Agreement Arrives
Wanda advises the president that a gift of this magnitude requires approval from the full board of trustees after a gift agreement has been approved by both sides. The president couldn’t answer some of Wanda’s basic questions, such as: How large is the gift relative to the operating budget? How will it be used? How quickly will it be paid? What’s the duration of the naming rights? Old Ivy never approved a GAP; the development committee has failed several times to persuade the prior president of its value. The president is instructed to brief the executive committee on developments before any gift agreement arrives. The majority of executive committee members are only mildly positive as the CEO’s unquestioning acceptance rankles them. They inform him that Wanda and the general counsel will handle the negotiations going forward.
The gift agreement arrives as promised. In reviewing it, Wanda and the general counsel note requests from Ernie needing examination:
1.Ernie’s role in identifying and hiring faculty members in engineering and business programs. As one of the top CEOs in the United States, Ernie has literally thousands of contacts who could identify promising faculty and researchers for both schools. He’ll be nominating those of “top credentials.” He would like to “review all finalists” for any of the professorships but explicitly rejects veto power.
2.Quarterly financial reports due from deans of engineering and business programs. Ernie seeks quarterly reports on enrollment, fundraising and research projects. Ernie believes even a not-for-profit is “only as good as the numbers indicating financial health.”
3.Perpetuity of naming rights. Ernie specifically seeks perpetuity of the naming rights because his gift is four times greater than the second largest gift.
4.Alternate beneficiary. During Ernie’s lifetime, he insists New Ivy, a different academic institution, receive funds in the event his gift isn’t stewarded well. He believes an alternate beneficiary keeps Old Ivy motivated to administer the gift as drawn.
5. Naming opportunity. Ernie also knows that in an era of ever-rising wealth, someone may want the naming opportunity. He read how David Geffen’s gift of $100 million for the renaming of Avery Fisher Hall at Lincoln Center in New York City necessitated the charity to reach a settlement with the Fisher heirs. In the event a donor comes forward after the longer of Ernie’s lifetime or 30 years after the execution of a gift agreement, then all prior contributions are to be equally split to Ernie’s living heirs and his foundation.
6.The frugal and vain philanthropist. Ernie asks that his legal fees incurred in the negotiation and monitoring of compliance of the gift agreement be reimbursed. Ernie also asks that his portrait be done by a recommended “artist.” The fee is estimated to be $100,000. He also asks Old Ivy to spend $1 million on the marketing and renaming of the engineering program.
7.Retention of the right to manage funds gifted to Old Ivy. Ernie owes part of his wealth to outstanding advice from Brown Boulder, a leading international wealth management firm. Their returns have easily outperformed the very lackluster returns of Old Ivy’s endowment managers.
Old Ivy Replies
1. Hiring. The academic leadership is very alarmed that Ernie will be influencing whom should be hired despite his claim of seeking “a voice, not a veto.” The quality of his recommendations isn’t likely to be questioned. Nonetheless, the institution feels strongly about considering his recommendations. The dean has no problem sharing the finalists with Ernie and will even be open to his feedback. To improve Ernie’s acceptance of Old Ivy’s point of view, Wanda will share the experience of the potential perils of overly enthusiastic supporters’ involvement in critiquing candidates.2 If Ernie can accept the real possibility some of his recommendations may not be interviewed or hired, then and only then could Old Ivy seek his input.
2. Financial reports. Part of Ernie’s gift is for the unrestricted use of the engineering and business programs. Old Ivy feels keeping Ernie abreast of enrollment and fundraising efforts is appropriate. They prefer not to divulge news about the research that has potential commercial applications. Old Ivy concedes this level of donor engagement is the price to be paid so long as the confidentiality of its research projects can be maintained.
3.Naming rights. The CDO wants the duration of the naming rights to run for the shorter of Ernie’s life or 35 years. Ernie’s life expectancy is 35 years. The CDO wants her successor to be able to have that naming opportunity to re-sell. The senior vice president of marketing raises the concern of the gift being so successful that it might want to retain the name after the expiration date.
4. Alternative beneficiary. In lieu of accepting an alternate beneficiary that might benefit a competitor, Old Ivy might ask for disputes to be arbitrated to reduce the cost and expense of public litigation and press scrutiny. Old Ivy might also alert Ernie that his heirs would be taxed on any payments pursuant to the tax benefit rule.
5. Frugal and vain. Here, the university should make clear they’ll be reducing the value of the gift to the extent of legal fees and artist’s commissions paid as required by law. The Internal Revenue Code notes the amount of the donation is the amount of the excess of the fair market value gifted over property paid to the donor.3
6. Management of funds. The university is surprised to learn that Ernie can retain the ability to invest his contribution so long as the conditions of Private Letter Ruling 200445023 (Nov. 11, 2004) are satisfied. Specifically, the transfer must be unconditional and irrevocable with no self-dealing. Old Ivy must have the right at any time in its sole discretion to end Ernie’s ability to invest his gift. Ernie’s legal advisors will need to research whether New Ivy as a contingent beneficiary could violate one of the requirements of the ruling.
Information About Donor?
How much should or must the institution know about the donor and how a fortune is made? The senior administration thinks the initial draft and their response to it is a good start. But, they’re worried about any skeletons that may be in Ernie’s closet or the company he founded.
In the age of pervasive social media to be harvested for anyone’s failures of judgment and good manners, the institution should do at least the minimal due diligence of finding “what’s in plain view.” To the extent issues of failed personal character such as dishonesty or domestic violence emerge, it will be hard to accept the commitment. The thornier issue to be decided is what happens if evidence of failed personal character arises after the commitment has been funded either in part or in whole. But, the issue needs either to be knowingly addressed in the agreement or omitted with the plan of dealing with any improprieties if they ever arise.
Lessons Learned
Our case study only skimmed the surface of some of the most challenging issues to be considered. Hopefully, some of the information both surprised and informed you.
Impactful donors can create the most visible public relations problems for an institution. A GAP can create a framework of how to work through the thorny issues involved in a donor relationship. With unprecedented wealth in the United States,4 there will be more donors with high 8- and 9-figure capacity, especially in an area of rising wealth inequality. And, these donors will be increasingly demanding about their recognition and involvement in the life of an institution.
Endnotes
1. The amount of a “transformational gift” will vary with the size of the institution. For a private, highly productive research university or internationally renowned medical center or arts organization, it might be $100 million and higher. For mid-sized charities outside the world of higher education and research, it might be $10 million and higher. For a locally based charity with a modest budget, it might be its largest gift ever, often at least $1 million.
2. The Pearson brothers and their foundation sued and alleged that the University of Chicago “failed to deliver on the most fundamental of its obligations under the Grants Agreement.” They were especially disappointed in the defendant’s failure to hire high quality faculty. See Christopher P. Woehrle, “Miscommunication Between Donors and Donees: Noble Intentions Don’t Always Translate to the Best Results,” Trusts & Estates (October 2018).
3. See Treasury Regulations Section 1.170A-1(h).
4. Seehttps://dqydj.com/how-many-millionaires-decamillionaires-america/. There are an estimated 121,822 households worth $50 million and higher. Among them are 36,202 worth $100 million or more. These households are most capable of high 8- and 9-figure philanthropy.