Thoracic surgeon Dr. Perry Cardium has made a fortune both through his medical practice and through publication of his best seller, Mending a Broken Heart—Repairing Torn Aortic Valves in Recently Divorced Individuals. He’s decided he wants to share his good fortune with the public by making a major philanthropic gift.
He particularly wants to benefit the world-renowned Museum of Modern Hearts. In particular, he wants to provide funds to the Museum to build a new wing that will house his collection of rare surgical tools, including machines that can install ventricular stents with no human intervention.
Perry has several initial conversations with the Museum’s director, Dee Akseshen, who presents him with a 1-page gift agreement. Perry decides to get legal advice on the draft agreement and consults with his lawyer, Anna Littical, to understand whether the draft agreement is acceptable.
Donors and philanthropic institutions such as museums have a number of mutual goals. Both want to provide the public with a means to see great works of art and culture and to learn about history, science and the entire body of human learning. Donors often want to create a charitable legacy for themselves and their families. Museums will often try to facilitate this goal by naming galleries or entire buildings after the donor or the family.
Nonetheless, donors and museums also have a variety of respective goals that differ from each other. Donors and philanthropic institutions have to work together to try to mesh those differing goals.
Perry’s Goals
• Museum uses contributions in accordance with his wishes and doesn’t change the use of the Wing or remove any of his surgical tools from permanent display.
• Museum generates additional contributions from other donors to assist with the project.
• He obtains naming rights for his gift and the ability to control naming rights for other donors.
• He’s kept “in the loop” regarding the use of funds.
• He controls the building project, including architectural designs, building specifications, signage and keeping the project on time and on budget.
• Museum attends to political issues that may arise, such as nondiscrimination and avoidance of use of institution by hate groups or other inappropriate purposes.
• Museum obtains proper attention from the press and media.
Museum’s Goals
• Ensuring the gift is completed in the time or times agreed on.
• To the extent possible, maximizing the amount of current dollars flowing to the institution.
• Maximizing the Museum’s flexibility in using the funds or the gift, including the ability to change the purposes of the gift if the original goals no longer are consistent with its charitable purposes or if circumstances otherwise change.
• Having a legally binding agreement.
• Maintaining the ability to disavow the gift or the donor if the donor doesn’t comply with the terms of the gift or if the donor suffers adverse publicity (a university wouldn’t, for example, be happy about having to maintain indefinitely a school called the “Bernard Madoff Institute for the Study of Ethics in Investing”).
• Input into or control of media attention.
• Flexibility to take future events into account, for example, the need to raise money to renovate the wing in the future.
Elements of a Gift Agreement
Any significant contribution to a charitable institution should be memorialized in a written agreement, entered into after review and consultation with legal and tax counsel. As in this case, the Museum or other charity will often have its own form of gift agreement—these tend to be relatively simple, straightforward documents. While they may be perfectly appropriate for smaller contributions, major gifts are usually the subject of detailed agreements entered into after extensive negotiations.1
The following elements are critical parts of a well-designed, mutually beneficial gift agreement:
1. Background. An introductory set of provisions that explains the history of the discussions between the donor and Museum and the overall goals of the contribution. For example:
The Museum and Perry have been engaged in discussions about a gift to the Museum for the primary purpose of building a new wing (the “Wing”) to house and make available for public viewing, the donor’s unique and outstanding collection of medical instruments. Perry and the Museum agree that this will broaden the mission of the Museum and increase the number of visitors to the Museum. As a result of these discussions, Perry and the Museum have decided to construct such new Wing at the corner of Artery Lane and Ventricle Boulevard, which will enhance that location and the surrounding neighborhood, all as mutually desired. The new building will have a total of 50,000 square feet of space, including galleries, informal gathering areas for staff to collaborate in a relaxed environment and a cafeteria selling only heart-healthy dishes.
2. Terms of the gift. This includes the anticipated amount of the gift and any conditions.
Aggregate gift. Especially if the gift is to be made in installments, set forth the total anticipated amount of the gift. For example:
Subject to the terms and conditions of this Agreement, Perry agrees to make gifts totaling $20 million payable in cash or marketable securities to the Museum. The gift shall be applied solely to the costs incurred by the Museum in connection with the construction of the Wing.
Subject to the terms and conditions of this Agreement, the gift shall be made in 5 equal installments of $4 million each, with each such payment to be made no later than Dec. 31 on each of the five years starting in 2019.
Conditions of gift. Often, donors want to attach conditions to their gifts. For example, a donor may want to attract matching contributions from other donors to assist with the cost of the project. For example:
The Museum shall raise $20 million in annual gifts to support the development and construction of the Wing. Raising such funds shall be the sole responsibility of the Museum. Legally binding pledges [may] [may not] be counted towards such fundraising requirement. The Museum shall certify in writing to Perry that such contributions or pledges have been received. If such payments and pledges have not been received by Dec. 31, 2021, any funds that Perry has contributed to the Museum shall be returned to him, and he shall have no further responsibility for making any contributions pursuant to this Agreement. Prior to making the final installment payment, the Museum shall certify in writing to Perry that it has spent (not merely set aside) all of the funds received for construction of the Wing in accordance with the provisions of this Agreement.
3. Protection for Museum against problems with Perry. The Museum also wants to have protection—and leverage—in the event Perry reneges on his promises to contribute. Charitable institutions are typically reluctant to sue donors even in the case of clear noncompliance with the terms of a binding agreement. Dee’s view is that, in her experience, removal of a donor’s name from a building previously named for him carries the risk of public embarrassment that’s often sufficient to keep the donor from reneging on commitments.
Consider:
In the event that an installment is not received by the Museum as set forth herein, the Museum may, at its option, remove Perry’s name from the Wing and in such event, the Museum shall not be required to offer restitution or refund all or any part of the installments previously made.
In the event Perry agrees to such a provision, he’ll want to be certain that the Museum can’t also sue him for any other unpaid installment. Consider the following:
This Section shall be the sole recourse of the Museum against Perry.
4. Annual reports. Perry is entitled to know how his funds are being used—particularly in a project that involves payments over multiple years for a complex construction project. Accordingly, the Museum should commit to provide him with periodic updates on the uses of his funds and the progress of the project. For example:
The Museum shall provide Perry on an annual basis a report outlining the payment conditions and the progress made toward satisfying them. The Museum shall also provide Perry with any reports with regard to the progress of the project that are provided to the Board of Trustees. In addition, the Museum agrees to provide Perry with such additional reports and information on the activities of the Museum and the Wing as Perry shall reasonably request from time to time.
5. Particular conditions with respect to construction projects. Any building project is embodied in a set of plans, drawings, architectural designs and the like. Depending on the nature of the project and the scope of the donor’s financial contribution, the donor will often have significant input into the design of the project. The agreement should set forth in as much detail as possible the agreed on design for the project. For example:
The Wing shall contain 20,000 square feet of space. Fifty percent of such space shall be dedicated for the permanent exhibit of Perry’s collection, and Museum shall have no right to remove any of Perry’s collection. Twenty-five percent of such space shall be dedicated to temporary exhibits that must be related to the principal purposes of the Wing, such as exhibits of historical heart surgery tools. The other 25% shall be used for collaborative space, cafeteria space and the other purposes set forth above. The Wing shall not be used for any purpose other than as set forth in this agreement except with the prior written consent of Perry or his personal representative.
Further, installment payments can be conditioned on satisfactory progress on the construction project as set forth in the construction documents. For example:
It is agreed that Perry shall not be required to pay any installment after the first installment until 10 days after the Museum certifies to Perry in writing that the agreed construction milestones for such installment have been satisfied. If the Wing has not been completed and occupied by July 31, 2022, Perry shall have no further obligation under this Agreement. Further, the Museum shall be responsible for any cost overruns in the development or construction of the Wing.
6. Naming rights. Naming rights can be a sensitive subject. Donors like Perry want to ensure that their names are displayed in a manner that they find appropriate and tasteful. They often want to have at least some input into the institution’s ability to grant naming rights over portions of the property. For instance, while the addition may be called the “Perry Cardium Wing,” Perry may want to allow other contributors to provide funds in return for naming the cafeteria or the collaborative space after them.
Here are some examples of provisions dealing with naming rights:
The Museum will include external signage outside the Wing which identifies the Wing as the “Perry Cardium Wing.” The Museum will obtain Perry’s approval with respect to such signage, which approval shall not be unreasonably withheld. Any other signage shall not be more prominent than such signage.
Perry understands that the Museum will be seeking additional major donors for this project. The Museum may enter into agreements with other donors with respect to naming opportunities with respect to the Wing subject to Perry’s approval, which shall not be unreasonably withheld. The naming opportunity must be commensurate with the naming honor and the prominence of any associated signage should be similarly commensurate as consented to by Perry, with such consent not to be unreasonably withheld.
7. Political issues. In these days of political division, donors like Perry often want to make sure that their donations won’t be used in ways that they find offensive. This can be a difficult discussion because museums and, particularly, universities, have stated commitments to freedom of expression. The two sides sometimes navigate this by creating stated goals and then providing mechanisms for resolving disputes. For example:
Perry is particularly concerned that the Wing not be used in a manner that can in any way be viewed as promoting discrimination, hatred or intolerance based on national origin, disability (including questions about heart-healthiness and its possible sociopolitical causes) or genetic information. Accordingly, the Museum shall on an ongoing basis notify Perry at least 48 hours in advance whenever an individual or group that has been publicly known to express positions that promote discrimination or hatred based on race, sex, national origin, ventricular or aortic size is scheduled to speak or otherwise present at the Museum. If Perry so requests, the Museum will prominently post notices in and about the Museum that the Museum does not support, condone or endorse any such views or opinions.
8. Media. A major event such as the creation of the Wing requires proper attention from the media. Dee and Perry will want to agree on the form of any press release or other opportunities for media attention. Consider:
All press releases and external and public announcements relating to the gifts being made by Perry to the Museum or which reference the gift or the Wing shall be subject to Perry’s and the Museum’s prior written approval, which approval shall not be unreasonably withheld.
9. Enforcement. Historically, the rule has been that any agreement regarding a charity can only be enforced by the Attorney General of the relevant state, as an exercise of the state’s obligation to oversee and protect charitable institutions.2 Therefore consider:
The parties acknowledge and agree that Perry or his authorized representatives may commence legal proceedings to enforce the provisions of this Agreement.
Dee wants to be sure that the agreement is legally enforceable by the Museum. State law varies on the enforceability of pledge agreements in the absence of clear provisions. Often, the test is one of “reliance,” that is, can the institution show that it reasonably relied on the donor’s pledge in taking concrete actions. If the Museum can show that it hired engineers, architects, construction advisors and the like based on Perry’s pledge, it may be able to enforce the agreement even if there’s no provision governing enforceability in the document.3
Clearly, it’s preferable from the Museum’s point of view to include a provision making enforceability clear. For example:
The parties agree that this Agreement is legally binding and not merely a general statement of purposes or intent. The Museum is specifically relying on the financial commitments being made by Perry that are embodied in this Agreement.
Be Creative
Every agreement to make a major gift to a philanthropic institution is different, and there’s no one size fits all. The suggested provisions in this article aren’t always required. Nonetheless, they’ll hopefully stimulate thought and creativity about how to fashion a major gift that embodies the donor’s goals while effectuating the legitimate needs of the institution.
Endnotes
1. This article won’t discuss the many tax and estate-planning issues connected with charitable gifts.
2. See generally Iris J. Goodwin, “Standing to Enforce Charitable Gifts: Civil Society vs. Donor Enforcement,” 59 Vand. L. Rev. 1093.
3. See Allegheny College v. National Chautauqua Co. Bank of Jamestown, 246 N.Y. 369 (1927); Matter of Kramer, 2016 N.Y. App. Div. Lexis 4110 (2d Dept. 2016).