Americans are extraordinarily philanthropic. The Charities Aid Foundation recently ranked the United States first among twenty-four countries based on the value of charitable giving when expressed as a percent of GDP.
Individuals sometimes find themselves in a fortunate position where they can consider making a major charitable gift. Perhaps they received a substantial inheritance and now want to share some of it with a non-profit where they have been active. Or they recently sold a family business and want to use some of the sale proceeds to fund a merit-based scholarship program at a university they attended. While the motivations to be generous are various, gifts of this magnitude necessitate entering into a gift agreement with the non-profit. A carefully negotiated and well-drafted agreement is essential for the donor to have a fulfilling charitable experience.
What goes into a gift agreement?
Most charities have routine gift agreements that specify the obligations and rights of the donor and the charity. The larger the gift, especially when compared to other major gifts received by the non-profit, the greater the negotiating leverage of the donor. Gift agreements should memorialize the goals and objectives mutually agreed to by the donor and charity, along with building in some flexibility in case of unforeseen circumstances. In a recent white paper, UBS highlighted a variety of issues that can be addressed in a gift agreement:
· The charity’s use of the gifted assets
· Recognition for the donor and/or the donor’s family (i.e., naming rights, publicity)
· Permitted participation or monitoring by the donor of the use of the funds. For example, if the donor is endowing a professorship, it is unlikely that the donor will have any role in selecting the professor. In the case of a scholarship, the donor may be able to serve as part of a selection committee or have some say in the recipients of the scholarship.
· Ongoing reporting obligations of the charity to the donor
· Measurements for success of the donor’s goal (incorporating realistic short-term and long-term benchmarks)
· Mechanisms to modify the agreement by the parties
· Alternative plans and procedures if the original purpose of the gift becomes impractical or impossible to sustain
· Circumstances under which naming rights might be changed (i.e., if the donor receives negative publicity)
· Terms and circumstances under which the charity may sell the gifted assets
Who should a donor consult when negotiating a gift agreement?
Donors can potentially receive substantial tax benefits associated with their charitable gifts. For example, a New York City resident in the highest income tax bracket in 2017 could potentially receive an income tax benefit equal to almost 50 percent of the value of their charitable gift. But the tax benefits can vary dramatically based on individual circumstances. As a result, it is vital that donors include their financial and tax advisors in their gift negotiation team, along with a qualified lawyer.
Dalya Inhaber, Ph.D., CFP ® is a financial advisor based in New York. She is the founder of Minerva Wealth Advisory, a Registered Investment Advisory firm. The mission of the company is to provide clients with tailored and unbiased financial planning and investment management. Dalya holds a Ph.D. in economics and statistics from the University of Michigan. The firm is named after Minerva - the Roman goddess of wisdom and knowledge. Minerva is often depicted with her sacred creature the owl, whose keen eyesight helps her navigate a path forward.