Key Provisions of a Charitable Gift Agreement

Most nonprofits will agree that a “perfect gift” is an unrestricted gift that can be used for any purpose. An unrestricted gift does not limit the organization to any restriction on the amount that can be expended or limit the purpose for which the gift may be used. During a pandemic or a natural disaster, such as a hurricane, unrestricted gifts are paramount in keeping nonprofits in business until our communities and the economy return to “normal.” When an unrestricted gift is conveyed, a detailed charitable gift agreement is not necessary, unless the donor wishes to have a level of recognition for the gift which must be spelled out clearly, as discussed below. Substantial gifts, those $100,000 or more, will typically have restrictions as to the purpose for the use of the gift, which triggers the need for a well-written charitable gift agreement. Most of today’s donors making significant gifts seek more control over their gifts, thus causing the necessity to discuss and document in detail the terms of the gift.

A well-drafted charitable gift agreement has the following provisions:

1. Identify the Parties to the Gift Agreement. The names of the donor and nonprofit must be spelled correctly, and the parties should discuss whether the name of the donor can be recognized in the manner the donor desires. Further, identifying the correct name of the charitable organization is important so there is no confusion as to who is to receive the gift, especially with a testamentary gift which will happen at a later point in time after the donor’s death. A professional advisor who drafts a charitable gift agreement should conduct the necessary due diligence to verify that the legal name of the entity is correct in the relevant documents. The formal name of the organization—as identified on the IRS 990 tax return, the EIN number, and city and state where the organization is operating—is a good way to ensure the organization has been identified correctly. Also, a discussion must take place among the parties as to how the donor’s name should be recognized—whether their formal name, a nickname, or including the family foundation’s name must be determined.

2. Amount of Gift. The entire amount of the gift should be stated and the timing of the payments of the gift should be discussed among the parties and documented in the gift agreement. A donor may wish to pay a percentage of the gift initially and have additional payments made when milestones are reached for the purpose of the gift. Language should also be written to address what happens if the gift is not completed prior to or at the death of the donor and whether the gift shall be binding upon the estate of the donor.

3. Purpose of Gift. The purpose of the gift needs to be carefully discussed among the parties, and restrictions spelled out clearly in the gift agreement for the donor to avoid conflict with IRS rules on deductibility of the charitable contribution or create obstacles that impede the benefits of the gift to the nonprofit. Scenarios for both the best case (purpose can be met completely) and the worse case, with an alternative use (purpose cannot be met as stated, but an equal value will be attributed to the donor’s gift), are important to discuss and be written into the gift agreement to determine the outcomes for these scenarios. A key element in crafting a gift agreement is the consideration of future changes in circumstances. What happens if a disaster occurs or substantial circumstances change for the nonprofit? A donor may wish to have language that requires the nonprofit to use insurance proceeds to rebuild the building and put the donor’s name on the rebuilt facility as it was prior to the disaster. Language should spell out whether the gift is fully expendable or to be held in an endowment. Discussing what happens if the charitable purpose cannot be met is important, and whether the nonprofit should hold the gifted assets in a separate account throughout the term of the gift until the purpose has been met. These items, as well as alternative uses for the gift, should be addressed in the charitable gift agreement. Further, alternative solutions for use or recognition of a gift must be documented if full payment is not made to the organization.

4. Recognition of Gift. The parties must discuss whether the donor desires publicity of their gift or they wish to have anonymity. The charitable gift agreement should address the nonprofit's right to use the donor’s name and image to promote the gift and publicize such gift during the organization’s capital campaign. A donor may wish to reserve the right to revoke the organization’s use of their name and/or image.

5. Naming Rights. Most substantial gifts are recognized by naming rights at the location of the building of the nonprofit. If a donor wishes to have their name on a building, then the location of the name, the size of the letters, the material used in the signage, and whether a government permit must be obtained to hang a sign or name should be discussed among the parties and documented in the charitable gift agreement. The donor should ask the nonprofit to provide a rendition of the naming recognition as an exhibit in the gift agreement before it is executed by the parties. Further, it is important for a gift agreement to address both the future obsolescence of the project and the charity’s obligation if the honoree’s subsequent actions or reputation later tarnish, rather than enhance, the reputation of the charity. Nonprofits also may wish to term out naming rights. All of these issues must be spelled out clearly in the gift agreement.

From left to right: the Community Foundation of Sarasota County’s Jay Young, vice president of philanthropy, and Betsy Pennewill, general counsel, with Sam Donaldson, professor of law at Georgia State University, and Susan Hines of Sabal Trust

6. Standard Contract Terms. While charitable gift agreements are generally drafted to reflect the gratuitous nature of the transaction, it is important to have standard contract provisions to avoid unnecessary uncertainty and expense for both the donor and the nonprofit. The governing law, merger clauses, indemnification of the parties, and how an amendment or modification to an existing agreement is made must be discussed in the gift agreement. Today’s donors who make significant contributions to nonprofits often retain control over the purpose of their gifts. While donors may impose reasonable conditions that can be carried out by the nonprofit, changes are inevitable. Changes in the organization’s operations and leadership, changes in the economy, changes in the needs of the beneficiaries served, and changes in the law all affect the charitable purpose for the use of the funds contributed. Discussing and documenting the provisions above help set forth reasonable expectations for the parties and their heirs and successors. Considering the long-term use of funds and having broad language that allows the nonprofit to pivot the charitable purpose of the gift when necessary helps prevent defeating the benefits intended by the donor in making the gift to the nonprofit.