Donor intent should be better protected

Even with a gift agreement, donors have little recourse in the event of their intent being flouted. There are state Senate bills under review to change that.

Philanthropy affects the lives of every American in some way, but most of the public—and even major donors—know little about the legal structure governing our nation’s charitable sector. Many donors assume that a gift agreement functions like a contract and that a breach of this “contract” by either party will land the matter in court. The perplexing reality, however, is that when a charitable organization fails to fulfill the terms of a restricted gift agreement, donors have far less legal recourse than a reasonable person might expect.   

As philanthropy has grown in scope and sophistication, it is high time to extend the right of legal standing to the donor, his or her heirs, or to a designated third party. This is a particularly urgent need for gifts to higher education, which have too often proven problematic in recent years.

Donor standing bills in Ohio

A bill currently under consideration in Ohio addresses the vital issue of donor standing. Introduced by Senator Jerry Cirino, Senate Bill 135 includes a number of broad reforms to the state’s system of higher education, including a section addressing donor standing. The bill modifies the process of enforcing gift agreements, allowing other parties than the attorney general to file a complaint.

According to the most recent version of the legislation in the Senate Workforce and Higher Education Committee, donors, their legal representatives, or other parties specified in the gift instrument are to notify the attorney general of potential violations. If the attorney general does not obtain “full compliance with the restriction” within 180 days and “restitution to the endowment fund of property approximately equal to any value lost due to the violated restriction,” the party who notified the attorney general can file a complaint.

Philanthropy is a personal endeavor that often leads to a complicated partnership between various parties. Gifts to colleges and universities, given their size and institutional complexity, are challenging to enforce. Legal disputes at Johns Hopkins University, St. John’s University in Minnesota, and the University of Missouri are just a few of the recent cases where donors, or designated third parties, have discovered violations of donor intent.

Insufficient standing

Most donors are unaware that, once a gift has been made to a college or university, the state attorney general may be the only person with authority to enforce the terms of a gift agreement. Some donors specify in the agreement itself that they, or their heirs, have standing, but this is no guarantee that the court will recognize that claim. Yet the school is usually able to sue a donor for failing to fulfill his or her pledge. There is a startling imbalance of power when it comes to charitable giving.

Senator Cirino’s legislation reflects growing frustration with the difficulties of donor standing. Witness the case of Michael Moritz. The family of Michael Moritz, a donor to Ohio State University, discovered that the school failed to honor the terms of Mr. Moritz’s $30 million gift to the law school. Rather than award 30 scholarships each year, as stipulated in the gift agreement, the university funded significantly fewer. The state attorney general declined to pursue the case, and the family was not granted standing to rectify the matter through the court system.

Nearly $50 billion in charitable gifts went to higher education in 2019 alone, and the number of major gifts continues to grow. Most state attorneys general offices do not have an incentive to pursue the misuse of restricted funds. They are notoriously underfunded and often lack personnel dedicated to enforcing charitable gifts. Establishing standing for donors, or a designated third party, would relieve the pressure on the state attorneys general and allow them to pursue other priorities.

The considerations involved in updating donor standing are numerous and nuanced, but all of them can be addressed. Should gift agreements be honored in perpetuity? What if the donor has passed away and the school has no contact with his or her heirs? Should standing be limited to gifts above a certain threshold so that frivolous lawsuits do not clog the courtroom? When is it appropriate to redirect funds?

Good stewards welcome donor standing 

Colleges that already practice good stewardship have little cause for concern when it comes to expanding donor standing. Being upfront with donors about the difficulties of giving in perpetuity is better than asking them to give under false pretenses. Donors, too, should think twice about giving to a school that discourages third-party enforcement, those institutions that the Bard might say “doth protest too much.”

Philanthropy exists in a murky area of the law. The private decision to give often has profound public effects. As representatives of the public, the state attorneys general should be the first to ensure the proper use of charitable gifts, but donors should not have to rely solely on underfunded attorneys general offices to steward their gift agreements. As colleges and universities face an uncertain financial future in the wake of the coronavirus pandemic, they should seek to strengthen their relationships with donors, not undermine them. Donors are neither adversaries nor unfeeling cash cows—they are the foundation of our institutions of higher education.

This article originally appeared in Philanthropy Daily