EXECUTIVE SUMMARY 

Too often, charitable organizations use restricted donations for general purposes or, in the worst cases, to line the pockets of executives. Beginning in the Fall of 2020, Charitable Allies launched the Donor Integrity Project, a targeted initiative aimed at protecting donor intent. Our goal is to help charitable organizations understand their donor-related obligations so that charitable contributions made directly to or through Charitable Institutions—institutions of higher education, charitable grantmaking foundations, and other philanthropic vehicles—reach their intended recipients and fulfill donors’ intended goals.

The reality is that donor intent is not only limited to the gifts made by major donors, it is also essential for any donation received by a nonprofit or charitable organization. When donors give to charity, they do not expect their money is going for anything illegal or purposes other than what is designated by the cause. Taking steps to protect donor intent is thus essential both to the success of your personal undertakings and to the integrity of our charitable system. Well-articulated and faithfully observed donor intent is what establishes the culture and effectiveness of your foundation. It will pay dividends now and in the future.

Charitable Allies will help ensure proper use of charitable dollars through: Research, Education, Legal Representation (Compliance) and Legal Representation (Litigation). (Jump to the last page for descriptions of what these objectives each entail.)

The Donor Integrity Project thus includes a holistic approach to raising the bar of charitable giving.

The Donor Integrity Project thus includes a holistic approach to raising the bar of charitable giving. The fundamental intent of the project is to ensure that philanthropic donations meet their philanthropic goals.

PROJECT BACKGROUND

Large foundations founded by individual wealth creators or families no longer dominate the philanthropic sector as they once did. In recent decades, the role of third-party giving vehicles—such as pass-through or special purpose funds at  community foundations and scholarship funds at educational institutions, among others— has grown exponentially. Not only have the vehicles for charitable giving grown in number and scope, this proliferation in the philanthropic sector parallels a marked growth in charitable giving over the same time period. According to Giving USA’s most recent report, giving has increased in current dollars every year since 1977, with the exception of three years (during recessions) that saw declines: 1987, 2008 and 2009.

For example, more than 800 community foundations across the US give out more than $7 billion in charitable grants each year. Community foundations range from less than $100,000 to over $7 billion in total assets, and the largest community foundations are among the largest grantmaking institutions in the country. Donor-advised funds have seen explosive growth in recent years going from $57 billion in assets in 2013 to $110 billion in 2017, far exceeding the growth rate of other giving vehicles.

In general, the purpose of third-party giving vehicles is to bring together financial resources from a broad range of donors to support nonprofit organizations, often of a particular sort. For example, community foundations support nonprofits in a defined geographic area, while other funds can be organized around support of a particular faith or political ideology. Donors employing these vehicles benefit from a variety of unique features, including anonymity and the ability to establish donor advised or endowment funds managed by the institution. Gifts through these vehicles often allow donors an immediate tax deduction, deferred distribution to charities, estate tax avoidance, capital gains, and tax-free growth within the fund.

Funds housed within the giving vehicle or philanthropic institution are typically governed by a fund agreement that describes the purpose of the fund and how it will be distributed. For example, if a donor wishes to establish a fund that makes annual grants to nonprofits that provide housing for homeless veterans in a particular city, the fund agreement would specify those terms, along with other details. In the case of community foundations, in order to retain tax exempt status, fund agreements must include a provision that allows the institution to modify the donor’s restrictions if it should ever determine that the restrictions have become unnecessary, incapable of fulfillment, or inconsistent with the current needs addressed by the institution as a whole as met by that charitable fund. This provision creates the variance power.

Invocation of the variance power is sometimes necessary and reasonable to maintain donor intent and the proper process to do so involves a good faith effort to document how the use and management of the charitable fund has become unnecessary, incapable of fulfillment or similar. Yet giving vehicle administrators often exercise near-absolute discretion—without utilizing proper procedures of expert opinions, board committees and board votes—to determine when modifications to the fund agreement are “required.” The institutions may choose to suspend distributions temporarily or divert a portion or all grants to nonprofits or projects that—in the giving vehicle’s judgment—more closely align with the original donor’s wishes.

This situation is fertile ground for widespread abuse that deprives worthy organizations, communities, and students, of the critical financial resources a donor may have intended to supply.

However, with few exceptions, transgressions of donor intent pass unremarked. Unless the donor is living and able to protest a variance or a nonprofit challenges the philanthropic institution’s modification of the fund, disbursement of funds is largely at the unfettered discretion of the charitable institution, community foundation, scholarship fund, or institution of higher education. This situation is fertile ground for widespread abuse that deprives worthy organizations, communities, and students, of the critical financial resources a donor may have intended to supply. 

For example, in 2008, descendants of donors Charles and Marie Robertson clawed back approximately $100 million from Princeton University for failing to observe the terms of a 1961 gift to the Woodrow Wilson School of Public and International Affairs that was intended to be used to prepare students for government service.

Similarly, a 2001 gift from Michael Moritz to Ohio State is currently the subject of an extensive legal battle, after Moritz’s family discovered the $30.3 million gift to the university in 2001 had shrunk over the years to $21.9 million while only being used for 12 to 16 full-tuition scholarships, instead of the 30 mandated in the original gift agreement, all while the university charged an exorbitant “management fee” totaling over $3 million to the fund.

Some of the potential “abuse” actually comes from a lack of knowledge of one’s obligations. Smaller charitable institutions often rely upon the legal advice of attorneys on their boards of directors. All attorneys are generally familiar with contract law, including the general principle that we look within the “four corners” of a document to find out its meaning unless some exception—such as allegations of fraud—exists to allow the judge or jury to look outside of the document itself. Interestingly, this fairly strong and normal “four corners” rule is flipped on its head in the charitable gift instrument context.

Under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which has been adopted in 49 states and D.C. (only Pennsylvania has not adopted UPMIFA), a “gift instrument” is defined as a writing in any form, including a fundraising solicitation, under which property is transferred to or held by a charitable institution. See UPMIFA § 2(3). So even if there is a “fund agreement” signed by the donor and the charity or a provision of a will or trust executed by the donor, there may exist letters, electronic correspondence or other writings that evince the intent of the donor. Under UPMIFA, door intent is king. An institution should take great care in permanently documenting all materials related to a gift at the front end.

DONOR INTEGRY PROJECT STRATEGY

A recent community foundation audit, conducted by Charitable Allies, revealed that of the 210 funds managed by that foundation, grants from only 130 were being made to local nonprofit organizations, as intended by fund donors. This means that that 80 of the 210 funds, primarily intended as pass-through funds with specified beneficiary nonprofits, were lying dormant in terms of community impact, but throwing off investment returns. Year in and year out, this community foundation retained those returns to fund the already above-market salaries for community foundation executives. This is one of many verified examples of such abuse.

Based on an initial review of tax documents, annual reports and websites from more than a dozen community foundations around the US, we estimate that 15-30% of the 800 community foundations in the country are engaged in similar abusive practices—failing to distribute from currently-spendable funds, keeping investment returns for the organization’s “overhead”, using donor funds to pay unreasonably high overhead expenses for lavish offices and events, as well as exorbitant staff and consultant compensation. Based on a similar review of records from around a dozen of the nearly 2100 institutions of higher learning, we have found a similar prevalence of abusive practices.

Charitable Allies has represented many community foundations and grantmaking charities, several of whom were out of compliance with UPMIFA’s requirements. Sometimes the noncompliance developed unwittingly. Other times it was a willful ignorance born out of a need to make “ends meet” on the operating budget. In egregious cases, it was willful and intentional conduct as a power play in one’s own community by an executive that was found by the board only after the long-serving executive retired. In any event, someone should put a stop to the “echo chamber” justifications for donor abuse and mishandling of charitable dollars that has developed within the world of institutions that regularly hold charitable funds.

That someone is Charitable Allies and its Donor Integrity Project.

OUR STRATEGIC APPROACH

The Donor Integrity Project has four primary objectives:


1. Research. Over a two to three year period, Charitable Allies will research publicly available information such as IRS filings, annual reports, and court decisions that reveal the grantmaking habits of the more than 800 community foundations and 2100 institutions of higher learning in the U.S. This survey will identify those Charitable Institutions that may have engaged in abusive practices that ultimately deprive the intended charitable recipient from access to the life-changing resources the donors intended to provide. Such practices include:

  • charged charitable funds with excessive “management fees”, 
  • failed to use the funds for their intended purposes, 
  • “stockpiled” funds that were supposed to be applied on a current basis to specified charitable projects or purposes
  • allocated investment returns to general operating accounts instead of back to the invested charitable fund, 
  • abused their “variance” power in modifying restrictions on how a fund is used, invested or managed, or
  • failed to distribute funds to charitable beneficiaries.

2. Education. Charitable Allies will publish on an ongoing basis, a series of articles along with online and print publications that educate individuals, businesses, foundations, and nonprofits about ways they can protect their intent and enforce fund agreements with giving vehicles such as community foundations and institutions of higher education. Charitable Allies will similarly share the results of its research findings, including in peer-reviewed professional or academic journals. Charitable Allies will also educate attorneys, accountants and nonprofit executives through professional development and limited-engagement efforts on how to carefully navigate the very unique obligations related to donor intent.

3. Legal Representation

  • Compliance. Charitable Allies will continue to work with charities that have identified that they may be out of compliance to help them achieve compliance. We will assist charities who wish to improve their fund management practices by conducting internal reviews of the specific obligations under their gift instruments. Charitable Allies will develop opinion letters, file the necessary notices and petitions, and provide educational resources and training to implement fund management practices that honor the letter and spirit of donor intent. This may ultimately involve researching the historic gift instruments, drafting opinion letters, obtaining Attorney General authorization on certain modifications to institutional funds and even judicial approval for modifications.
  • Litigation. Charitable Allies has already identified two egregious cases and will continue identifying others who are clearly out of compliance with UPMIFA and other laws related to donor intent. Charitable Allies will represent individual nonprofit organizations and individual donor plaintiffs who may have been harmed by an institution’s donation-related actions. This will include civil legal action against the institutions or giving vehicles that have impermissibly withheld philanthropic support or have failed to honor donor intent and distribute donated funds. Prior to filing any complaints against the offending giving vehicle, Charitable Allies will make every reasonable effort to avoid litigation and attempt to enforce existing fund agreements using pre-litigation demand letters and negotiations. Should non-litigation efforts fail, the Donor Integrity Project Fund will be used to fund litigation. 

PROJECTED BUDGET

Charitable Allies envisions the Donor Integrity Project will be a long-term initiative, beginning in 2020 and continuing at least until 2025. However, the following budget outlines the annual projected expenses for years 1-3.

Research                                           75,000.00

Education                                          75,000.00

Representation                               325,000.00

Administration (17.5%)                  83,125.00

TOTAL                                     $558,125.00