What’s a Donor to Do When Nonprofits Do Wrong?

The key is the type of donation, which determines how much control the donor has

A recent New York Times story detailed serious governance problems at the Thoroughbred Retirement Foundation, a charitable entity funded by prominent philanthropists, including a $5 million endowment from the Paul Mellon estate, which later added another $2 million.

Other organizations favored by donors, notably National Public Radio and Planned Parenthood, have been the subject of embarrassing incidents that may have raised questions in some donors’ minds about their leadership and practices. Overseas, Mohammad Yunus was accused of using Bangladesh’s Grameen Bank, a pioneer in microlending, for personal gain and forced to retire as its head despite indications that political infighting lay behind the charges. Moreover, organizations in some countries engaged in microlending have come under attack for usurious lending practices.

These situations raise a question: What recourse do donors have when they think a recipient organization has gone off the rails?

Many ways exist for a donor to control a gift, according to David Leibell, a partner at the law firm Wiggin and Dana. The least control comes from an unrestricted gift, which means the charity can basically do whatever it wants with the gift within its charitable purposes. Other gifts such as an endowment may be restricted as to use—scholarships, say—or how much can be spent—income from the endowment or whatever organization’s spending policy is, usually 4.5% a year.

Leibell, whose practice focuses on business succession and charitable planning,says that many times donors use a charity’s form or rely on a very simple instrument such as a pledge agreement or a restricted gift agreement to set up a gift rather than work with an expert. Later, they may find that if something goes wrong, they do not have standing to enforce the terms of a restricted gift.

When a gift is restricted, and that is put in writing, the focus turns to what a donor can do to enforce the terms if the recipient organization does not use the gift for the intended purpose or misuses it.

Leibell says that in most states, unless the donor retains some kind of enforcement mechanism in the instrument, “which is typically not the case,” he or she has no standing in court. “The court wouldn’t recognize them as a plaintiff because only the attorney general in most states has standing to enforce the terms of a restricted charitable gift.” There are exceptions, however.

“If Connecticut is among the most conservative with respect to not giving donors standing, which is the general rule, New York is the most liberal, and has in many cases given donors of restricted charitable gifts the ability to enforce the terms on their own or with the attorney

general,” says Leibell who practices in both states. He says New York is ahead of the trend, but a movement appears to be underway among states to enhance donor rights.

In the interim, he says, a robust restricted gift instrument is the safest course. It can state that the donor retains the right to enforce the terms of the gift, including through judicial action, though there is no guarantee this will work in some states.

To back up this kind of provision, Leibell says he does something that works in every state. He provides a “gift-over” to another charity. “What it means is: look, charity A, if you don’t use this for the purpose that’s specifically spelled out here, then the assets pass to charity B to be used for the same purposes subject to the same restrictions.”

In addition, if the donor is making an outright gift, Leibell adds a stipulation extending control of the gift after the donor’s death. This says that the instrument can be enforced by the donor, his or her spouse and descendants. Similar provisions can be added to remainder and lead trusts if they are restricted, he says, though this does not typically occur.

All these things must be done in advance, says Leibell, because restrictions cannot be added after the fact. “Once it’s gone, it’s gone and you’ve got no real recourse.” He says many people do not know about these control strategies, while others do not want to go through the expense and effort to put them in effect. “But the only control they can have is what they’ve retained in the restricted gift instrument.”

Leibell acknowledges that some charities decide to override restrictions, and such cases can wind up in court. “Big charities are like giant corporations: they can fight you,” he says.

With donor-advised funds (DAFs), a public charity intermediary becomes involved in the giving, and the donor retains only limited rights after the fund is set up in terms of advising when and to which organizations gifts should be made.

Here, Leibell says, the donor can put in some rules in advance. He says he would negotiate to have the DAF become a party to the pledge. “You’re no longer a party to an outgoing gift, but it’s still your fund.” He says that in establishing a fund, it is important to become involved with a DAF organization or a community foundation that is large enough and willing to work with the donor to enter into a restricted gift instrument between itself and the end-user charity.

For wealthy individuals and families, grant making through a private foundation may be the preferred method of charitable giving. A private foundation is a charitable entity that can do many things a public charity can do, but control resides with the donor as long as he or she follows the rules, says Leibell. The foundation has more rights than an individual because one charity is entering into a contract as to the terms of the grant with another charity. If it makes a heavily restricted grant, then it has more authority to enforce the terms.

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