Nonprofit Resources

Should Your Organization Accept That Gift?

We’ve all heard the adage “Never look a gift horse in the mouth,” but that is not sound advice for nonprofits. Not all gifts are equal, and not all gifts are free. In fact, some charitable gifts may have implications or costs that could negatively affect your organization.

We previously explained how to create a gift acceptance policy that ensures your organization considers the potential impact of a gift and provides your donors and staff with clear guidelines. Now we’ll examine issues around gift restrictions, gifts with associated costs, gift agreements, and other factors.

Restrictions and Conditions on Gifts

Donors often want their gifts to fund a specific project or program. A core principle in charitable giving is that the recipient organization must take exclusive ownership and control of each gift and exercise control and discretion over its use. Within this context, it is permissible for a charitable organization to accept a contribution subject to a donor’s express or implied intent as to the use of the gift, as long as the purpose of the gift is consistent with the organization’s exempt purpose.

While a restriction may be permissible, it may leave an organization with unusable funds if the purpose of the restriction becomes impossible or infeasible in the future. For example, a gift intended to endow a fund for maintenance of a specific building will be frustrated if the building is sold, torn down, or otherwise becomes unavailable. The organization could go back to the donor and request that the restriction be lifted, but this may be impossible if the donor passes away or becomes incapacitated. Where the donor is unavailable to lift a restriction, an organization may petition a court to alter it. This requires significant additional expense, however.

To avoid the undesirable consequences of a donor restriction, it is strongly recommended that you encourage donors to impose the least restrictive restriction possible. To document the donor’s intent, it is customary to incorporate the understanding in a written gift agreement. In addition to limiting the scope of a restriction, it is also desirable to include a power permitting the exempt organization to alter the restriction (a so-called variance power) when achieving the purpose of the restriction becomes impossible or impracticable.

A condition on a gift may be a restriction on the use of the gift after the transfer or a requirement that the exempt organization must meet before it can use the asset. For example, the donor may require that the organization delay the sale of stock for some period after the contribution. A precondition on use generally means the gift is incomplete until the condition is met or removed. Consequently, the donor may not be able to claim an income tax deduction for the gift until the condition is removed.

Why Not All Gifts Are Free

Not all gifts are as simple as receiving a check or a transfer of publicly traded securities. In some cases, your organization may need to obtain legal counsel to review the circumstances surrounding the receipt of a gift. For example, if your organization is offered stock in a closely held corporation, you may be asked to sign a shareholders’ agreement that prescribes conditions on your ownership of the stock (e.g., limiting your ability to sell the stock to other shareholders). And if that same stock is the subject of a sale, you may be presented with a purchase agreement to sign. In either case, you should engage legal counsel to review these agreements before signing.

In addition to legal fees, receipt of a gift may require transporting it from the donor to your organization or incurring other delivery costs. While the donor may be willing to supplement the gift with cash to cover these additional costs, in whole or in part, the existence of these costs remains a real consideration.

The donor may also require an appraisal to substantiate the value of the contribution for income tax purposes. Donors frequently request that the recipient of their gift pay the fee for preparing the appraisal report. As a best practice, your organization should not pay for the donor’s appraisal. This could be a private benefit and, if the donor is a disqualified person, it could constitute an excess benefit transaction that would subject your organization and the donor to excise taxes. However, if your organization chooses to pay the appraisal fee, your letter acknowledging the gift should clearly disclose the amount of the fee as a quid pro quo for the gift.

The Importance of Gift Agreements

For gifts of noncash assets, assets that involve additional costs, or gifts that involve a donor restriction, it is a best practice to create a written gift agreement that captures the mutual understanding and agreement of the exempt organization and the donor. The topics frequently covered in a gift agreement include:

• The nature of the asset contributed
• The existence of any restrictions and the conditions on which the restriction may be amended or removed
• Which party is responsible for any costs
• Any donor recognition to be given

Considerations Around Specific Types of Gifts

Not all gifts are created equal. Some gifts require special care in accepting the gift, planning for care after the gift, or both.

Real property gifts can provide a significant benefit. However, your organization should consider several points before accepting a real property gift:

• The property should be examined for environmental contamination
• To protect your organization’s title to the property, you should consider obtaining a title insurance policy
• For buildings and other structures, you should obtain insurance covering the structure
• For vacant buildings and similar property, you should arrange for security for the building
• For property that may have a crop or other perishable element, provision should be made for harvesting or otherwise preserving the property

Closely held business interests may also be a source of significant gifts, but they can pose unique challenges. For example, a contribution of S-corporation stock will produce unrelated business taxable income to the extent the business produces net income from any source during the period the exempt organization is the owner, including capital gain upon the sale of the S-corporation stock. Because the Tax Code’s gift rules require that your organization take the donor’s basis for the purpose of computing taxable gain upon the sale of S-corporation stock and not the fair market value on the date of contribution, this requirement can significantly reduce the net cash your organization will realize from the sale of gifted S-corporation stock.

A limited liability company interest, limited partnership interest, general partnership interest, or other passthrough entity interest may also generate unrelated business taxable income during the year.

Works of art and other collectibles (e.g., stamp collections, coin collections, or pottery collections) require special care:

• Proper transportation and delivery of the art or collection must be arranged
• The art or collection should be insured against loss
• Proper storage should be arranged, which in some cases may involve a specialized storage facility with environmental controls governing temperature and humidity

Balancing Gratitude with Good Governance

Thoughtful gift acceptance helps protect your organization’s mission, finances, and stewardship. Carefully evaluating gift restrictions, conditions, associated costs, and the potential long-term implications of noncash gifts will mitigate unintended consequences that may outweigh the initial benefit of a contribution. When approached strategically, gift acceptance becomes a governance best practice, rather than a transactional decision.

CapinCrouse can help you evaluate specific gifts or types of gifts and the potential implications for your organization. Please contact us to learn how we can support your organization in making confident, informed gift acceptance decisions.

 

Additional Resources:

Elements of a Well-Drafted Gift Acceptance Policy

What to Consider Before Accepting a Real Estate Contribution

 

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