.

AMBIDEXTROUS GIFT POLICIES:.

Getting the Right and Left Hands to Work Together.

by.

ROBERT E. HARDING and SHERYL G. MORRISON.

GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.

500 IDS Center, 80 South 8th

Street.

Minneapolis, MN 55402.

Robert Harding – Phone: (612) 632-3091 Fax: (612) 632-4091

robert.harding@gpmlaw.com.

Sheryl Morrison – Phone: (612) 632-3376 Fax: (612) 632-4376

sheryl.morrison@gpmlaw.com.

www.gpmlaw.com.

November 4, 2014.

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I. Overview.

A. Participants in Development Program.

1. Governing Board/Committees.

a. Approves policies.

b. Reviews and adjusts endowment spending rate.

c. Reviews particular gifts if required by Gift Acceptance Policies.

2. Development Department.

a. Promotes gifts to prospective donors in person, at presentations,

and via written materials.

b. Interacts with donor, donor’s counsel, Treasurer’s Office and

organization’s counsel to plan gifts.

c. Coordinates with same group of players to implement gifts.

3. Treasurer’s Office (Business Office).

a. Makes recommendations to board regarding endowment spending

rate.

b. Oversees management of investment assets.

i. Endowment funds.

ii. CGA pool.

iii. CRT and CLT assets where organization is trustee.

iv. Restricted non-endowment (“demand”) funds

4. Operations.

Consists of the programs conducted by the organization, on which its

Section 501(c)(3) exemption is based.

B. Policies and Procedures.

1. Gift acceptance policies.

2. Endowment Fund policies.

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3. Procedures for compliance with restricted gifts.

4. Planned gift administration policies.

5. Investment policies. We will not be addressing these policies in this

presentation.

C. Need for Coordination Among Participants and Policies.

1. Establishing, reviewing, and revising various policies.

2. Handling particular gifts.

II. Gift Acceptance Policy.

A. Purposes and Benefits.

1. Focus fundraising efforts.

Drafting gift acceptance policies forces the Board, Development

Department, Treasurer’s Office and Operations to focus on the kinds of

proposed gifts the organization may encounter and the way it wishes to

handle those proposals:

a. Gifts it wishes to pursue actively;

b. Gifts it will not pursue actively but which it wishes to be ready to

accept if offered; and

c. Gifts it is simply not equipped to deal with at this time.

Once the organization makes these decisions, members of the

Development Department can focus their energies appropriately.

2. Avoid liabilities, risks, unwanted gifts and disputes.

Establishing a policy as to what information to request regarding a

proposed gift and how to evaluate that information and come to a decision

helps the organization avoid financial risks associated with certain types of

gifts and avoid disputes with difficult and potentially litigious donors.

3. Promote donor relations.

Gift acceptance policies allow a Development Officer to project

confidence and competence to a prospective donor: the Development

Officer can promptly tell the donor whether the type of gift in question is

acceptable, if so, what information the organization will need to evaluate

the proposed gift, and how long the review process will probably take.

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B. Decision-making Authority.

The policies should delineate what types of gifts require what level of review and

by what persons.

1. Governing board.

a. The board can reserve for itself whatever decisions it deems

appropriate. In addition, it can give to the other decision makers

the discretion to refer particular cases to it for a decision. Further,

the board will usually review and ratify all actions taken by the gift

acceptance committee between regular board meetings.

b. The board will commonly wish to review the most complex gifts

and gifts that create significant potential liability for the

organization or have significant risks associated with the property

or the arrangement. For example, review at this level might

include gifts that require the organization to conduct a major

program, capital project or other activity it would not otherwise

undertake and gifts that require the organization to enter into

obligations which involve unusually large financial commitments.

2. Gift acceptance committee.

a. Typically composed of the VP for Development, someone from the

Treasurer’s Office, and members of the board who have particular

expertise.

b. Reviews gifts that present intermediate complexity and liability

exposure or risks. These commonly include:

i. Gifts of real estate.

ii. Gifts of restricted securities.

iii. Gifts of closely held business interests.

iv. Gifts of tangible personal property that require the

institution to incur substantial costs.

v. CRTs and CLTs where the institution will act as trustee,

co-trustee or successor trustee.

vi. CGAs, CRTs and CLTs that involve property other than

cash and unrestricted publicly traded securities.

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vii. Gifts that involve contracts or other documents under

which the institution assumes a legally binding obligation

or other liability.

viii. Transactions with potential conflict of interest, self-dealing

or private benefit concerns that could give rise to IRS

sanctions and penalties.

ix. Gifts that will generate unrelated business taxable income

(UBTI) for the institution.

x. Gifts that present any special risk of liability.

xi. Restricted gifts.

xii. Gifts referred to the committee by the VP for

Development.

c. The committee can refer more complex gifts to the board for

review.

3. VP for Development.

a. The VP would typically review more routine types of gifts such as

cash, unrestricted publicly traded securities and CGAs and CRTs

funded with these types of assets and that fit within the gift

acceptance policy parameters.

b. The VP would normally also have the power to refer proposed

gifts to the gift acceptance committee.

4. Legal counsel.

The organization should consult legal counsel about more complex gifts

and their implications for the organization. The gift acceptance policies

might require that counsel is involved where the gift involves one or more

of the following issues:

a. CGAs, CRTs and CLTs funded with assets other than cash and

unrestricted publicly traded securities.

b. Any asset with restrictions on sale or transfer or other restrictions.

c. All CRTs and CLTs where the institution will act as trustee.

d. Any gifts identified as “problem” gifts under the screening

procedures discussed below.

e. Gifts of closely held business interests.

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f. Large or complex gifts of tangible personal property.

g. Funding of testamentary CRTs with retirement account assets.

C. Types of Gifts.

1. For each type of gift the organization will generally accept, the gift

acceptance policies should cover three components:

a. Information gathering.

b. Criteria for acceptance.

c. Procedures for implementation.

i. Receipt.

ii. Liquidation/holding.

iii. Prearranged sale concerns.

2. In crafting the policies for each type of asset, there are a number of

considerations that the organization will have to take into account:

a. The feasibility and complexity of liquidating the asset.

b. The expense of managing the asset while it is held.

c. Liabilities associated with the asset, including environmental

liability, premises liability and financial liability.

d. The human resources of the organization needed to manage and/or

dispose of the asset.

e. The potential for UBTI.

f. The potential for self-dealing or private benefit concerns.

3. An example: Proposed gift of real estate.

a. Information gathering.

i. Evidence of title.

ii. Confirmation of any debt.

iii. Contracts, options or restrictions affecting the property.

iv. Valuation.

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v. Rent and other income to be anticipated.

vi. Expenses (taxes, insurance, etc.) to be anticipated.

vii. Leases.

viii. Potential market for sale.

ix. Environmental review.

b. Criteria for acceptance.

i. Minimum acceptable value should be defined in the

policies after consultation with Treasurer’s Office and

board.

ii. Other factors that must be considered:

(a) What factors support a decision to hold as opposed

to a decision to sell and re-invest the net sale

proceeds in another type of asset?

(b) How marketable is the property?

(c) Are there any restrictions, reservations, easements

or other limitations with respect to the use of the

property?

(d) How will carrying costs for the property be paid?

(e) Is the property subject to a lease or similar

arrangement that will generate UBTI?

(f) Does the property present any special risk of

liability, including premises and environmental?

iii. Leases and sales to members of the donor’s family must be

for fair value but transfers of real estate to charitable trusts

and donor advised funds are subject to restrictions

regarding self-dealing and private benefit.

c. Implementation

i. Title search and title policy.

ii. Form of deed.

iii. Liability insurance.

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iv. Delivery and recording of deed.

v. The charity must pay all carrying costs for the property

from the time it receives the gift until it is sold. Donors

may be encouraged to make cash gifts to assist in paying

such carrying costs.

vi. If the property is of a type where management and

disposition are not within the capabilities of the

organization, then an outside manager may need to be

hired.

D. The Perfect Storm.

1. The situation.

a. Proposed gift structure:

i. Two-life flip CRUT

ii. Life of donor then life of child.

iii. Charitable remainder beneficiary is trustee.

b. Funding asset. Large parcel of real estate located at intersection on

the edge of a growing city.

c. Coordination of policies and personnel.

i. Pre-acceptance evaluation: prospects for sale.

ii. Problem gift guidelines: inheritance for child.

iii. Planned gift administration: capacity to handle sale.

E. Restricted Gifts.

The materials in Section IV below can be included in gift acceptance policies or

adopted as a separate, free-standing set of policies.

F. Screening for Problem Gifts.

1. The gift acceptance policy should contain guidelines for screening

problem gifts that are designed to help the organization sniff out:

a. Donors with unrealistic expectations about tax or financial results.

b. Donors who have unrealistic expectations about retaining control

over the organization’s use of a gift.

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c. Donors whose behavior indicates that they will be difficult to deal

with and may create problems.

d. Gifts that constitute part of the family members’ inheritance but to

which they are opposed.

e. Donors who do not have any relationship to the institution.

f. Gifts involving marital or community property (such as AZ, TX,

CA, WI) or title questions.

2. The board should define in the gift acceptance policy the estimated dollar

amount threshold for problem gift review.

G. Pledges.

1. The gift acceptance policies should provide guidelines about how pledges

will be recognized and counted in campaigns, as well as whether and how

they will be made binding on the donor, if desired.

2. Legally binding pledges should not be satisfied with payments from an

entity (e.g. private foundation, CRT, or donor-advised fund) that is

prohibited from self-dealing.

H. Gift Implementation.

1. Donor’s counsel.

a. Avoid appearance of undue influence.

b. Gift property located in state other than where the organization’s

counsel does business.

c. Avoid tax or legal advice to donor.

2. Organization’s counsel.

a. Separate from donor’s counsel.

b. Drafting or reviewing legal documents governing or implementing

the gift.

c. Avoid tax or legal advice to donor.

3. Fees.

a. Legal – paid by party engaging counsel.

b. Qualified Appraiser – paid by donor.

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c. Environmental Review – paid by organization.

4. Receipts and tax reporting.

5. Reporting to donor.

a. Recognition.

b. Accounting.

c. Other.

I. The Gift that Eats.

1. The situation.

a. Donor proposes to give a university a large collection of paintings.

b. The paintings are of varying quality and educational interest.

c. The donor wishes the university to put the collection to an

educational use to maximize the donor’s income tax deduction.

d. Insuring, storing, maintaining and displaying the collection will be

expensive.

2. Coordination of policies and personnel.

a. Sale of less important paintings to create endowment fund that will

pay costs of maintaining the collection?

b. Discussion with donor of implications of sale of some items for

donor’s income tax deduction.

c. Operations: confirm with art department that it can use and

display the portion of the collection that the university will keep.

d. Coordinate sale with endowment spending policies to generate

sufficient endowment.

III. Endowment Fund Policies and Procedures.

A. Types.

1. An institution owns an endowment fund in its own capacity, not as trustee.

Typically, the fund will be segregated for accounting and investment

purposes.

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2. True endowment funds have a restriction imposed by the donor in the gift

instrument that established the fund which legally binds the institution to

operate the fund as an endowment under applicable state law, typically

UPMIFA.

3. A quasi-endowment fund is legally unrestricted as to current spending, but

the institution has elected to operate it as if it were a true endowment; the

institution holds the fund and withdraws an annual spendable amount

computed under its endowment fund spending policy.

B. Spending (Distribution) Policy.

1. Policy established by governing board.

a. UPMIFA standard.

Unless the gift instrument specifies otherwise, an institution may

spend from an endowment each year an amount the institution

determines an ordinarily prudent person would spend from the

endowment in question. The institution must take into account:

(a) the duration and preservation of the endowment fund;

(b) the purposes of the institution and the endowment fund;

(c) general economic conditions;

(d) the possible effect of inflation or deflation;

(e) the expected total return from income and the appreciation

of investments;

(f) other resources of the institution; and

(g) the investment policy of the institution.

2. The gift instrument can say that the organization will appropriate

according to its endowment spending policy, but even with such a

statement it is wise to follow UPMIFA’s standard of care.

C. Management of funds under UPMIFA.

1. Standard.

a. The organization must manage and invest the endowment with the

care of an ordinarily prudent person in a similar position.

b. A person who has or claims to have special skills or expertise has a

duty to use that expertise in managing an endowment.

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c. Except as otherwise provided by a gift instrument, investment

decisions must be made not in isolation but rather in the context of

the endowment’s portfolio as a part of an appropriate overall

investment strategy.

2. Factors.

In making investments, the institution must consider:

a. general economic conditions;

b. inflation and deflation;

c. expected tax consequences;

d. the role of each investment in the portfolio of the fund;

e. the expected total return;

f. other resources of the institution;

g. the needs of the institution and the fund to make distributions and

to preserve capital; and

h. the asset’s special relationship, if any, to the charitable purposes of

the institution.

3. Diversification.

a. Unless provided by the donor in a gift instrument, an institution

must diversify the investments of an endowment unless because of

special circumstances, the purposes of the fund are better served

without diversification.

b. Within a reasonable time after receiving property, an institution

must decide whether to retain or sell the property.

D. Minimum Size.

Because endowment funds involve some expense and administrative time, most

charitable organizations determine a minimum size to establish and administer an

endowment fund. To be flexible, however, many charities also give donors other

options for reaching the minimum size endowment fund.

1. Accumulation.

The agreement may provide that the organization will not withdraw and

expend any amounts from the fund until it has reached the minimum size

and in the meantime the return on the fund’s investments is accumulated.

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2. Pledge.

Many organizations allow the donor to satisfy the minimum amount

requirement by making an initial gift and pledging to make additional gifts

over a specified period which will bring the aggregate contributions to the

fund to the required minimum amount. The gift agreement typically

provides that if the donor does not complete the pledge payments by the

required time, the organization need not administer the fund as an

endowment but can spend from it as a non-endowment fund.

E. Purposes/Recognition.

1. Example: Endowed chair.

2. Minimum amount related to the purpose.

3. Recognition policy.

4. Changes in Purpose.

a. UPMIFA offers an institution two ways to release a restriction on

an endowment fund.

i. The donor may consent.

ii. The institution may obtain a court order releasing the

restriction upon a showing that it is obsolete, inappropriate

or impractical. The court order may not, however, convert

an endowment fund into a nonendowment fund.

iii. Expedited procedure for “small, old” funds.

b. Cy Pres and Equitable Deviation.

The cy pres doctrine allows an institution to petition a court for

modification of a gift restriction if a change in circumstances has

made literal compliance with the original restriction impossible or

impractical. Equitable deviation allows a court to modify the way

the fund is administered, e.g., investment and spending policies.

F. Gift Instrument.

The “gift instrument”, as defined by UPMIFA, refers to the written document or

documents in which the donor specifies how the institution will use his or her gift

including memoranda, letters and other communications.

1. UPMIFA definition is broad and includes all files and communications.

2. Drafting a gift instrument.

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a. Clear statement of use and purpose and restrictions.

b. Organization has discretion to modify use.`

c. Disclaimers.

i. Not a trust.

ii. Not conditional.

d. Document constitutes entire gift instrument.

G. Enormous Changes at the Last Minute.

1. The situation.

a. Donor proposes to make gift of his interest in a closely held

business to establish an endowment fund at a health care

organization.

b. The endowment fund will support a new research program.

c. The donor insists on substantial name recognition in connection

with the gift.

d. The donor insists that the endowment fund be managed by an

investment manager designated by the donor.

2. Coordination of policies and personnel.

a. Is value of gift asset sufficient to create endowment large enough

to support the designated purpose?

b. How much control over management of the endowment

investments does the organization wish to maintain?

c. What happens with respect to operation of the program and/or

recognition if:

i. The sale price is substantially lower than expected.

ii. The investment manager selected by the donor has poor

results or is fraudulent.

IV. Restricted Gifts.

A. Legal Rules.

1. Restrictions placed on a gift by the donor are binding.

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2. Procedure for release or modification.

a. Donor consent.

b. Court proceeding.

c. Under Minnesota law if a donor, the trustee and the beneficiaries

all consent, the trust may be modified. For charitable trusts, there is

a required contingent provision for payment to alternate charities if

the named charitable beneficiaries are not qualified charities or no

longer exist. This may present an obstacle to modifying a trust by

consent of all the parties.

B. Standing to Enforce Restriction.

1. Attorney General – yes.

2. Donor – maybe.

3. Donor’s family members – probably not

4. However, some doubt may be cast on the proposition that the donor’s

family does not have standing where the Attorney General declines to act.

C. Gift Instrument.

1. Clear statement of use and purpose.

2. Organization has discretion to modify use.

3. Disclaimers.

a. Not a trust.

b. Not conditional.

c. Entire gift instrument.

D. Internal Due Diligence – Consultation with Operations and board.

1. Is compliance with the restriction feasible?

2. Is compliance with the restriction desirable?

3. Guidelines.

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The policy should clearly state that the institution will not accept gifts

subject to restrictions that:

a. Impose an undue administrative burden on the institution.

b. Involve unlawful discrimination of any kind.

c. Otherwise violate any applicable federal or state law.

d. Are inconsistent with the institution’s mission and/or ethical

standards.

e. Would prevent or impede the institution from seeking other gifts.

f. Are likely to generate adverse publicity for the institution.

4. Pre-acceptance procedure.

An officer of the institution (preferably an officer not affiliated with the

development department) should be designated to consult with relevant

personnel to determine that the institution can and will use the gift for the

designated purpose. That officer should report to the gift acceptance

committee.

5. For restricted endowment funds, it is also important to ask whether the

proposed fund will be adequate to carry out the designated purpose.

E. Mourning Violins (Not as much fun as Dueling Banjos)

1. The situation.

a. Testamentary gift of instruments in poor condition.

b. Required to be used for music program and students but no such

program exists.

2. Operations can attest that the gift cannot be used for the stated purpose.

3. Legal counsel can attest that an action to change the restriction and allow

sale of the instruments would be costly.

4. Treasurer’s Office can confirm that repairing the violins to saleable

condition would incur more cost that probably sales price.

5. Policies could allow institution to not accept the gift in such

circumstances.

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II. Planned Gift Administration.

A. Types of Gifts.

1. Charitable gift annuities.

2. Charitable remainder trusts.

3. Charitable lead trusts.

B. Establish Policies.

1. Development department should have a dialog with the Treasurer’s Office

to determine the organization’s policies.

2. For CGAs.

a. Minimum size.

b. Minimum age.

c. Rate.

d. Funding assets.

i. Cash and unrestricted publicly traded securities.

ii. Other assets: adjust annuity rate and/or defer payment to

account for unknown sale price?

e. CGA reserves?

3. For CRTs.

An organization will usually accept gifts of remainders in CRTs but the

question is whether it will serve as a trustee.

a. Criteria for acceptance of trusteeship.

i. The value of the assets with which the CRT will be funded.

ii. The number and ages of the beneficiaries.

iii. The institution should be designated as the irrevocable

remainder beneficiary of at least some specified percentage.

iv. The institution should establish a minimum present value

for the remainder interest, as computed under IRS tables.

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v. Funding assets.

(a) Will the institution accept initial trusteeship of a

CRT funded with nonliquid assets, e.g., real estate

or closely held business interests?

(b) Some institutions will not accept initial trusteeship,

but will agree to be successor trustee after the

nonliquid asset is sold for cash.

(c) The institution should have the trust agreement

reviewed by its legal counsel to be sure that the

document satisfies the governing instrument

requirements for a CRT and gives the institution

the right to review all trust records before

accepting the successor trusteeship.

vi. Factors to consider include:

(a) The identity of any co-trustee and the likelihood

that the trustees will be able to cooperate.

(b) Any provision that gives the co-trustees unequal

power, authority and/or responsibilities.

(c) The inclusion in the trust agreement of a provision

that exonerates one co-trustee from liability for

actions taken by the other co-trustee in which the

first co-trustee did not participate or acquiesce.

(d) A provision allowing the institution to resign its

trusteeship simply by giving notice to the other co-

trustee without the need for a court hearing.

b. Implementation.

i. Because the donor and the institution as trustee are both

parties to the document, whose legal counsel should draft it

(and by implication who should pay for the drafting)? Even

in cases where the donor’s legal counsel will draft, the gift

acceptance policy should require that the institution’s

attorney will review the trust agreement before execution.

ii. The donor should not transfer the funding asset to the

institution/trustee until both parties have executed the trust

agreement.

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iii. Before the trust agreement is executed, the institution

should put in place any necessary accounts or other

mechanisms to receive the funding asset, e.g., a temporary

brokerage account at the donor’s brokerage firm in cases

where the trust will be funded with marketable securities.

4. Similarly, the question for CLTs is whether the institution will serve as a

trustee.

a. Organizations want to be the beneficiary of CLTs because they are

akin to a term endowment. The question is whether to act as

trustee.

b. Criteria for acceptance of trusteeship.

i. Who are the remainder beneficiaries? They will experience

the impact of the trust’s investment performance (good or

bad) when the trust terminates. Typically, the remainder

beneficiaries will be the donor’s children or grandchildren.

What does the institution know about their attitude toward

it and toward the CLT arrangement?

ii. How long is the trust term? A shorter term gives the

children or grandchildren less time to become impatient to

receive their distribution, but it also gives the trustee less

time to recoup any losses from bad market years.

iii. Is the CLT to be funded during the donor’s life or at death?

If during life, low basis assets limit the trustee’s ability to

diversify the trust’s portfolio.

iv. Sometimes donors propose to fund CLTs with nonliquid

assets such as real estate or closely held stock. An

institution should agree to accept trusteeship in this type of

case only after very careful review and consultation with its

legal counsel.

c. Implementation procedures are the same as those for CRTs

discussed above.

d. Example of considerations

i. Proposed testamentary gift via CLT for 2 charitable

beneficiaries for 20 year term

ii. Funding asset is income-producing mineral and oil/gas

interests in producing properties

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iii. At end of term, payout to fairly distant relatives (grand-

nieces and grand-nephews) which is taxable for GST tax

purposes

iv. Trust funding dependent on actions of prior other

fiduciaries in administration of estate

v. Development officer should discuss the above

considerations and also the following additional concerns

with the Treasurer’s Office and others knowledgeable at the

organization

(a) Significant tax liability at end of term and question

as to whether there will be liquidity of asset to pay

liability payable by trust

(b) Institution’s internal ability in managing the assets

(c) Possible changes in the asset’s ability to produce

income to the charities

C. General Administration.

1. Accounting.

2. Tax reporting.

3. Annual payment calculation.

D. Investment Management.

1. Oversight of investment managers.

2. Delegation to outside managers.

3. Investment strategy.

a. CGA pool.

b. CRTs and CLTs.

4. Diversification.

E. Avoiding Self-Dealing.

1. In-house expertise.

2. Outside legal counsel.

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This outline is based on the law in effect on the date it was completed: October 1, 2014. It is

only a summary of the subject matter it addresses, and it is intended to provide information of

a general nature only. It should not be construed as a comprehensive treatment or as legal

advice or legal opinion on any specified facts or circumstances. Readers are urged to consult

with an attorney concerning their own situations and any specific legal questions they may

have.

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