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October 21, 2015
Why Your Nonprofit Should Have A Gift Acceptance Policy And What Should Be In It
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A CAUTIONARY TALE

You’re the Development Director of a struggling nonprofit.  It’s getting to “crunch time” in your biggest ever fundraising campaign. Your numbers are behind where you really want them to be. The telephone rings; a donor offers to give you a spectacular home in Lakewood! You hear the estimated value; you know that this will guarantee a successful campaign. You immediately respond, “We’ll take it!”

You take title to the home and immediately put it on the market. Then, your real estate agent and title company inform you that the land under the home is contaminated by hazardous substances from a long-abandoned gas station. The cost of clean-up could be hundreds of thousands of dollars; the owner of the gas station and your donor are nowhere to be found. Who must pay for the clean-up? Your nonprofit! A gift of a spectacular home has become a financial disaster!  And, your future as Development Director doesn’t look too promising either.

What could have prevented this disaster? A gift acceptance policy. This cautionary tale is a real possibility and it emphasizes the urgency for any nonprofit soliciting gifts other than unconditional cash gifts to have – and follow – a written gift acceptance policy.

WHAT IS A GIFT ACCEPTANCE POLICY?

A gift acceptance policy is your nonprofit’s set of written guidelines concerning the acceptance of charitable gifts to your nonprofit. The policy should describe the standards necessary to evaluate various kinds of gifts for acceptance and should allow for some flexibility in handling each case. It should apply to everyone involved in the gift process, from professional and volunteer fundraisers to the Board of Directors.

WHAT WILL A GIFT ACCEPTANCE POLICY DO FOR YOUR NONPROFIT?

A strong and comprehensive gift acceptance policy can be very valuable to your nonprofit in at least four separate ways:

Maintain Discipline. The primary benefit of a gift acceptance policy is to establish and maintain discipline in accepting and administering charitable gifts. A gift acceptance policy should clearly define:

1.  the TYPES of assets that are acceptable gifts for your nonprofit;

2.  the FORMS of gifts that are acceptable; and

3.  your nonprofit’s ROLE in gift administration.

Discipline in crafting and following these definitions will help prevent your nonprofit from accepting gifts that will cost your nonprofit time, money and possibly its reputation.

Provide Education.  A gift acceptance policy can educate your nonprofit’s staff and Board of Directors about the critical issues that certain gift can trigger. For example, a high-end pleasure boat may at first seem to be a lucrative gift. But, “beware of gifts that eat.” After you consider moorage costs, insurance, maintenance, the limited market for such assets, and sales costs, the boat may turn out to be more of a liability than an asset.

Development staff members need to distinguish between a planned gift that is given by a donor who wants to benefit the nonprofit and a “gift” primarily motivated by the donor’s personal financial gain. These latter gifts could obligate the nonprofit to a long-term arrangement that could cost the nonprofit time, money and possibly reputation! A strong and clear written gift acceptance policy helps everyone involved to understand the difference.

Preserve Donor Relationships. A strong donor base is a nonprofit’s most valuable asset. You would prefer not to risk alienating a donor by refusing a gift.  But, sometimes you should. And, written gift acceptance policies help preserve relations with donors when the nonprofit needs to decline gift. It’s much easier for the development officer to handle any negative reactions if she can give the donor the nonprofit’s written policy.

Written policies remove focus or blame from the contact person. They make it clear that the nonprofit’s rejection of a gift is the result of policies the nonprofit had previously considered and determined. A donor may gain a greater respect for the professionalism of a nonprofit that is prepared to respond quickly to an offer of an unusual gift.

Instill Best Practices.  Most nonprofits have to file a Form 990 with the IRS.  In this form, the IRS suggests that it is a best practice for a nonprofit to have and use a gift acceptance policy, asking the nonprofit if it has such a policy.[1]  While answering “no” to the existence of a gift acceptance policy does not carry a real penalty (other than increasing the perception of the IRS might audit the nonprofit), a “no” answer does not paint the nonprofit in a favorable light to donors and potential donors.  Since the 990 is a public document, a “no” answer could be quite visible to anyone from whom the nonprofit is looking to raise money. 

DRAFTING AND ADOPTING GIFT POLICIES

This material does not include a sample or model gift acceptance policy because, when it comes to gift acceptance policies, one size does not fit all. When your nonprofit creates a gift acceptance policy, please do not simply copy another nonprofit’s policy. Just as every nonprofit is unique in its own way, every nonprofit’s gift acceptance policy must also be unique.

Collaborative Process. Since you should really “do it yourself,” who should create your nonprofit’s policy? The best practice is to develop of the policy as a collaborative process involving all critical parts of your nonprofit:

  • Planned giving staff;
  • Finance personnel;
  • Program administration staff;
  • Management; and
  • The Board’s committee responsible for development oversight.

This may seem like a lot, but a broad-based approach will yield dividends. Involving staff from development, finance, administration and other management areas along with the Board can create a spirit of teamwork and mutual understanding. Those not involved in the day-to-day fundraising activities can gain a greater understanding of what drives the development process before the gift is completed. Likewise, those who work directly with donors can gain a greater understanding of the issues faced by those who must meet the expectations of donors after the nonprofit actually receives the gifts.

Self-Assessment.  How does a nonprofit decides what gifts to accept and what gifts to decline? The best practice for answering this question is self-assessment. Your nonprofit needs to determine its ability to manage each type and form of gift. For example, your nonprofit may not want to accept gifts of real property if your nonprofit is not staffed to investigate, manage and dispose of the property. We can assume that the apocryphal development officer who took title to a Superfund site in our cautionary tale did not have the staff to investigate the gift. With gifts of real estate, your nonprofit could be obligated to act as landlord and realtor, even for out-of-state property. Do you have that capacity?

Tangible personal property, such as furniture or stamp collections gifts may need insurance storage and special display cases, which could commit your nonprofit to incur substantial out-of-pocket costs for many years. Because split interest gift arrangements obligate a charity to make payments to a donor for life, your nonprofit must have the staff and resources to monitor the gift for the protection of both the donor as well as your nonprofit.

In summary, your nonprofit needs to ask itself the following question: Does your nonprofit want, and have the resources, to manage and be responsible for the gift? I recommend having the broad-based committee that drafts the policy also do the self-assessment. Be brutally honest in the assessment; if you don’t have the capacity to accept some gifts, or if they’re more trouble than they’re worth to your nonprofit, don’t take them. 

Once your nonprofit completes its self-assessment, your gift acceptance policy should list the types of gifts your nonprofit will accept and those gifts it will not accept. The policy should also provide how the gifts will be managed, how the gifts will be disposed of and how the gifts will be invested after they are accepted.

Exactly how to involve all these constituents will vary by nonprofit. But, since the resulting document will be policy, the nonprofit’s Board of Directors should review, approve and adopt it and attach the date of this approval to the policy.

CRITICAL ELEMENTS OF A GIFT ACCEPTANCE POLICY

So, what should go into your gift acceptance policy? I’ve seen policies ranging from one-page long (not recommended) to policies running to hundreds of pages (not particularly recommended either). The best practice among nonprofits suggests that the length is less important than the content.  Best practices indicate that a gift acceptance policy should include the following elements, which I will discuss in more detail below:

  • Your nonprofit’s mission;
  • The purposes of the gift acceptance policy;
  • Recommendation that donor use legal counsel;
  • Your nonprofit’s use of legal counsel;
  • Your nonprofit’s policy on restricted gifts;
  • Types and forms of gifts your nonprofit will accept;
  • Reporting requirements;
  • Your nonprofit’s adherence to ethical standards;
  • Use of a Gift Acceptance Committee; and
  • Annual review.

Nonprofit’s Mission. I believe nothing is more important in making a nonprofit successful than clarity with regard to its mission. Your nonprofit’s mission statement should be clear, memorable and useable. You should prominently display your mission statement on every document your nonprofit generates, and especially its gift acceptance policy. It is critical to keep your nonprofit’s mission in mind when drafting and using the gift acceptance policy.

Policy’s Purposes.  After displaying your nonprofit’s mission, your gift acceptance policy should clearly state its purpose, and how the policy relates to your mission. For example, “The purposes of this gift acceptance policy is to further (nonprofit’s mission) by governing the acceptance of gifts to (the nonprofit) and providing guidance to donors and their professional advisors in completing gifts.”

Donor’s Use of Legal Counsel.  The gift acceptance policy should also clearly state that the nonprofit will ask donors to seek their own legal or tax counsel before making a gift. While it may seem counterintuitive to ask your donor to incur extra expense to make a gift, there are two very good reasons for doing so.

Your nonprofit must avoid the conflict of interest that would occur if it functioned as the donor’s adviser and received the donor’s gifts; especially where the gift is one in which the donor retains certain life benefits, the donor should rely on the donors own advisor and not on illustrations by the nonprofit.

Your nonprofit cannot involve itself in the unauthorized practice of law.  While there is an exception in Washington for transactions in which the person giving legal advice is also a party, you don’t really want to test the limits of that exception.

If the donor chooses not to consult with counsel after the nonprofit advises her in writing to do so, the nonprofit may still accept the gift.

Nonprofit’s Use of Legal Counsel. The gift acceptance policy should also provide that the nonprofit will inform the donor of the circumstances in which your nonprofit will hire legal counsel to assist with the gift. Those circumstances may be several; as an example, your nonprofit may hire a lawyer:

  • To review certain gifts, such as closely held stock, or closely held stock subject to buy-sell agreements or other restrictions.
  • To review all transactions governed by contracts or legal documents
  • To review all transactions with potential conflicts of interest
  • To review transactions in which the committee or board members believe the use of counsel is appropriate.

The nonprofit will, of course, pay its own attorneys' fees.

Restrictions on Gifts. All nonprofits prefer unrestricted gifts so they can use the funds as they wish. However, because many donors want to influence how their gift will be used, nonprofits that do not allow donors to restrict their gifts often find it difficult to raise large amounts from relatively sophisticated donors.

Gift acceptance policies are an excellent place to explain your nonprofit’s approach towards restricted gifts. Accordingly, your nonprofit should determine the types of restrictions that can be placed on gifts and specify such restrictions in its gift acceptance policy. Options range from:

  • A firm policy prohibiting restrictions;
  • A policy which allows endowment pools for specific purposes;
  • A broad policy stating that all gifts that fit your nonprofit’s mission and purpose will be accepted.

All policies, however, should state that the nonprofit will not accept gifts which are counter to or beyond the scope of the nonprofit’s mission and purpose.

A nonprofit may also include language about specific endowments, chairs or other naming opportunities and set out the dollar limits, pledge restrictions and other governing principles. Large schools and universities should have more extensive policies to ensure proper communication and consistency. Smaller nonprofits may be able to manage with a less detailed policy.

Types and Forms of Gifts; Three Primary Options for DonorsMany presentations on gift acceptance policies go into great detail about the myriad types and forms of gifts.  I am going to resist the temptation to do so here, although we certainly can “get into the weeds” about these details in the discussion period.  For now, I just want to describe in very broad strokes the three primary options available to a donor: current outright gifts, charitable bequests and deferred and split interest gifts.

Current Outright Gifts. A current outright gift is kind of the “gold standard” of charitable gifts, at least from the nonprofit’s standpoint. A current gift involves the donor’s transfer of money or property to the nonprofit, without the receipt of any consideration or economic benefit. Although the donor may restrict the use of the property, the donor must retain no control over the money or property transferred to the nonprofit to qualify as a current gift. Current gifts include the following:

  • Cash:  The perfect gift, unless the donor places restrictions that are unacceptable to your nonprofit, contrary to public policy, potentially illegal or are incompatible with your nonprofit’s  mission.
  • Securities: There are two kinds of securities: publicly traded and closely-held. Publicly traded securities are more easily valued and usually sold relatively soon and relatively easily after receipt.  Closely-held securities are significantly more difficult to value and more difficult to sell because of a limited market and likely restrictions on sale.
  • Tangible Personal Property.  This includes art, furniture, coin and stamp collections, livestock, jewelry, equipment, cars, boats and clothes, among other things. A gift acceptance policy should include restrictions on accepting gifts of tangible personal property and provide guidelines for analyzing such gifts. Your nonprofit should examine a potential gift of personal property for the item’s financial value, its potential use by your nonprofit and if you will not use the item, whether the item could be sold quickly and converted into cash.
  • Real Estate.  This includes improved and unimproved real property, detached single-family residences, condominiums, apartment buildings, rental property, commercial property, farms, and gifts subject to a retained life estate. But as indicated in the introductory cautionary tale, substantial liabilities can go with real estate. So, a critical part of your gift acceptance policy should establish thoughtful guidelines to handle real estate gifts. These guidelines will help deal with accepting the gift, using an outside appraiser, and addressing environmental concerns.
  • Life Insurance.  Your gift acceptance policy should provide guidelines to state the minimum face value accepted, the type of insurance products accepted (term, whole life, etc.) and the rating minimum that the insurance company offering the policy must meet. Your policy should require that your nonprofit be named as the owner and irrevocable beneficiary of the life insurance policy.

Charitable Bequests. A testamentary charitable bequest is a gift made to the nonprofit named in the donor’s will or trust and is payable according to the terms in the document. Bequests may provide for a specific dollar amount in cash, specific securities, or specific articles of tangible personal property.

Your nonprofit may want to include language in its gift acceptance policy to assist donors or their counsel in drafting testamentary language. You should also specify that donors should recognize that the nonprofit’s needs can change in the future The gift acceptance policy should advise donors to describe the specific purposes of their gifts as broadly as possible and to avoid detailed limitations and restrictions.  You might also want to ask donors to include a contingency clause allowing your nonprofit to change the use of the money under changed circumstances.

Your nonprofit’s gift acceptance policy should also encourage donors to name your nonprofit as beneficiary of their retirement plans and life insurance policies. Educate donors how to properly name your nonprofit and encourage the donors to work with you to plan gifts for special purposes.

Deferred and Split Interest Gifts. A deferred gift or split-interest gift involves the donor’s irrevocable transfer of an interest in an asset to the charity, but the donor generally retains either an income stream or the remainder interest. The planned giving program may include the following types of split-interest gifts:

  • Charitable Gift Annuities.  A charitable gift annuity is a lifetime contract between your nonprofit and the donor. The donor makes a gift to your nonprofit and receives a fixed amount of income for the donor’s lifetime, and if desired, for another beneficiary’s lifetime. Upon the death of the last beneficiary, your nonprofit will receive the remainder. The donor may not make additional contributions to a charitable gift annuity; however, the donor may enter into additional contracts.
  • Charitable Remainder Trusts.  A charitable remainder trust is a flexible arrangement involving an irrevocable contribution of property. The trust can be either inter vivos or testamentary. The trust can be created for up to 20 years, not to exceed 20 years, or for the lives of the named non-charitable beneficiaries. At least one income beneficiary must be non-charitable. The trust income (not less than five percent or more than fifty percent of the value of the trust assets) will be paid to the donor and/or other designated beneficiaries on an annual or more frequent basis, such as semi-annually or quarterly. The trust remainder will be distributed to your nonprofit. The trust may be funded with contributions of cash, securities or real property.

There are two types of charitable remainder trusts. A unitrust pays a fixed percentage of trust assets (not less than 5%) determined annually to the income beneficiary or beneficiaries. The percentage of assets that are required to be distributed at least annually cannot be greater than 50% percent. An annuity trust pays a fixed annuity and requires that a sum certain (not less than five percent of the initial fair market value of trust assets) be paid at least annually to the named income beneficiary or beneficiaries. The annuity for any year may not be greater than 50% of the initial fair market value of the trust assets.

  • Other Types of Deferred Split Interest Gifts.  Your nonprofit should also provide guidelines for gifts of remainder interest in real property; charitable lead trusts; and pooled income funds.

Reporting RequirementsYour nonprofit’s gift acceptance policy should describe its reporting obligations. Will your nonprofit send the donor a donor information Form 8283 even though it has no obligation to do so? You should advise your donor that you will file done information Form 8282 with the IRS on or before the 125th day after your nonprofit sells, exchanges, or otherwise disposes of donated property within two years of its receipt. Your policy should also emphasize that it shall be impermissible to agree with a donor to delay the sale or liquidation of property solely for the purpose of avoiding the filing of Form 8282.

Your gift acceptance policy should require you to provide a written acknowledgement to donors who make any single charitable contribution of greater than $250. The gift acknowledgement must make a good faith estimate of the value of any goods or services, if any, provided by your nonprofit in exchange for a gift and should describe any property the donor donates. If your nonprofit does not provide such written acknowledgement to the donors, the donors may be denied a charitable income tax deduction and you may lose any future donations from your donors

Ethical StandardsYour gift acceptance policies should also include the Model Standards of Practice for the Charitable Planner. The Model Standards, promulgated by the National Committee on Planned Giving, establish ethical standards for everyone involved in the planned giving profession. Including the Model Standards in your nonprofit’s gift acceptance policy will incorporate those ethical standards into your gift planning operation.

Gift Acceptance CommitteeThe gift acceptance policy should establish a Gift Acceptance Committee separate from the planned giving committee of the board. At smaller nonprofits this committee may be composed of the executive director, development director, and a board member from the finance committee. The policy should grant the gift acceptance committee access to outside legal counsel when necessary. It should also establish a procedure for the gift acceptance committee to access board expertise and approval when necessary. The decision to go to the board should be reached by the committee together with its legal adviser.

Annual Review.  Once the Board adopts a gift acceptance policy, the Gift Acceptance Committee should review the policy annually to determine if any amendments are necessary.

CONCLUSION

In these days of increased scrutiny of nonprofit governance, it is especially important that nonprofits have well developed gift acceptance policies. Gift acceptance policies serve as helpful roadmaps and demonstrate to donors that your nonprofit intends to operate professionally and ethically. Gift acceptance policies will substantially reduce unanticipated problems and will increase the knowledge of key individuals in your nonprofit regarding sophisticated charitable giving techniques.

[1]  The 990 also asks is the nonprofit has policies on whistleblowers, document retention and conflicts of interest. It asks about the method of preparation of the financial statements and whether the nonprofit has an audit committee.  The IRS considers all of these “best practices” for nonprofits.

Disclaimer

This advisory is a publication of Eisenhower Carlson PLLC. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

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