Posted August 1st, 2007

Can You Afford These Gifts?

Some years ago when I was the brand new executive director of a local chapter of a national charity, I decided to accept a gift of a used station wagon. Although I would have to pick the car up from a town 80 miles away and then drive it to a local car dealer, I regularly had to go through the area anyway, so I thought “Why not?”

After I picked up the car, I ran out of gas twice because, it turned out, the car got only a few miles per gallon. It took the better part of a day to go 80 miles. Then, the dealer gave us only $300 for the car, rather than the estimated $600. Was it a good gift? In retrospect, probably not.

Those of us involved in gift planning sometimes work on unusual gifts because donors offer what they have, which may sometimes be unique, complex, and hard-to-value assets. The first instinct of any good development staffer is to thank the donor and find a way to accept just about any gift. However, this is not always the right decision. Accepting gifts of noncash assets requires thought and a thorough understanding of the asset in question.

With these gifts, it is important to look further and go deeper before making a decision. While not all encompassing, examples of some of the gifts that need to be examined carefully include real estate, water rights, livestock, partnerships, closely held stock, life insurance, and personal property (paintings, jewelry, vehicles, boats, etc.)

The best place to start when it comes to such gifts is by having an up-to-date gift acceptance policy that outlines the various gifts that will and will not normally be accepted. Ideally, as part of this policy, there will be backup information and perhaps a manual that includes topics, resources, and a discussion about various types of gifts. This should be a living document that is reviewed annually. Basic policies and guidelines should be approved and understood by senior staff and board members, although the more detailed manual and backup material usually does not get to the board level.

These policies should take into account the nature of your organization, your fund-raising structure, your geographic scope, and other factors. Determining the acceptability of certain gifts will depend on the value of the gifts as well as the expertise necessary to work with various properties available in your organization or from outside consulting expertise.

Getting real

Easily the most complex, valuable, and potentially problematic gifts are those of real estate. While they can be wonderful and profitable, real estate gifts can also present significant issues. One of the most important threshold factors is the location of the property. If it is located within easy driving distance and in an area where you are familiar with market values, the gift may be quite viable. Having board members or others nearby with special legal or real estate expertise can also save money and help in decision-making.

However, if the proposed gift is located 1,000 miles away and you know little about the local market, it may be a very different story. You may hire local experts to investigate the property for you, but this may involve payment of significant sums in advance, before you can determine the viability of the gift.

Having worked on over 500 real estate projects over the years, I have encountered any number of issues in various combinations and permutations. Examples of issues involving real estate gifts include title questions, boundaries, environmental assessments, marketability, current and future land use, time to sell, costs and risks of holding the property, assessing liabilities, and determining realistic values. Such gifts sometimes simply shift a donor’s problems with a particular property to you, while at other times a problem property for the donor is not a problem for the charity.

Even if there is a serious roadblock regarding a proposed real estate gift, it is not always necessary to reject the gift. For example, if there is a toxic waste problem on a property, it may well be possible to sell it as is (with full disclosure) or to buy insurance to cover the cost of any cleanup and limit any potential liability. The key is knowing the nature and severity of the problem.

Lessons in life

Life insurance gifts can also present special challenges. While there is little to be concerned about in the case of life insurance gifts that simply name an organization as the beneficiary at death, today we are seeing more complex insurance policies. For example, some donors will buy life insurance expressly to give to a charity, usually with the encouragement of their insurance agent. Since most life insurance policies are never kept to maturity and thus never pay a death benefit, these can be problematic—generating a commission for the agent, but perhaps diverting annual gifts and never benefiting the charity.

When the donor decides to stop paying the premiums or furnishing the funds to do so, the charity is then in the difficult position of having to press the donor to pay the premiums or deciding to use the organization’s funds to do so. As a result, charitable entities accepting life insurance may wish to go slow in giving recognition where future payments need to be made, and should consider retaining the right to modify or cash out the policy at any time.

If an organization is named the owner of a policy, it should regularly obtain an “in-force illustration” every year or two. What is an “in-force illustration?” When a policy is sold, the agent usually provides two illustrations—one showing the guaranteed earnings on the policy, and another that will show a higher assumed or estimated (but not guaranteed) earnings level. An in-force illustration is the insurance company’s best estimate of the current and future projected financial health of the policy. Insurers will normally provide this document upon request without charge.

Armed with this information, it is often possible to predict when the cost of providing death benefits will surpass the earnings, i.e. when the policy will start to lose value or even collapse without more premiums. When a policy starts to slide, it is usually possible to make additional premium payments, terminate the policy, and receive its current cash value, or convert it to a policy that will provide a lower death benefit. It is also a good idea to obtain an in-force illustration prior to or immediately after accepting a gift of an existing life insurance policy.

Related-use property

The nature and purpose of the organization will also often determine what kinds of gifts may be offered and should be accepted. For instance, a music school may be well-positioned to receive gifts of musical instruments because the gift is related to their mission and the staff should be knowledgeable of the instruments’ values, while a national health charity might have a more difficult time handling a gift of this type. Similarly, an art museum may be capable and willing to handle gifts of most paintings and easily determine if they have value, either for the museum itself or on the open market. For a maritime academy or water-focused organization, a boat or yacht may be an acceptable and natural gift, since such groups tend to attract donors with similar interests. For organizations that lack such expertise, accepting gifts of boats can be very problematic.

Accept that you can’t accept everything

Keep in mind that each charity’s gift acceptance policies will differ depending not only on the nature, mission, and structure of the organization, but also on the it’s risk tolerance, available expertise, and fiscal capacity.

Don’t reject gifts simply because they are unusual or complex, but do investigate them carefully before making a decision. Seek and accept gifts that are within your areas of expertise and interest, while making sure to get knowledgeable and qualified advice for gifts that are outside of your comfort zone.

Most importantly, make sure to factor in the real cost of staff time and effort for all gifts. Depending on the work and costs involved, the donor’s gift may sometimes be one you simply cannot “afford” to take because the ultimate cost to the charity in terms of time, staff engagement, fees, and other costs may be more than the amount that is finally received.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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