Posted October 6th, 2016

Claim Against a Donor’s Estate Creates Media Frenzy

Law books (Law Cases) on a shelf

by Barlow Mann

How one university’s pursuit of a promised gift gained media attention and raised concerns about how to handle deceased donors’ outstanding pledges.

A recent claim filed against the estate of a donor to a major university to collect millions of dollars in outstanding pledges created a media firestorm that was covered by the Wall Street Journal, Bloomberg, FortuneThe Chronicle of Philanthropy and numerous other media outlets. The resulting negative publicity no doubt played a role in the university’s decision to drop its claim to nearly $10 million in outstanding documented pledges a few days after the story broke.

In the wake of the publicity, many fundraisers expressed concerns about the wisdom of pursuing such a claim against a donor’s estate and worried that such a high profile story could have a chilling effect on other donors’ willingness to make significant pledges and “document” their intentions—especially those through their will and other estate plans. This complex and unusual case brings to the forefront a number of legal, accounting and other issues regarding pledges that the gift planning community should consider.

First, is a pledge a legally binding agreement? In many instances, the answer is no. Some state laws may even preclude collection of a legally binding pledge. A pledge is quite often merely the manifestation of a donor’s intention to make a gift at some point. Even though the pledge is really only a statement of intent, most pledges are eventually fulfilled. In other cases, a charity and donor may enter into a contract that both parties agree will be legally binding.

From an accounting standpoint, a basic pledge does not rise to the level of an unconditional promise to make a gift. If, however, the donor has made an unconditional promise to make a gift, the commitment should normally be recognized as income and reflected on the charitable organization’s balance sheet under Financial Accounting Rules. For tax purposes, the gift will, however, generally be deductible only in years when cash or other assets are actually transferred.

In recent years, particularly when there is a large capital campaign, there has been an increased interest in documenting pledges. In some cases, large pledges may be accompanied with documentation that specifically directs that the donor’s estate pay the balance of any outstanding pledge payments. The enforceability of such a pledge against the estate depends upon state laws.

Pursuing a pledge

As a practical matter, if a donor passes away with an outstanding pledge, the charitable organization may well need to file a claim in probate in order to receive the gift that the donor intended. In many cases, the personal representative or executor of the estate would not otherwise know about the pledge commitment and could require the claim as part of the court-supervised probate process. Even when a claim is made, however, payment is not guaranteed. The gift may or may not be received depending on the solvency of the estate and other factors such as the accompanying documentation.

Any number of circumstances may impact an organization’s decision to make a claim or refrain from doing so. For example, if the organization relied on the donor’s commitment to construct and name a building, it would be a routine matter to file a claim. On the other hand, if the donor had suffered financial setbacks, or if the family was not amenable to the pledge commitment, the organization might not pursue a claim.

There are many gray areas in which the decision to submit a claim is not clear and the resulting negative public relations could impact future fundraising efforts.

Each case should be evaluated independently to determine whether a claim is warranted. That being said, however, remember that a binding pledge represents a property right of the charity and it may have no choice but to pursue the claim under applicable law. Not to do so would, in effect, result in the organization making an impermissible “gift” to the non-charitable heirs. For an examination of another similar case from 1974 and the Florida Supreme Court’s ruling, check out our September 8, 2016 blog post “Let’s Look at the 1974 Jordan Case From Florida.” ■

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.

Give & Take

Site Search

Give & Take Archives

2017 Issues 2016 Issues 2015 Issues 2014 Issues 2013 Issues 2012 Issues 2011 Issues 2010 Issues 2009 Issues 2008 Issues 2007 Issues 2006 Issues 2005 Issues 2004 Issues 2003 Issues 2002 Issues 2001 Issues 2000 Issues 1999 Issues 1998 Issues 1997 Issues