Understanding and Honoring Donor Intent
Donor intent is an area that can create significant risk for nonprofit organizations if they’re not careful. Understanding and honoring donor intent requires thinking ahead to the future of the organization, putting a written donor agreement in place for larger donations, and ensuring the right processes are in place to honor a donor’s intent.
What is donor intent?
Donor intent applies to any donations where a donor specifies how the funds should be used. That could mean a one-time $50 donation to a specific fund or a substantial multi-year donation for a specific purpose. The donor must state the intent of the funds at the time of donation and the intent must fall within the parameters of the law and IRS guidelines for deductible donations. For example, they may donate $10,000 to be used for scholarships or to fund a specific program. If donors do not specify their intent when the donation is made, they cannot later control how the money is used.
The organization receiving funds must honor the donor’s intent in using those funds. If they don’t, the nonprofit could face legal repercussions and damage their overall donor relations. A gift that is not used as intended could result in losing future donations from the same donor or donations from other sources if the organization gets a reputation for not honoring donor intent. Furthermore, the donor or the state’s attorney general could also take legal action against the organization for failure to follow donor intent.
The importance of thinking ahead
All too often, nonprofits don’t think ahead to what may be required to honor donor intent. For donations to an established fund, the organization needs to ensure they have the right systems in place to earmark those funds for their intended use. Taking the time to consider future scenarios also helps an organization craft an agreement that satisfies both the donor and the organization’s long-term plans for use of the donation.
Nonprofits should consider their future needs and think through how a gift could be used now and in the future. If the donor’s intent is to support a current program but that program ends in two years, the organization can’t simply shift those funds somewhere else because the donor has restricted the use of those funds.
Written agreements for donor intent
A written agreement between the organization and the donor is ideal because it details how the donor wants the funds to be used and should include a term in the agreement that if the program, or donor identified use, is no longer in existence, then the organization can use it in other ways as identified by the donor.
“Having a written agreement for detailing a donor’s intent and usage of its funds allows all parties to be on the same page.”
Without the addition future oriented terms, questions of intent may arise many years after the original donor has passed and those involved in the organization have changed. Having a written agreement for detailing a donor’s intent and usage of its funds allows all parties to be on the same page. These agreements should be kept with corporate documents and easily accessible for organizational leadership.
Whether it’s a donor, their heir, or the recipient organization questioning the use of a gift, the written agreement will determine the stated intent of the gift and the parameters that need to be followed. If the use of a gift is challenged in court, the written agreement provides proof of intent to ensure that the donor’s wishes are carried out or that the organization is operating within the parameters of the donor’s intent.
If a donor proposes an agreement, the organization’s legal counsel should review that agreement to ensure the details are clear and it protects both parties. Every written donor agreement should include a variance powers clause that outlines the circumstances in which the organization can change how the funds are used, especially if the donor is deceased at the time changes are needed.
What happens when changes are necessary?
Even the most forward-thinking organizations can run into a scenario where the original donor’s intent can no longer be fulfilled.
An animal rescue initially focused on one specific breed might shift to helping a different breed. A disease-specific nonprofit might pivot their focus because of medical advancements related to the disease. In some cases, an emergency or natural disaster could create a more immediate need than the intent of the original gift. In these cases, long-standing gifts may need to be repurposed. What then?
If the donor is still alive, the organization should contact them and work to modify the written agreement for how funds can be used. Communicating with the donor and working together to find the best solution preserves both the donor’s intent and future donor relations.
If the donor is deceased, the variance powers clause in the original written agreement may allow the organization to shift how the funds are used. If there were no variance powers or the changes go beyond the scope of these powers, the organization may have to use the Uniform Prudent Management of Investment Funds (UPMIFA) to have a gift agreement modified through a court with competent jurisdiction. In these situations, the court’s goal is to seek a solution that honors the intent of the original gift while addressing the changes in the organization’s programs.
Always consult with your legal team
Because the details and nuance of these written agreements can vary so widely, you should always consult with your legal team. From the initial creation of an agreement to evaluating potential changes in the use of funds, your attorneys can help ensure the organization’s actions honor the donor’s intent and reduce risk to the organization.
Understanding and honoring donor intent is critical for nonprofit organizations that accept donations of any amount to carry out their mission. With some forward thinking, the right agreements in place, and support from your legal team, nonprofits can maintain strong donor relations and further their mission.
If you need help navigating donor agreements within your nonprofit organization or need help modifying an old agreement through the court, reach out to our team at Nonprofit Solutions for a consultation.
