Considerations in negotiating and drafting gift agreements
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Considerations in negotiating and drafting gift agreements

3 months ago · 3 min read

When accepting gifts from donors, it is vitally important to consider the underlying laws and principles that govern those gift agreements.

Gift agreements may be oral, written, merely implied based on the form and content of a donor solicitation, or nonexistent altogether. Many gifts are given by donors who have no contact with the NFP, the only evidence of their intent to contribute manifested by the receipt of a single check, on-line payment, or cash donation. In certain instances, usually involving large and complex contributions and promises to give, and when trust or agency arrangements are involved, NFPs and donors enter into written gift instruments to memorialize the terms and conditions of the gift, and to ensure a mutual understanding.

NFPs that accept non-cash gifts are required on IRS Form 990 Schedule M to indicate whether they have a gift acceptance policy that requires the review of non-standard contributions. Non-cash contributions include securities, real estate, vehicles, inventories, art work and so on. Certain giving arrangements provide donors with tax benefits, and require written agreements in support of the charitable contribution deductions claimed by the donor.

NFPs and donors alike can achieve clarity by working together to create gift instruments that include the important details on which the parties have agreed.

Elements of Gift Instruments

The following list is intended to help NFPs and donors consider the important elements of gift instruments. It is not intended to be comprehensive, nor does it constitute legal advice. NFPs and donors are encouraged to seek legal counsel when negotiating and entering into gift instruments.

  • Date of the agreement.

  • Legal name of the NFP recipient.

  • Legal name(s) of the donor(s).

  • If more than one donor, an indication of the donors’ intent to be obligated jointly, severally, or both jointly and severally.

  • Complete description of exactly what is to be contributed and the dates on which it will be contributed, e.g., cash, securities (specify), personal property (specify), real estate (specify), etc.

  • Detailed description of amount to be contributed (if cash), quantities (if personal property), legal description (if real estate).

  • Detailed description of the means of transfer and instrument(s) of conveyance, if applicable, e.g., cash, check, wire-transfer, physical delivery of personal property, first deed of trust, quitclaim deed, etc.

  • A statement that the donor’s gift or promise to give is unconditional and irrevocable, and that the designation of the NFP as recipient also is irrevocable (if the gift instrument is irrevocable, but the donor retains the right to change the recipient, the contribution would be conditional and not recordable by the NFP.

  • A statement that in the event of the donor’s death prior to fulfillment of the promise to give, the donor intends, and hereby instructs his or her personal representative to fulfill the promise to give from the assets of the donor’s estate.

  • The purpose(s) for which, and time periods during which, the contribution(s) may be expended. If permanently restricted for endowment, the purpose(s) for which, and time periods during which, the earnings may be expended.

  • Any other terms, restrictions, or other details agreed-to by the NFP and the donor(s). If the NFP intends to use a portion of the contribution to pay legal, title, transfer-related, or other administrative expenses, it should obtain the donor's agreement and include an indication of such in the gift instrument.

  • The signatures of an authorized representative of the NFP and each donor.

Considerations When Evaluating Gift Instruments

It is quite common that a gift agreement will exclude one or more provisions that may be necessary to determine whether a contribution should be recorded for accounting purposes, and if so, that the contribution has been properly recorded. Because there is no simple process to answer all questions that may be raised in connection with a gift agreement, judgment and additional investigation often are necessary to make an accurate determination.

Determine what provisions are not stated clearly and require further clarification. Common ambiguities include:

  • Lack of clarity regarding whether the donor is expressing an intention to give, making a conditional promise to give, or an unconditional promise.

  • For unconditional promises to give, insufficient information regarding the timing of the cash flows.

  • For purpose-restricted contributions, unclear indications regarding the nature of the restrictions.

  • For time-restricted contributions, the time frame for expiration of the restriction(s).

  • For endowment funds, unclear or no indication(s) regarding the treatment of endowment earnings.

Importance of Period Reviews

Additionally, it is a good business practice to periodically review your recordkeeping systems to ensure that existing procedures and documentation in the records will meet the reporting needs of the entity. Reporting needs change as an entity evolves and fundraising strategies change. Consider whether your development office is actively seeking or accepting non-traditional and non-cash gifts. Also, if there has been some turnover in the development office or other staff involved in soliciting donors or obtaining and maintaining records, it is important to ensure that new staff have adequate training to put those procedures into practice.

Additional Resources

Example Gift Acceptance Policy (Word)
Form 990 Schedule M: Noncash Contributions (IRS website)
Revenue from Contributions: Not-for-Profit Accounting & Financial Reporting (self-study)

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