In recent years, the philanthropic community has confronted several significant developments involving the issue of donor intent that could significantly affect charitable giving in the United States. Given the challenges confronting donors who are concerned that their charitable intent will not be carried out after they die, there are several strategies these donors may use to protect their goals.
Americans historically have been an extremely generous peAmericans historically have been an extremely generous people. In 2006 alone, Americans contributed $295 billion, continuing an upward trend in charitable giving that has occurred over the last several years. Undoubtedly, most of these contributions were unrestricted gifts of cash and marketable securities, which the recipients were permitted to use for whatever charitable purposes they deemed appropriate. However, some donors, particularly those who give large gifts, likely imposed restrictions on their use. This is not a new development, since philanthropists have always, to a degree, sought to control, or at least influence, the manner in which their charitable gifts are used. This is particularly true for gifts funded after the donor dies, when he will not be able to personally monitor their use by the charity. On the other hand, charities have always preferred unrestricted gifts free from the influence of the donor's "dead hand," as opposed to those whose use is mandated by the giver. The tension can lead to a mismatch between the goals of the donor and the activities of the charity or private foundation.
The Problem Of Mission Drift
Whenever a donor contributes to a charity for a specific purpose, there is always a possibility that the charity will fail to satisfy the donor's intentions. Similarly, whenever a donor creates and funds a private foundation, there is a possibility (particularly after the donor's death) that the organization's goals and mission will gradually morph into something very different from the donor's original intent.
Such instances of "mission drift" could occur for numerous reasons. For example, the donor may not have clearly articulated her charitable intentions, or she may have imposed overly restrictive qualifications on the gift that are either impractical or impossible for the charity or private foundation to fulfill. In addition, the donor's long-term charitable goals may no longer be relevant as times change. For example, a charitable fund created in the 19th century exclusively for the treatment of tuberculosis patients in the United States may be irrelevant today-and accordingly problematic to administer. Otherwise, mission drift could occur because of a lack of attentiveness to the donor's original intentions by the charity or private foundation. In rare situations, the governing body of the receiver may believe that the donor's intentions are unknowable or do not govern her gift. In even rarer situations, the boards may make the conscious business decision to circumvent those intentions. In any event, many donors are alarmed by the possibility that their charitable plans will not be fulfilled.
One commonly cited historical example of mission drift as perceived by a donor's heirs involved the Ford Foundation, founded by Henry Ford's son Edsel. Several years after Edsel's death, his son Henry Ford II resigned from the board of directors as an act of protest against the foundation's activities, arguing that they were anticapitalist and therefore anathema to the free-market values of his father and grandfather. Though Ford did not pursue litigation in an attempt to reverse the mission drift, the story is useful in articulating the concerns that many donors feel when making large charitable gifts or establishing private foundations.
Another fight involved the perceived mission drift of the Barnes Foundation of Merion, Pa., which planned to relocate a multibillion art collection to Philadelphia. The foundation's founder, Albert C. Barnes, specifically mandated that his collection remain on display in his former Merion residence in perpetuity, specifying the exact manner in which the artwork was to be displayed for public viewing. After a multiyear court battle between the foundation board, members of the community and other charitable organizations, the foundation was indeed permitted to move the art to the new Philadelphia facility. While the general purposes of the foundation-to display Barnes' outstanding collection of artwork-remains the same, the court significantly changed several key restrictions by allowing the foundation to move. This case is noteworthy to many in the philanthropic community as a clear example of a court's inherent authority to break a donor's plan, even one as meticulously laid out as Barnes'.
Another ongoing controversy involves Princeton University and the Robertson family of the A&P grocery store fortune. These parties presently are involved in litigation over the proper use and administration of a charitable fund established by heir to the fortune Marie Robertson in 1961. The Robertson family alleges that Princeton has not used or administered the gift in accordance with her wishes and has mismanaged her legacy. Princeton contends just the opposite and has argued that the Robertson heirs are effectively attempting to rewrite her plan. Meanwhile, the philanthropic community is anxiously awaiting the New Jersey court's decision in the case, which will no doubt affect how restricted funds and indeed charitable organizations are governed in the future when the donor articulates specific goals.
These two cases are major and newsworthy, but are not isolated. In recent years, there have been several other significant disputes between donors, their families and the charitable organizations that they wish to support regarding the ongoing use of donated funds. Obviously, donors who wish to support the particular activities of a charity are interested in these developments because they want to make sure that their gifts will be used for the purposes intended. While nothing can prevent a court from breaking a trust or any other legal document that restricts the use of a charitable gift, donors can nonetheless plan accordingly to avoid mission drift.
The Advantages Of Lifetime Philanthropy
One component that seems to be common in such cases is a breakdown in expectations and understanding between the donor, her family and the governing board of the recipient body. One way to avoid a communication breakdown is for a donor to begin a relationship with and oversee the activities of the charity or foundation during her lifetime. This could mean establishing the parameters of her restricted fund or gift during her lifetime, effectively requiring the charity and donor to work together to effect her charitable goals. In this manner, a pattern of activity will be established that could guide the charity's stewardship of the contributed assets following the donor's death and prevent any future misunderstanding of her charitable objectives. Moreover, the collaborative charitable activities of the charity and donor could serve as powerful evidence of the donor's intentions should controversy arise following her death.
Use Of Charitable Trusts
Even though the Pennsylvania court's decision in the Barnes case suggests otherwise, generally a charitable trust is a more effective vehicle than a nonprofit corporation for locking in a donor's charitable intentions. By its nature, a nonprofit corporation is inherently flexible. Articles of incorporation, bylaws and mission statements are all subject to change, which gives the corporate form its main advantage. While it is possible to create corporate governance documents that are difficult to amend (for example, those requiring a supermajority or even a unanimous vote), you cannot block amendments completely.
By contrast, a charitable trust instrument could include a mission statement, distribution requirements and a governance structure that cannot be amended without a court order. Even though a court can always change the purposes or administrative provisions of a charitable trust, this is a cumbersome and uncertain process. Moreover, the circumstances in which a court will change the express purposes of a charitable trust are typically limited to rare situations in which the purposes are illegal or impossible to fulfill. While charitable trusts may be somewhat clumsier than nonprofit corporations for day-to-day operations, for a donor who has clear goals regarding the use of her charitable gift and who is concerned about mission drift, the charitable trust may be the preferred vehicle for her philanthropy.
Mission Statements And Clear Charitable Purposes
Obviously, a donor who is concerned about mission drift should clearly articulate the purposes of the foundation or gift in a mission statement. There is no required form or content for a statement, but the purposes must qualify as "charitable" under Section 501(c)(3) of the Internal Revenue Code. However, it is important that the donor avoid using boilerplate language that merely recites the charitable language of the section. Instead, the donor should attempt to draft specific language regarding the intended uses of her charitable gift, perhaps including examples of both permitted and prohibited uses. Similarly, a donor can articulate the grant-making activities that her foundation should support and those which should be avoided. A carefully drafted mission statement can serve as a clear direction to the donor's family, to the charities supported by the donor, to the leadership of the donor's foundation and, if necessary, to a court trying to determine the donor's charitable goals.
Perhaps most important, however, is that the donor's mission statement and charitable purposes include some element of flexibility. One possible reason that the court in the Barnes Foundation matter allowed the foundation to divert from its expressed purposes was the inflexibility of Mr. Barnes' plan, which the court eventually interpreted as a hindrance to the foundation's success. Accordingly, a donor may wish to include secondary and perhaps even tertiary charitable goals and purposes that must be followed in case the donor's primary goals become impossible, impractical or unnecessary, thus her intent will continue to govern the use of the charitable property.
Enforcement Mechanism
During a donor's lifetime, her participation in the charity or foundation's activities and her continued willingness to contribute is the most obvious and effective mechanism to enforce her charitable wishes. However, after the donor dies, her intentions will be carried out by proxies, which may include the charity or foundation and surviving family members. It is important that a donor specify the parties that should be consulted for purposes of carrying out her charitable intent and that the donor notify each party of his or her role. With a restricted gift to charity, the donor can name individuals to advise the charity regarding the use of the charitable gift and possibly grant those individuals the legal right to enforce the terms of the gift. With a private foundation, the donor can create a succession plan for the foundation's governance, and specifically name individuals whom she trusts to effect her goals.
Even with the most carefully planned enforcement mechanism, however, there is an increasing risk of mission drift over long periods of time, particularly as the individuals charged with administering the gift or foundation are less likely to have interacted with, or even known, the donor. For this reason, it may be wise for donors to consider the creation of a separate discretionary fund that future fiduciaries can use for their own charitable purposes. This creates an incentive for future fiduciaries to adhere to the donor's intent because they also will have the opportunity to support their own charitable interests.
Time Limits
An increasingly effective tool to avoid mission drift is to impose time limits on the lifetime of the foundation or the period of time in which a charitable fund must be completely spent by the donee charity. A time limit is useful for preventing a situation in which decision makers have no actual knowledge of the donor's intentions. A time limit also avoids the institutional inertia that could cause a charity or foundation to misinterpret or disregard the intentions of the donor. Furthermore, a time limit would impose a sense of urgency on the directors and staff of the recipient organization to develop a business plan for the efficient and strategic use of the gift.
There are several significant examples of time limits, both in the context of restricted gifts and foundation administration. Most notably, the decision by Bill and Melinda Gates that their foundation will be terminated within 50 years after they have both died evinces a concern that the world's largest foundation could stray from its original mission. Even more dramatic are the restrictions that Warren Buffett placed on his gift to the Gates Foundation, requiring that each year the amount of the previous year's gift be used up by the foundation and that all the funds contributed by him be totally expended within ten years of the close of his estate for administration purposes. This also illustrates a concern that the longer a charitable organization holds a donor's funds, the more likely that its own goals, rather than the goals of the donor, will be fulfilled.
The issue of mission drift is significant, particularly for donors wishing to make large gifts to a specific charity or to a private foundation. It is important for charities and donors to work together to carry out the donor's intent. The use of these strategies to give charitable funds focus may serve not only to avoid the mission drift, but improve philanthropy overall.