In recent years, charitable organizations have faced growing pressure to incorporate values of equity and representation into their donor agreements, particularly for scholarships and fellowships. Many gifts now express donor preferences for their gifts to specifically benefit individuals from underrepresented racial, ethnic, or gender groups. But in today’s legal climate, these well-intended restrictions can create compliance risks that nonprofits cannot afford to ignore.
With the Supreme Court’s decisions in Students for Fair Admissions v. Harvard and Fearless Fund v. American Alliance for Equal Rights, moving forward, the line between what is permissible and what is legally risky has grown thinner. Nonprofits need to understand the shifting legal landscape to craft gift agreements that respect donor intent and uphold anti-discrimination laws.
Donor Preferences vs. Anti-Discrimination Law
It’s a foundational principle of charitable giving that nonprofits should honor donor intent, particularly when it’s tied to a restricted gift. But charities also operate under the constraints of state and federal nondiscrimination laws and the requirements of maintaining 501(c)(3) status.
A donor can ask that a scholarship be aimed at helping underrepresented communities. But if the criteria for selecting recipients are too rigid, e.g., “must be a Black female” or “must be a Latina entrepreneur,” the nonprofit may expose itself to liability under Title VI (for federally funded organizations), Title VII (employment-related grants), or state equivalents of public accommodation laws.
What You Can Do
Rather than walk away from these donors, or blindly accept the gift, organizations can structure donor agreements to be both impactful and compliant.
Use aspirational language. Instead of “must be Black,” say “preference will be given to applicants from historically underrepresented racial groups.”
- Include a fallback clause. Build in a statement like “In the event that any of the donor’s stated preferences become impractical, illegal, or inconsistent with the Foundation’s charitable status, the board reserves the right to modify the restriction in a manner consistent with the donor’s intent.”
- Combine criteria. Use race-neutral but equity-informed language such as “first-generation college student,” “resides in underserved ZIP codes,” or “demonstrated commitment to community engagement.”
- Apply a broad diversity lens. Consider including socioeconomic status, disability, geography, or other neutral characteristics aligned with the donor’s goal.
What to Avoid.
When negotiating the terms of a gift with the donor, there are some clear legal landmines to steer clear of:
- Absolute strict preferences based on race or gender. These are increasingly subject to challenge, even outside the employment or educational context.
- Overly narrow eligibility. Avoid language that limits eligibility to only one group without a compelling, legally sound rationale.
- Outdated or inflexible restrictions. Laws evolve. Build in mechanisms for periodic review and adjustment.
Consider IRS Compliance, Too.
Even if your restriction wouldn’t trigger a lawsuit, it might still raise red flags with the IRS. Foundations making scholarships with race- or gender-specific language should expect questions on audit or in the Form 990 review process. The IRS looks at whether selection criteria further charitable purposes without violating public policy.
Final Thoughts.
This is a nuanced area. You don’t have to say “no” to every donor who wants to make a difference for a specific community. But you do need to ensure that their wishes are framed in a way that keeps your organization on solid legal footing.
Get legal advice before finalizing restricted gifts that reference protected classes. These gifts can be powerful tools for equity, but only if structured with care.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.