Donors often ask what happens if a charity takes a restricted gift and then uses it for something else. The charity is bound by the restriction, but the harder question is who can make it comply. In most states that has traditionally been the attorney general, not the donor. Whether a donor can sue depends on the state, and neither Arizona nor Washington has a statute that says so directly. This post covers what donors and charities can rely on in our two states.
The UPMIFA Baseline
Every state except Pennsylvania has adopted a version of the Uniform Prudent Management of Institutional Funds Act, which sets the floor for how charities handle restricted endowment funds. A charity must follow a specific donor restriction, but it can ask a court to modify or release the restriction if it becomes impracticable, wasteful, or hard to administer. In some cases it does not need a court. A charity can change a restriction on its own, without the donor’s consent and without telling the donor, if the fund is worth less than $25,000 and the gift is more than twenty years old. Only the attorney general has to be notified.
Arizona
Enforcing donor intent can be tricky in Arizona. Arizona’s version of UPMIFA is at A.R.S. 10-11802(A), which requires a charity to manage a fund consistent with the donor’s restriction, and A.R.S. 10-11805, which covers modification. Arizona is less protective than the model act on one point. A charity can release or modify a restriction it considers impracticable if the fund is worth less than $50,000, twice the model act’s $25,000 threshold.
Arizona has no donor-standing statute, but donors are not without a remedy. In Dunaway v. First Presbyterian Church of Wickenburg, 442 P.2d 93 (Ariz. 1968), donors gave stock to a church to build a Sunday school building. The church used it to buy property instead. The Arizona Supreme Court held that the church’s acceptance of the gift on those terms created an enforceable contract, and the donors could sue. A completed gift with a clearly stated condition can therefore be enforced as a contract in Arizona. For charitable trusts, Arizona has adopted the Uniform Trust Code, and A.R.S. 14-10405(C)(10) gives the settlor standing to enforce the trust’s terms.
The Bashas’ case shows the limit of that reasoning. In In re Bashas’ Inc., Eddie Basha pledged $25,000 a year for ten years to a St. Joseph’s hospital capital campaign. After Bashas’ filed for Chapter 11, St. Joseph’s Foundation tried to collect the unpaid balance. The federal district court affirmed the bankruptcy court’s ruling that the pledge could not be enforced. The foundation gave nothing in exchange for it, did not rely on it, and Arizona has not adopted the Restatement rule that charitable subscriptions bind without reliance. The court called it greedy for a charity to insist on a gift against a bankrupt donor’s other creditors. A promise to give later is much harder to enforce than a completed gift with a stated condition.
Washington
Washington’s version of UPMIFA is the Institutional Fund Act, chapter 24.55 RCW. Under RCW 24.55.045, a charity can release or modify a restriction with the donor’s written consent. Without consent, it can ask a court to modify a restriction that has become impracticable or wasteful, or that no longer serves the fund’s purpose because of circumstances the donor did not anticipate. The attorney general must be notified of the application and given a chance to be heard. Washington’s Nonprofit Corporation Act, at RCW 24.03A.185 and 24.03A.190, treats restricted and unrestricted gifts differently and sends modification questions back to chapter 24.55.
Like most states, Washington has no express donor-standing statute. A Washington donor or a donor’s estate would have to rely on general contract and trust principles to enforce a restriction directly.
Reversion Clauses and the Charitable Deduction
An individual donor who wants to be able to enforce donor intent should think about the tax effect before adding a reversion clause. Under Treas. Reg. 1.170A-1(e), if a gift reverts to the donor or a third party when the charity fails to use it as directed, the donor can deduct the gift only if the chance of that happening is so remote as to be negligible on the date of the gift. Courts have read that to mean a chance most people would ignore in a serious business transaction. Suppose a donor conditions a large gift on the charity building a named wing, with the gift reverting if it does not. If there is any real chance the wing will not be built, the entire deduction may be disallowed.
A private foundation making a grant is in a different position. It takes no new deduction when it makes a grant, because it deducted the assets when they came into the foundation. A clause requiring the grantee to return unspent or misused funds is a standard part of a good grant agreement. It also supports the expenditure responsibility a foundation must exercise over certain grants to organizations that are not public charities, under Treas. Reg. 53.4945-5(b). The same clause that could cost an individual donor the deduction is an ordinary compliance tool for a foundation.
What to Do
Donors in Arizona or Washington who want a restriction to hold should not rely on a general statement of wishes in a pledge letter. Put the purpose in a signed gift agreement. Either set the gift up as a charitable trust, which gives you standing as settlor, or write the restriction as a specific condition on the gift, as the donors did in Dunaway. If you are an individual claiming a deduction, talk to a lawyer before adding a reversion clause. If you are a foundation, include a return or repayment right in your grant agreements. Charities that accept multi-year pledges should document them as binding obligations with consideration on both sides, so they do not end up where St. Joseph’s did.
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 corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. 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. This post is for general informational purposes and does not constitute legal advice.