Empty Promises and Uncollectible Charity Pledges – How to Avoid Them

Money Disappearing in Thin Air

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What is a Pledge?

The dictionary definition of a pledge is a solemn promise or agreement to do or refrain from doing something. Regardless of its solemnity, such a pledge may or may not be legally enforceable. Most of the time, it is not. This frequently leads to problems for charities.

How to Lose Money You Never Had

Here are two common scenarios:

Scenario 1:

A long-term supporter of a charity informally pledges (orally, in an email, or using a pledge card) a significant amount of money, becomes ill and then passes away. The heirs are advised that this promise is not enforceable, and unless they feel a moral obligation, the heirs will not fulfill the decedent’s unenforceable promise.

Scenario 2:

Two spouses want to give to charity and pledge, but a check is never written. One spouse dies, and the surviving spouse re-evaluates, deciding they need the money for themselves.

The approach to these two scenarios will be a bit different, and we will have recommendations below. Let us first examine the legal situation.

The Legal Status of Charitable Pledges

  • Non-Enforceability in California:
  • Charitable pledges are not enforceable in California unless the pledgor receives consideration for making the pledge.
  • Definition of Consideration: Consideration is something of value exchanged between parties in a contract. In a charitable context, it can include benefits such as naming rights or public recognition.
  • Examples:
  • Naming a building or facility after the donor.
  • Providing exclusive event access or memberships.
  • Publicly recognizing the donor in publications or at events.
  • Often, no such consideration exists.
  • In some cases, the existence of consideration is uncertain, leading to potential litigation.
  • Accounting Standards:
  • Statement of Financial Accounting Standards No. 116 requires nonprofit organizations to record charitable pledges as income, regardless of their legal enforceability.
  • This requirement can distort income if pledges are not honored due to their unenforceability.
  • A reserve for uncollectible pledges may mitigate this distortion.

How to Make a Pledge Collectible

Scenario 1:

A supporter who dies before the pledge can be collected, and the heirs do not honor the promise. 

Charitable donations do not happen overnight. Instead, they are a process where potential donors and donees interact, provide mutual support, and consider each other’s needs and concerns. The donor will go through the well-known stages of change such as precontemplation, contemplation, preparation, action, and follow-up or maintenance. It is up to the charity to foster progression through these stages and encourage the potential donor to take appropriate action at each stage.

For example, early on, discussions with family and spouse may be appropriate, followed by discussions with financial planners and estate planning attorneys. Once the preparation stage is reached, a more formal and enforceable pledge should be solicited by the charity.

Scenario 2:

Two spouses want to give to charity and pledge, but a check is never written. One spouse dies, and the surviving spouse re-evaluates, deciding they need the money for themselves

In California, most property acquired during marriage is community property, meaning each spouse owns one-half. One spouse may not make a gift of the other spouse’s share. For practical purposes, a binding pledge will need to be executed by both spouses. 

One of the spouses, especially if there is a substantial age difference, may have valid concerns regarding their longevity risk, such as whether the money will last or if there will be enough for long-term care. This is where advice from knowledgeable estate planning attorneys and financial planners is indispensable. Charitable gifts can be structured to address such concerns. Charitable Remainder Trusts are a particularly useful vehicle, see our article in the National Law Review.

Issues in Using Enforceable Pledges

Theoretically, if the donor or the estate will not honor the pledge and the charity chooses not to sue, it may face fiduciary issues in justifying why it is not collecting the asset. Convincing justification needs to be documented. 

Best Practices for an Enforceable Pledge

An enforceable charitable pledge agreement should include clear terms and mutual commitments:

  • Consideration: The donor must be provided consideration, such as naming rights or public recognition.
  • Clear Intent: The agreement should express the donor’s clear intent to make a binding commitment and outline specific details like donation amount, payment schedule, and conditions.
  • Transparency: Both parties need to be transparent about their roles and responsibilities.
  • Registered Non-Profit: The charity must be a registered non-profit and recognized as tax-exempt under IRS §501(c)(3).
  • Donor Objectives: The donor should acknowledge their objectives, whether for conservation or tax benefits, and confirm their understanding of federal tax implications and the need for a qualified appraisal unless one is not needed (publicly traded equities, cash).
  • Initial Contribution: The agreement should ideally specify an initial contribution to cover the charity’s costs and outline the steps each party will take.
  • Conditions and Termination Clauses: The agreement should include conditions that the donor must fulfill before the charity accepts the pledge, and allow either party to exit the agreement under certain conditions, ensuring flexibility if issues arise.

Donors must be advised to select their own legal and tax advisors and rely on their counsel to ensure the agreement aligns with their best interests, while providing accurate information and necessary documents to the charity. 

Each charity is different and may have more than one pledge agreement that needs to be carefully drafted with wording that is legally accurate but does not seem cold. This comprehensive approach ensures legal enforceability and mutual understanding, benefiting both parties involved.

Klaus Gottlieb at Wealth Care Lawyer has a special interest in advising charitable organizations in San Luis Obispo County and helping individuals optimize their charitable giving strategies.

See also:

Smart Philanthropy: What Your San Luis Obispo Charities Might Not Tell You

 

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