The Coming Wave of Third-Party Enforcement Mechanisms to Protect Donor Intent
As originally published in Philanthropy Daily’s Giving Review blog.
A donor who endows a private foundation and is keenly interested in ensuring his or her intent is respected by it has several options, each with their own benefits and drawbacks, including:
1.) make the foundation grant out all the money before he or she dies, so the grantmaking can be overseen and any risk of deviating from the intent is eliminated;
2.) make the foundation spend all its funds within a certain specified period of time after his or her death, minimizing the risk of deviation from intent;
3.) select trusted board members and foundation leadership, perhaps even including family members, that will ensure steadfast adherence to the intent; and/or, …
4). leave a detailed description of the intent, maybe even with instructions about how to carry it out.
These are all common recommendations, and they are often followed, as they should be.
A donor interested in ensuring that his or her intent is respected by a particular nonprofit § 501 (c)(3) grantee, through a foundation or otherwise, also has options, of course. They are at least roughly analogous. Among them:
a.) limit the term of any and all grants, so their effectuation by the recipient organization can be overseen and any risk of deviating from the intent is eliminated or mitigated;
b.) select only trusted recipient groups, with trusted leadership; and/or, …
c.) leave a detailed description of the intent, right in the grant agreement, perhaps with some instructions.
For hypothetical examples of c.) above, a donor may want to fund, say, a nonprofit newspaper or magazine’s coverage of a particular issue like diversity in nonprofits or the racial achievement gap in education, an institute for the study of free-market economics at a university, or a homeless shelter with the condition that no funds are to be used in any effort to obtain additional government dollars.
These types of examples of c.), in which a donor successfully details his or intent in binding writing, can and do occur all the time. Sometimes, however—and seemingly increasingly—they occur during instances in which 3.) above is decidedly non-hypothetically unsuccessful; the donor’s foundation’s board and/or leadership, even occasionally including family members, is less than steadfast in its adherence to that intent.
The result is that the donor’s intent is lost—the (c)(3) recipient organization, not subject to any “checks and balances,” finds itself with unanticipated discretion to deviate from the donor’s intent.
From the (c)(3) to what the donor wanted with 3.) and c.)
There’s another option for this donor. He or she can consider essentially “contracting out” the role of ensuring steadfast adherence to his or her intent to a third party. Some “third-party enforcement mechanisms” like this, in fact, have already succeeded.
Successful third-party donor-intent enforcement mechanisms should be part of grant agreements that clearly lay out the donor’s intentions and limitations for the grant funds, as with the c.) examples above. (I represent clients that have served or could serve as third-party enforcement mechanisms.) In addition, the agreement should contain specific provisions in which the recipient organization acknowledges that the agreement is a binding contract and that if it breaches the terms, a third-party (c)(3) group will be able to require it to turn over the funds to the third party.
A donor could give this “contingent beneficial interest” to a separate, third-party (c)(3) group with an earned reputation for respecting donor intent, keenly cognizant of how philanthropies can drift away from it, and with the willingness to enforce it. The grant agreement may require that the grantee provide information to the “enforcer,” so that it can evaluate whether there has been a breach of the original terms.
Alternatively, a donor could try to mimic the incentives of the “annual-gift” approach—a small gift each year to be spent within the current year, only to be followed by a gift each year if the donor’s intent is met—by making a large gift to a trusted intermediary. This intermediary could be a donor-advised fund provider such as, in the conservative context, DonorsTrust, the National Christian Foundation, or the Bradley Impact Fund. The donor could give directions to the intermediary, so that funds are only distributed to the ultimate recipient if it is meeting the donor’s intent.
This alternative mechanism may be a better way to avoid potentially costly litigation than an enforcement mechanism for a contingent beneficiary in the grant agreement. It would also avoid the appearance of a conflict of interest on the part of any contingent beneficiary, which would almost always be alleged to have an ulterior financial motive any time it made a move to recover funds as part of a donor-intent enforcement.
As the dismissive treatment of donor intent in America—by both legacy grantmakers and grantees—continues to cause concern, third-party enforcement mechanisms may become much more common in the future.
