Crafting Donor Agreements That Withstand the Test of Time

CRAFTING DONOR AGREEMENTS THAT WITHSTAND THE TEST OF TIME

©2014 Stokes Lawrence, P.S. 2 Ebenezer's Old People's Home of Evangelical Ass'n of Ebenezer, N.Y. • "In the event there is an institution in the City of South Bend at the time of my death or within two years after the time of my death, which has for its purpose of its existence the maintenance of a home for old people irrespective of their religious beliefs upon at least a partial charitable basis then I desire and direct my said executor to turn all the rest and residue of the property of which I may die seized to said institution."

• Ebenezer's Old People's Home of Evangelical Ass'n of Ebenezer, N.Y. v. South Bend Old People's Home, Inc., 48 N.E.2d 851, 854, 48 N.E. 2d 851 (1943)

©2014 Stokes Lawrence, P.S. 3 Ebenezer's Old People's Home of Evangelical Ass'n of Ebenezer, N.Y. • If no such institution exists in South Bend at my death or two years later, the residue is to be distributed between two homes for senior citizens and an orphanage, all identified by name, as takers in default. • After a hearing, the South Bend Old People’s Home, Inc. was selected as the recipient of the gift.

©2014 Stokes Lawrence, P.S. 4 Ebenezer's Old People's Home of Evangelical Ass'n of Ebenezer, N.Y. • The South Bend Old People’s Home, Inc. never incorporated and never acquired other assets. • Default takers filed suit to have the assets transferred to them.

©2014 Stokes Lawrence, P.S. 5 Ebenezer's Old People's Home of Evangelical Ass'n of Ebenezer, N.Y. • Court Holding: • The Gift was Outright and Fully Vested • It was "nothing more than a gift to a charitable institution in whose purposes and objects he was sympathetic."

©2014 Stokes Lawrence, P.S. 6 Ebenezer's Old People's Home of Evangelical Ass'n of Ebenezer, N.Y. • Court Holding: • “The true rule is that--'conditions subsequent, having the effect in case of a breach to defeat estates already vested, are not favored in law, and hence always receive a strict construction.' A condition subsequent will not be raised by implication from a mere declaration in the deed that the grant is made for a special purpose, without being qualified with words to make such a condition." ©2014 Stokes Lawrence, P.S. 7 Matter of Booker

• Leon C. Booker created a trust in 1969 with approximately $700,000. • Purpose: “[T]o construct, fully equip and furnish a forty (40) bed Rest Home in the City of Dayton, Columbia County, Washington . . .” • To have 20 single patient rooms, 10 double patient rooms, each with private bath and bathtub. Several other specific requirements. • “To be constructed so that it is adjoining or attached to the Columbia County General Hospital . . .”

Matter of the Trust of Booker, 37 Wash. App. 708, 682 P.2d 320 (1984)

• Contemplated accumulation of assets over time, that bids would be received, and when “reasonably certain” that the trust is sufficient, the hospital district is to be apprised to see if it will take on the project. • If the hospital district “does not desire the Rest Home, refuses to agree to construct, equip and furnish the Rest Home in the manner directed herein or at any time should the Trustee absolutely determine it is impossible to accomplish the Trust charitable residuary purpose,” the funds are to pass to the alternate beneficiary - St. Mary Community Hospital in Walla Walla.

• Hospital district filed a petition seeking an interpretation of the terms of the trust. The alternate taker also filed a petition asking that the trust benefits be given to them if the district did not proceed as provided in the trust. • Lower Court: Allowed deviation from the terms to construct fewer units with fewer beds among other things. • Alternate taker appeals - on basis the trust has a specific intent that there be a gift over if the stated purpose is impossible to accomplish, including the accumulation of adequate funds to construct the home as specifically directed.

• Court Holding: • The trust fund vested immediately on the death of Mr. Booker. The charitable purpose was to construct a rest home. That purpose can still be accomplished, so the trust does not fail. • Deviation was appropriate as it is reasonably necessary in effectuating the primary purpose of the trust. • “Noncompliance with detail provisions of a trust does not give rise to a transfer to the alternate beneficiary as such provisions are not of controlling importance. (Citing Trustees of Dartmouth College v. Quincy, 357 Mass. 521, 258 N.E. 2d 745, 753 (1970).)

• In 1956, the Emmanuel Congregational Church of Vaughn deeded property to the Vaughn Community Church “with the stipulation that the property shall forever remain for the perpetual use of Protestant Evangelical Churches of the Community of Vaughn.” • The Church grew dramatically. In 1999, 79% of the congregation voted in favor of selling the property and using the proceeds to construct a new church on another parcel of property. • Suit was brought by Niemann, a parishioner at the Vaughn Community Church, to enjoin the church from selling the property.

Niemann v. Vaughn Community Church, 154 Wn2d 365, 113 P.3d 463 (2005)

• Trial Court Holding: • The deed created a charitable trust, with the Vaughn Community Church as the primary beneficiary. • Found the overriding and dominant intent in conveying the property was to “assist and ensure the continuation of the Protestant evangelical ministries of the Vaughn community through VCC, regardless of where they were specifically located . . .” • Applied (without distinction) the doctrines of cy pres and equitable deviation to modify the deed to allow the sale and the use of proceeds to finance a new church.

• Court of Appeals Holding: Affirmed

• Supreme Court Holding: • The determination that the deed created a charitable trust was not appealed, so that ruling stands. • Applied the doctrine of equitable deviation and upheld the trial court’s modification of the deed. • NOTE: Justice Madsen’s concurring and dissenting opinion - the deed conveyed a fee simple absolute and no trust was created.

©2014 Stokes Lawrence, P.S. 15 Matter of the 1934 Deed to Camp Kilworth • In 1934 land was deeded to the Boy Scouts of America on the “express conditions that [the Boy Scouts] shall never convey, lease or encumber said premises . . . and shall never allow the same to come into the possession of any other party.” • The deed provided that if the condition was violated, the property was to revert to the grantors or their heirs.

Matter of the 1934 Deed to Camp Kilworth, 149 Wash. App. 82, 201 P.3d 416 (2009)

©2014 Stokes Lawrence, P.S. 16 Matter of the 1934 Deed to Camp Kilworth • In 2006 the Boy Scouts petitioned to remove the reversionary clause and use the proceeds to fund other Boy Scout camps on the basis that this was a trust and the court could modify the trust under the doctrine of equitable deviation. • Trial Court Holding: The petition was granted and the reversionary clause was removed from the deed.

©2014 Stokes Lawrence, P.S. 17 Matter of the 1934 Deed to Camp Kilworth • Court of Appeals Holding: • Trust relationship is created where one party grants, with inent, property to a second party, the trustee, for the benefit of a third party. • Granting a gift does not establish a trust relationship if there was no intention to do so. • An interest subject to a condition subsequent is not, because of the condition, held in trust. Restatement (Second) of Trusts §2 (1959)

©2014 Stokes Lawrence, P.S. 18 Matter of the 1934 Deed to Camp Kilworth • Court of Appeals Holding: • Held - no trust was created. The deed was a conveyance subject to a condition and was not subject to revision. • COMPARE decision in Niemann v. Vaughn

• Restatement (Second) of Trusts § 399 (1959) • If property is placed in trust for a particular charitable purpose, and it is or becomes impossible, impracticable or illegal to carry out the particular purpose, and if a more general charitable intention is also expressed, the court will direct the application of the property to some charitable purpose which falls within the general charitable intention of the settlor.

• Restatement (Third) of Trusts § 67 (2003) • Extends the doctrine to circumstances where it would be wasteful to carry out the particular stated purpose.

• Must find: • Specific purpose gift • It is now impossible, impracticable, illegal or wasteful to carry out the specific purpose • General charitable intent

• Traditionally cy pres only applies to charitable gifts in trust • Some courts now apply cy pres concepts to outright gifts and other charitable interests

• Estate of Beryl H. Buck • Will of Beryl H. Buck created the Leonard and Buck Foundation with approximately $7,000,000 which “shall always be held and used for exclusively non-profit charitable, religious or educational purposes in providing care for the needy in Marin County, California, and for other non-profit charitable, religious or educational purposes in that county.”

In the Matter of the Estate of Beryl H. Buck, Deceased, Marin Co. Sup. Ct. No. 23259 (August 15, 1986)

• Estate of Beryl H. Buck • “The assets hereof are irrevocably dedicated to charitable, religious or educational purposes. If the purposes specified herein cannot, at any time, be accomplished, the then remaining assets shall be distributed to such public charities, for charitable, religious or educational purposes, as the Court having jurisdiction in the matter shall determine proper.”

• Estate of Beryl H. Buck • The trust grew to approximately $340,000,000. • The Foundation sought court approval to permit distributions within all five counties that the Foundation service.

• Estate of Beryl H. Buck • Court Holding: • Cy Pres is not applicable • The restriction was not impracticable or impossible to comply with and the modification would do harm to the donor’s intent

• Restatement (Second) of Trust § 381 (1959) • The court will direct or permit the trustee of a charitable trust to deviate from a term of the trust if compliance is impossible or illegal, or that owing to circumstances not known to the settlor and not anticipated by him compliance would defeat or substantially impair the accomplishment of the purposes of the trust.

• Restatement (Third) of Trusts § 66 (2003) • The court may modify an administrative or distributive provision of a trust, or direct or permit the trustee to deviate from an administrative or distributive provision, if because of circumstances not anticipated by the settlor the modification or deviation will further the purposes of the trust.

• Must find: • Changed and unanticipated circumstances. • The deviation must further the purposes of the trust. • The original purpose is to remain the same, but changes can be made to how the trust is to be administered to accomplish that purpose

• Barnes Foundation • Dr. Albert Barnes created the Barnes Foundation in 1922. • The trust documents required, among many other things, that the gifted art be displayed in the building he had built to house the art, hung exactly as it was when he died. The art could not be moved, sold, or lent to other museums.

• The Barnes Foundation, 2004 WL 2903655, 25 Fiduc.Rep. 2d 39, 69 Pa. D. & C. 4th 129 (Pa.Com.Pl.)

• Barnes Foundation • The gallery was to be open to the public on an extremely limited basis, and fees were prohibited. • Over time there were traffic problems with the location; lawsuits with neighbors; financial problems with no real way to raise money.

• Barnes Foundation • The trustee sought leave from the court to increase hours, hold fundraising events at the gallery, take part of the collection on a world tour, move gallery to downtown Philadelphia and to lift restrictions on public access and social gatherings.

• Barnes Foundation • Court Holding: The requested changes were allowed on the basis of equitable deviation. The court found that these changes were merely administrative.

• Niemann v. Vaughn Community Church • [C]ourts apply equitable deviation to make changes in the manner in which a charitable trust is carried out while courts apply cy pres in situations where trustees seek to modify or redefine a settlor’s specific charitable purpose. • Deviation will be allowed if compliance with the trust terms defeats or substantially impairs the trust’s primary purpose.

• In fashioning a remedy (the deviation) the court has broad discretionary powers. • “Even though the settlor has expressly forbidden what the court permits to be done, the theory is that he would not have forbidden it, but on the contrary would have authorized it if he had known of or anticipated the circumstances.” IIA Austin Wakeman Scott & William Franklin Fratcher, The Law of Trust §167 at 287-88

• Common Law: • Charitable trusts are for public benefit; however an individual member of the public has no rights as such to maintain a suit contesting activities within a charitable trust.

• Common Law: • "The law is well settled that inasmuch as the enforcement of public charities are matters of public interest the attorney general appearing as a public officer is the proper party to maintain litigation involving questions of public charitable trusts. And an individual member of the public has no right as such to maintain a suit of such character." Boice v. Mallers, 96 N.E.2d (Ind.Ct.App. 1950)

• Restatement (Second) of Trusts § 391 (1959) • A suit can be maintained for the enforcement of a charitable trust by the Attorney General or other public officer, or by a co-trustee, or by a person who has a special interest in the enforcement of the charitable trust, but not by persons who have no special interest or by the settlor or his heirs, personal representatives or next of kin.

• Restatement (Third) of Trusts § 94 (2012) • (2) A suit for the enforcement of a charitable trust may be maintained only by the Attorney General or other appropriate public officer or by a co-trustee or successor trustee, by a settlor, or by another person who has a special interest in the enforcement of the trust.

• Washington Law • Goldmark v. McKenna, 172 Wn.2d 568, 578, 259 P.3d 1095 (2011): The Attorney General can maintain actions for the enforcement of charitable trusts given its constitutional and statutory authority, even without express statutory authorization.

• Washington Law • TEDRA - RCW 11.96A.080: [A]ny party may have a judicial proceeding for the declaration of rights or legal relations with respect to any matter, as defined by RCW 11.96A.030.

• Washington Law • RCW 11.96A.030(2): “Matter includes any issue, question, or dispute involving “any question arising in the administration of an estate or trust . . .”

• Washington Law • RCW 11.96A.030(5): Party means a person “who has an interest in the subject of the particular proceeding” and includes the trustor, trustee, an heir, a beneficiary, a creditor, and “any other person who has an interest in the subject of the particular proceeding.”

• What Should They Do? • Clearly state donor intent • Clarify the obligations and rights of the donee • Establish procedures for when questions arise • Must be clear, but must also be flexible to address changing circumstances • Must be crafted for each particular circumstance

• Purpose of the Gift – Donor Intent • Most critical part of the agreement • Have clear statement of primary purpose • Identify specific requirements as mandatory or precatory

• What Is Being Given? • Identify specific value or specific assets to be transferred

• Conditions and Restrictions • Clearly state if the gift is to be held in trust for a specific purpose, or if it is to be a direct gift subject to conditions • If conditions, clearly state what they are AND what happens if they are not met

• Conditions and Restrictions • Conditions precedent: • Does the gift fail (reverter)? • Does the gift pass to another taker? • Is the alternative taker clearly identified or identifiable?

• Conditions and Restrictions • Conditions subsequent: • Time limit for application? • Does the gift fail (reverter)? • Does the gift pass to another taker? • Is the alternate taker clearly identified or identifiable?

• Conditions and Restrictions • Provide for alternative use or disposition of funds

• Changed Circumstances • Tension with Specificity of Purpose Statement • What Changes Result in Modification? • Purpose of gift has been accomplished • Purpose has become impracticable, impossible or wasteful • The organization’s purpose has changed • The organization no longer exists • Needs in other areas are greater • The organization has surplus funding

• Changed Circumstances • Who makes the determination? • Donee determines in good faith? • Require consultation with donor or donor’s spouse or adult children? • Require consent of donor or donor’s spouse or adult children? • Involvement of the attorney general • Decisions by majority, sole or unanimous action

• Changed Circumstances • Who has standing to raise the question? • The donor • A family member • A beneficiary • An alternate taker • A committee of designated parties • How is the committee constituted • How are members replaced and vacancies filled

• Special Situations • Naming Rights • Deferred Gifts • Endowments and Gifts with Limitations on Distributions • Gifts in Kind

• Naming Rights • Indicate name to be used • Identify where name is to appear • Identify how name is to appear • Size • Font • Color • Materials used

• Naming Rights • How long will the right continue? • Life of building • So long as certain contributions continue • Life of a department or field of study • Must the named location be maintained in a certain manner or condition? • Associated right of access by the named party or the party’s family to confirm compliance

• Naming Rights • Termination of Right • Default in payment • Modification or destruction of facility • Relocation of associated activity from named location • Obligation to relocate name? • Who decides new location • What conditions give rise to obligation to relocate name

• Naming Rights • Termination of Right • Actions of named individual or family • Specific identified activities or types of activities • As determined by the donee’s board in good faith to be detrimental to the reputation, image or mission of the donee

• Naming Rights • Effect of Termination • Removal of name from specific location • Removal from other information • Effect on use or return of donations • Effect on outstanding gift commitments

• Deferred Gifts • When will the contributions be made • When will benefits accrue from the gift (e.g. Naming rights) • Effect of non-payment or partial payment • Ability to enforce obligation (e.g. Against estate) • Loss of associated benefits (naming right; preferential seating; position with organization)

• Endowments and Gifts with Limitations on Distributions • If limited to “income,” define what that means • If distributions are stated as a percentage of assets, can principal be used in the distribution? • How long is it to continue? • Is the amount of the original contribution to be maintained in all events?

• Gifts in Kind • Confirm value to be transferred • Establish method of valuation • Establish ability to transact asset after transfer

• Gifts in Kind • Must the asset be retained • For how long • For what purpose • What would allow a sale or disposition • If in trust, impact on duty to diversify • Interests in closely held businesses • How is the entity controlled • Are there any “voting rights”

• Is Gift To Be Disclosed? • If so, state how donor will be identified and how disclosure will be made • Address right to use name, likeness and image of donor and to reproduce same in materials

• Management of Gifted Funds • Will funds be added to a pre-existing fund • Will funds be managed separately or as part of a pool • What entity or person will be in charge of investing the funds • Will investments be handled according to the specific investment policies and procedures

• Management of Gifted Funds • RCW ch 24.55 – Prudent Management of Institutional Funds Act • “Washington UPMIFA” • Applies to all “Institutions” - “persons, other than an individual, organized and operate exclusively for charitable purposes”

• What Reporting Will Be Required • Report on use or application of gift • Report on investment of funds • To whom will the report be given • How long will reporting be required

• Method for Dispute Resolution • Mediation – by whom and using what procedures • Arbitration – by whom and using what procedures • By designated individual or committee • Reservation of right in donor to enforce • Right of specific performance if non-monetary interest involved

• Agreement Basics (the Boilerplate) • Notice Information • Parties to be notified • Addresses to be used • Method for changing address

• Agreement Basics • Methods of providing notice • Personal delivery • Mail • Overnight delivery service • Facsimile • When notice deemed given

• Agreement Basics • Process for amending agreement • Integration paragraph (the agreement constitutes the full agreement of the parties) • Preservation of rights unless waiver in writing • Effect of waiver of noncompliance (does not constitute waiver of future failures to comply)

• Agreement Basics • Acknowledgment of use of or right to independent legal advice • Statement of binding effect on donor, donor’s estate, heirs and successors • Waiver of rule of construction construing ambiguities against the drafter • Statement of intent that gift qualify as charitable contribution under tax code

• Agreement Basics • Applicable law • Venue for judicial actions • Counterpart signature provision • Signatures for all parties

• Agreement Basics • Representations of authority if entities involved • Spousal consent if community property • Notarial acknowledgments if real property may be involved

• Establish and publish clear and consistent policies • Specify criteria for specific kinds of gifts • Scholarships • Endowed funds • “Chairs” • Naming rights

• Establish and publish bases on which gifts may be modified, and how the modification will be accomplished • Passage of time • Public events that impact the institution or purpose of the gift • Unanticipated changes in circumstances

• Establish and publish method by which changes to the gift will be made • By action of the donee • Participation by the donor or the donor’s family • By judicial action (cy pres or equitable deviation)

• RCW 11.96A.080 • If the parties are not able to agree, the matter can be resolved judicially • Any “party” may have a judicial proceeding for the declaration of rights or legal relations with respect to any “matter.”

• RCW 11.96A.220 • Any “matter” can be resolved by written agreement of the “parties.”

• RCW 11.96A.220 • Matter - 11.96A.030(2) - any issue, question or dispute involving (among other things) a question arising in the administration of an estate or trust. • Party - 11.96A.030(5) - any person who has an interest in the subject of the particular proceeding, including (if applicable) the trustor, trustee, personal representative, heir and beneficiary.

• RCW ch. 24.55 • (1) If the donor consents in writing, an institution may release or modify a restriction relating to the management, investment or purpose of the fund.

• RCW ch. 24.55 • (2) The court may modify a restriction regarding the management or investment of a fund if the restriction has become impracticable or wasteful or if, because of circumstances not anticipated by the donor, a modification will further the purposes of the fund. To the extent practicable, any modification must be made in accordance with the donor's probable intention.

• RCW ch. 24.55 • (3) If a particular charitable purpose or a restriction becomes unlawful, impracticable, impossible to achieve, or wasteful, the court may modify the purpose of the fund or the restriction in a manner consistent with the charitable purposes.

• RCW ch. 24.55 • (4) For funds under $75,000 that are at least 20 years old, if an institution determines that a restriction on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution may release or modify the restriction sixty days after notification to the attorney general.

©2014 Stokes Lawrence, P.S. 92 BIBLIOGRAPHY The following materials were used in preparing this presentation: • Bogert, Trusts and Trustees, Chapter 22, The Cy Pres Power (2nd. Ed. 1991) • Harvey P. Dale, The Buck Trust, 1987 • Hana H. Eisenstein, Keeping Charity in Charitable Trust Law: The Barnes Foundation and the Case for Consideration of Public Interest in Administration of Charitable Trusts, 151 U. Pa. L. Rev. 1747 (2003) • Susan N. Gary, The Problems with Donor Intent: Interpretation, Enforcement and Doing the Right Thing, 85 Chicago-Kent Law Review 2010 • Gina M. Giacone and Andrew M. Vento, Charitable Gifts, Bequests & Agreements: Enforcing Donor Intent, Ice Miller LLP (2010) • Richard M. Horwood and John R. Wiktor, Gift Acceptance Agreements Avoid Headaches for Charitable Donors, Their Descendants, and the Charities They Wish to Support, 24 Journal of Taxation of Investments 355 (Summer 2007) • Eric A. Manterfield, Perfecting Donor Intent on Gifts to Charity: The Gift Agreement, Journal of Practical Estate Planning (February-March 2009) • Perlman & Perlman, LLP, Legal Issues Related to Unfulfilled Charitable Pledges, 2008 • Alan F. Rothschild, Jr., Planning & Documenting Charitable Gifts, Vo. 3 No. 2 GP/Solo Law Trends & News – Estate Planning (American Bar Association 2007 • IIA Austin Wakeman Scott & William Franklin Fratcher, The Law of Trust §167 at 287- 88 • Restatement (Second) of Trusts , §§ 167, 381, 391, 399 • Restatement (Third) of Trusts, §§ 66, 67, 94