The Ins and Outs of Gift Agreements

A verbal contract isn’t worth the paper it’s written on.

Samuel Goldwyn

A financial advisor recently told me about a client who made a major charitable commitment to a local organization. The gift was for a building project, in addition to their usual support for the organization’s operating expenses. The advisor was concerned, because her client was asked to complete only a basic pledge card with the donor’s name, contact information, and the amount of their contribution.

“This was a big gift,” the advisor said. “Shouldn’t there have been a gift agreement?”

First, what is a gift agreement?

Like any other formal agreement between two parties, a gift agreement is a contract that spells out the terms of the charitable contribution and each party’s responsibilities. The document typically includes the following details.

• Name of the donor
• Amount of the gift or pledge
• Timing of gift payments
• Form of payment (cash, marketable securities, other property)
• Purpose/use of gift
• Whether the gift is fully expendable or restricted for endowment (See our August 7, 2023 post on this topic.)
• Party at the charity responsible for decisions on spending the gift according to its designated purpose
• Other expectations and/or conditions, such as
  • Donor recognition
  • Reports on use of the gift
  • Under what circumstances terms can change

  A note about that first point, the name of the donor. It is important that this be the legal entity that will be making the payments. In many if not most cases, that is an individual or couple – but not always. If the gift is coming from a company, association, or a private foundation, that entity should be the donor formally named on the gift agreement, and the appropriate officer should sign the document on that entity’s behalf.

  If an individual donor or couple is making the commitment and intends to use their donor advised fund to make payments, there are special considerations. The important point here is that a person cannot use a donor advised fund to pay their own legally binding pledges, so it is important to take care with related gift agreements. We will address that further in Part 2 on this topic.

  When is a gift agreement appropriate?

  There are several situations in which it behooves the donor and the charity to execute a gift agreement.

  • The donor is making a substantial contribution. In this case, the formal document clearly defines and memorializes both the donor’s intentions and the organization’s responsibilities.
  • The contribution will be paid over time. The gift agreement will then document when payments are due and in what form they are acceptable to the organization.
  • The donor is designating the gift for a specific use or including other restrictions. This might be for a specific project, a scholarship, or a particular program at the charity. A gift agreement outlines those restrictions and sets expectations regarding use of the funds and communication with the donor.
  • The gift establishes a named fund. Sometimes, a donor wishes for their gift to create a fund that bears their name or the name of a loved one. In this case, the gift agreement establishes how that fund will be managed and utilized.
  • The gift is for endowment, either adding to an existing one or establishing a separate named endowment fund. It is important that there be a formal agreement documenting the donor’s intent for an endowment and its purpose and establishing the charity’s acceptance of those terms.
  • The donor is contributing property, rather than cash. When a donor intends to transfer assets such as securities, real estate, collectibles, business interests, or other non-cash property, the gift agreement can outline the details of the transfer and any associated responsibilities.
  • The donor anticipates a need to change or revoke the donation. If the donor foresees a possible need to modify their commitment in the future, the agreement can specify the process for doing so, thereby protecting both parties’ interests.

  A gift agreement need not be a complex document; in most cases, it is fairly straightforward. Charitable organizations typically have a standard format that can be customized for the donor and purpose.

  The document should be carefully reviewed and signed by both parties, indicating that both the donor and the charity agree to the terms and will be bound by them. Donors are advised to have their financial and legal advisors review the gift agreement before they sign it.

  Stay tuned . . . .

  Next time, we will look at the elements of a thorough gift agreement and why they are there. We’ll also discuss what donors should pay attention to when negotiating the final agreement with the charity.

  If you have questions about a gift agreement, or if you’re considering a major charitable gift and feel a little out of your element, please contact us. A few minutes on the phone might be all you need to make that gift with confidence.

  Disclaimer: This information is not intended as legal, tax, or financial planning advice. Readers should consult with their own professional advisors before making any charitable gift.

  _{This article written in collaboration with ChatGPT.}