Loose Change - December 14th, 2022

How to make a major donation with the most impact and fewest headaches 

By AMY GUTTMAN 

As business winds down for the year, nonprofits are just hitting their stride, with up to 30% of all donations made in December. Giving may seem straightforward, but major donations — typically, $50,000 or more — and noncash gifts require planning, due diligence and clear, comprehensive agreements to avoid confusion and conflict. 

Bob Benjamin, an estate planning and probate lawyer in the New York office of Wiggin and Dana, shared a cautionary tale of one the first cases he handled more than 20 years ago. A major museum in New York was contesting the will of a woman who had pledged more than $1 million.  

“They would flatter her about her African objects, saying if she gave them a million dollars, they would open a room at the museum to display them,” Benjamin recalled. “She signed a will agreeing to give a large donation and gave them a copy. About a year before she died, she changed the will and instead left her entire estate to a private foundation that she created.”  

The museum claimed the new will wasn’t valid. After years of litigation, they settled. Benjamin offered to send the museum the artifacts, but they declined. 

“It turns out they were worthless — just souvenirs.” 

Concrete numbers aren’t available, but Benjamin said these contractual disputes and will contests are common — and costly.  

“It’s funny how often, a year or two before somebody dies, they change their mind and change their will,” he said. “These matters are often settled because nobody, especially charitable organizations, wants bad publicity.” 

It seems obvious, but hiring reputable, independent counsel to review agreements is paramount, along with due diligence to understand how funds are used. Benjamin advises including an opt-out clause for future donations. Non-cash assets should be appraised independently so donors know the value of their gift. 

HIGHLIGHTS  

• Hire reputable, independent counsel to review agreements. 

• Conduct due diligence to understand how funds are used. 

• Build accountability into agreements — desired outcomes, metrics for success, expected results. 

• Include an opt-out clause for future donations. 

While organizations prefer unrestricted gifts, advisers for donors and charities say agreements should be as specific as possible about the intention behind the gift.  

Dana Holt, founder of Holt Consulting in Minneapolis and an adviser to organizations on how to accept noncash gifts, cautions that explicit communication between donor and beneficiary is critical, especially when it involves liquidation.  

“A lot of assets are too complex for organizations to manage, so they want to liquidate them immediately,” Holt said. But liquidating assets isn’t necessarily straightforward. 

Holt described a case where a donor gave a significant share of a Silicon Valley stock with minimal trading value at the time. The understanding was that the charity would hold the asset until the value increased. But the charity’s gift policy stipulated they sell all noncash assets upon receipt.  

When the controlling stake was sold, it affected the share price.  

“Obviously, it would have made sense to sell a little bit over time,” Holt said. “Things weren’t documented properly, and maybe those who were on the front end understood this but didn’t communicate it to the people on the back end.” 

Just as organizations need to be clear about policies, philanthropy experts advise donors to build accountability into agreements — with desired outcomes clearly communicated — along with metrics for success and expected results. 

Audrey Kintzi is the executive director of the master’s program in philanthropy and development at St. Mary’s University of Minnesota in Minneapolis. She once worked with a foundation supporting four nonprofit organizations for an agreed, limited time. Two of them were not delivering.  

“Toward the end of the time limit, the benefactor ended their relationship with two of them,” Kintzi recalled. “Benefactors get to do that if the charities are not delivering on the promise. Cutting out two of the organizations gave more resources and longer life to the other two organizations.” 

Future-proofing agreements for market volatility and conflict resolution is essential, said Michael Moody, the Frey Foundation chair for Family Philanthropy at the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University in Grand Rapids, Michigan.  

“So many things happen in the world that could potentially affect whether the purpose of the gift is being honored or the outcomes proposed are being achieved,” Moody said. “Agreements about approving potential deviations or changes and how any disputes will be resolved are crucial. It’s not always that people are disagreeing; sometimes things happen in the world that require changes.” 

In addition, being specific about the intention and outcome, while allowing for different ways of executing the agreement, makes it easier for an organization to weather market fluctuations and other shifts, Moody said. He gave an example where a bear market affected the goals of a scholarship gift.  

“This is the kind of change the agreement should provide for,” Moody said. “If you’ve defined the gift as X amount of dollars every year for these five years to these many students, it’s a very specific process with defined metrics. Whereas, if you defined it more broadly as providing scholarships for students to help them achieve a certain career, then you can do less in one year or more in another without violating the agreement.” 

Lifespans can work in the opposite way. If a donor’s gift has been invested during a bull market, the returns can extend the life of the nonprofit.  

“I’ve seen it happen where the foundation says, ‘Now what do we do?’ ” Kintzi said. A combination of specificity behind the intent of the gift, along with a broad, flexible approach toward impact, can help organizations fulfill donors’ wishes while navigating an ever-changing world.” 

Q&A

JACQUELINE DUVAL

After an early career in tax law and then stints at Morgan Stanley, Goldman Sachs and Merrill Lynch, Jacqueline Duval spent 14 years as counsel and then partner with the Ziff family, having met Robert Ziff in law school. She’s now a partner in the Asset Management and Investment Funds Group at the New York office of K&L Gates. 

How did you end up in family-office work? 

I’m a tax lawyer by training, but I’m a generalist by practice. I started off at a big Wall Street firm and then went and did some investment banking — working at tax structuring and derivatives at Goldman Sachs and Morgan Stanley. I got called, I think it was in 2004, by a law school classmate, Robert Ziff, who together with his two brothers ran their own single-family office, Ziff Brothers Investments. 

And I went and joined them for nearly 14 years. And in that role, I was able to see every part of how a family office works because, even though I started off as tax counsel, my role very quickly shifted to covering anything that came through the family office. Then I went to another single-family office as a seconded tax lawyer [an arrangement of serving in a client's legal department] — and that’s not on my resume because it was confidential — where I worked on legal issues related to investments. 

My practice now focuses on structuring family offices and helping them with their investment transactions and other deals they work on and any operational legal work they need — and that can range from employment legal work to aircraft acquisition. For things I do not have expertise in, I coordinate the legal work and involve a colleague. But I am that point person who’s a trusted adviser for family offices. A large part of what differentiates my practice from other law firms who have a “private wealth” practice is that I’m on the asset management and investment funds side rather than trust and estates, because I see family offices are very much like investment funds without outside investors. This is a different perspective than you see with most family-office practitioners in law firms. 

How are family offices changing? 

Almost all family offices place a large focus on confidentiality and discretion, because they are dealing with very personal transactions; and for a long time I pretty much didn’t even tell people where I worked. What I would call the professionalization of family offices is changing that, amid market requirements to have some outward-facing presence, as they look for opportunities and inclusion in deal allocations. How do you know who these people are who are out there trying to compete for allocation of private equity deals — if there is no website presence, for example? But those family offices, until a few years ago, shied away from that. They really didn’t want that. 

What is the most important thing for family offices to do when it comes to taxes? 

Making sure that they have in place an understanding of how their structure is, in fact, taxed. Family offices are generally, at the top, owned by individuals; or various sorts of vehicles, such as trusts, that the individuals may have owned. Sometimes they interact with charitable entities, like private foundations, that they have contributed to. An issue that often comes up there is the deductibility of investment expenses, because individuals, generally speaking, cannot deduct expenses related to personal investments, while they might be deductible to other market participants. 

The solution isn’t just as simple as setting up different kinds of vehicles. You can’t easily just walk around the rules and set up an entity and fix those issues. And you have to take that structuring into account when you’re discussing the kinds of things that you want to negotiate in any transaction agreement. 

What else do family offices need to think about in that way? 

How to structure a family office. They will need to answer questions like: How do we pay the cost of employees who are helping us with investment advice? How do we give our investment professionals carry [a stake in the fund’s investments]? How do they get paid? All of those things become a question, and structuring is an important piece of solving the problem. There are also important regulatory rules, like the Investment Advisers Act, that need to be considered. When looking at the structure of a family office, we look at what activities are being done, who is doing those activities and who they are doing those activities for. One place you need to get legal advice on this issue is when the family office is somehow advising people who are not part of the family, when you get friends in there. And then all of a sudden you may have an issue. That is very common. 

Another area that I suggest needs to be better understood is the overlap between philanthropic entities that may be set up by a family and their personal investment vehicles. There are complex rules related to how you run a private foundation or other charitable entity, and so you’ve got to be careful, because the rules are really pretty onerous rules. Just understanding those rules is something that everybody involved could do a better job at. It is one of the things I spend my time on. 

Do you think that dealmaking among family offices is related to the professionalization of family offices? 

I think so. Let’s talk about the retention of talent, with the need for talent obviously growing, being able to compensate that talent with carry and the talent being able to gain access to larger deal tickets. Another reason we see family offices attracting outside investment and professionalizing is because of who founded them — we see more family offices from the founders of investment funds. Being out there and being in the mix with deals is something a lot of people who have founded family offices really love to be doing. They made their money because they love doing this, and they are now spending their time looking for deals personally and building a family office structure around it. 

Interview by Steven I. Weiss, a multiple-award-winning investigative journalist who has written for The Wall Street Journal, The Atlantic, The Washington Post and many other publications. He is also a data scientist and entrepreneur; his latest company is Candidates.ai.