Charities love them. Donors, not so much. The enforceable pledge is a double-edged sword, with advantages and disadvantages to charity and donor alike.
As a generous donor who is bound to be solicited for a major gift to support your charity’s next big campaign, the question you need to ask yourself is: should you sign an enforceable pledge?
3 Reasons to Sign
- You love and trust the organization, and in your mind you have already committed the funds for your gift. Signing an enforceable pledge cements that commitment should something happen to you before the pledge has been fully paid, in which case the charity would be a creditor against your estate.
- Since you have such fond feelings for the organization, you’ll feel a sense of satisfaction knowing that with an enforceable pledge agreement, the charity can book your gift as an asset on its balance sheet. Particularly in the midst of a capital campaign, booking gifts is critical to reaching the campaign goal.
- Benefits, benefits, benefits. If you enjoy the benefits that come with making a significant gift commitment, the charity is more likely to provide those benefits given the assurance that an enforceable pledge brings. In some cases – such as naming a building – the charity may insist on an enforceable agreement given the magnitude of the benefit being provided.
3 Reasons Not to Sign
- Sure, you love and trust the organization – but do you really want to bind yourself irrevocably? Many donors prefer to retain the right to change their minds, in which case an enforceable agreement would not work.
- Do you have a donor-advised fund or private foundation? If the answer is yes, congratulate yourself on being a generous giver – but sorry, Treasury regulations prohibit you from fulfilling your pledge using your donor-advised fund or private foundation. Similarly, you can’t use a charitable remainder trust to fulfill a pledge and, while there is no clear ruling on this, it follows that you can’t use a charitable lead trust either.
- If you fall on hard times (see: 2008) and are unable to fulfill your pledge, the charity may have an obligation to enforce the pledge, which could lead to some unpleasantness between you and them. What’s worse, if you are a “disqualified person” with respect to the charity – defined as a director or officer of the organization, or a substantial contributor – forgiveness of the pledge could be seen by the IRS as a prohibited excess benefit transaction. Penalties for excess benefit transactions are steep.
Alternatives to Enforceable Pledges
Enforceable pledges are not the demon that some make them out to be. In certain circumstances, they can produce a win-win for you as the donor and for the organization.
The good news is, if you are disinclined to sign an enforceable pledge, you have options:
- Letter of Intent / Gift Intention form – Similar to a pledge but without the language that makes a pledge agreement enforeceable. You “intend” to make a gift of $X dollars, payable over Y years. The charity can’t add the gift as an asset, but in many campaigns a letter of intent is sufficient to “count” the intention toward campaign goals.
- Charitable Lead Trust sans pledge agreement – You can establish a charitable lead trust that makes payments to the organization for a certain number of years. As long as you don’t sign a separate pledge agreement, the lead trust itself should serve as an irrevocable commitment for the total amount to be distributed to charity.
- Revocable Enforceable Pledge – First introduced() by Los Angeles attorney Reynolds Cafferata, the Revocable Enforceable Pledge is a twist on the pledge agreement whereby the entire amount of the gift is revocable, but as each installment payment comes due, only that payment becomes irrevocably pledged. If the donor passes away, the entire amount becomes a debt of the donor’s estate.
Any gift, but particularly major ones, should be memorialized with some kind of gift agreement. Think carefully and consult with counsel before you sign a gift agreement, whether it can be legally enforced or not.
Questions or comments? Contact me on Twitter @juanros.