March 2, 2017 | Read Time: 3 minutes
It doesn’t happen often, but when a wealthy donor fails to pay off a multiyear pledge, fundraisers are left scrambling to manage the fallout.
Donors may stop paying off gift commitments when a business fails, when an investment portfolio shrinks, or when they are upset about events on campus or at a charity. But nonprofits can take steps to prepare for those and other problems.
Andrea Wagner, vice chancellor for advancement at the University of Colorado at Denver, says judging the likelihood that a donor will renege on a pledge is tricky. You don’t want to alienate well-meaning donors by questioning their finances.
However, if during gift negotiations, there’s reason to believe a donor hasn’t carefully thought through a pledge, the fundraiser can ask if the donor foresees any reason the commitment couldn’t be fulfilled.
Let the donor articulate a plan for paying the pledge, she says. “Then it can open up a discussion about any potential setbacks.”
When asked carefully and respectfully, she says, the question may spur a donor to prepare a contingency plan in case of illness or a financial downturn.
She adds that for most wealthy donors, “their businesses and livelihoods are based on their reputations” — so they’re not going to enter into gift negotiations carelessly.
Ms. Wagner and other experts advise nonprofits to draft a gift agreement to address potential situations that could affect a donor’s ability to pay off a pledge. Putting something in writing also gives the donor and the nonprofit some flexibility — for example, a clause to accommodate an extended payment plan or unforeseen events.
While an agreement should be tailored to the gift, it should include the following basic provisions, says Morey Ward, a lawyer who advises nonprofits:
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The pledge total and a description of what the gift will support.
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The payment dates, including when the final payment will be made.
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An explanation of how the donation will be invested and managed if it’s going toward an endowment.
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A clause that provides flexibility to deal with unforeseen developments — for example, if a donor has paid off some of the commitment but can’t fulfill the entire amount or if a program closes or merges with another. In that case, lay out a plan to redirect the money to a program that is nearest to the donor’s original intent for the gift.
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The terms under which a building, project, or other program will be named for the donor, if applicable.
Bruce Hopkins, a lawyer with years of experience helping charities, says the main thing all nonprofits and their gift officers need to understand is whether a pledge is enforceable. Not all of them are, he says. This issue is governed by state laws, he says, so fundraisers “must know state law and then shape the pledge agreement accordingly.”
Even if you put every safeguard in place, if a donor decides not to fulfill a gift commitment, nonprofit leaders have several choices: file a lawsuit, do nothing, or try to find some middle ground
Mr. Hopkins cautions nonprofit leaders considering a lawsuit to think hard about the consequences of making such a move.
“It’s bad publicity and puts a charity in a bad light,” says Mr. Hopkins. “The development people have to look out for the charity. Legally they may have a case, but they ought not to bring it.”
Yet that doesn’t mean you have to walk away, either. He says a wiser course of action is to try to negotiate a new set of terms for paying off the pledge. A well-developed gift agreement should include an opening for such renegotiation.
“The best we can do is understand the laws and design agreements accordingly and be prudent,” he says. “Don’t go out and spend money or plan for things before the money starts coming in.”
