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Irrevocable Bequest Pledges
To Sue or Not, That is the Question
Click the picture (or here for a PDF of the article Duke University Makes Claim on Estate of Aubrey McClendon – WSJ) and check out an article about how Duke University filed a claim against the estate of the late Aubrey McClendon for close to $10 million in unfulfilled pledges.
We have no doubt that the pledges were legally binding.
What we should be doubting is whether this was the right move by Duke or not. $10 million is a decent amount of money, even for Duke and its $6+ billion dollar endowment.
But here are a few questions I would have hoped Duke considered before embarking down this road:
- What is the likelihood that this story will end up on the front page of the Wall Street Journal – embarrassing the university and possibly sending a chill towards major donors making legally binding commitments (by the way, someone from Princeton told me that their policy is make all pledges NON-legally binding)?
- What is the likelihood Duke will receive their share considering Mr. McClendon may not have any wealth left by the time they get to unsecured creditors like Duke?
- What if it turns out that Duke will be taking funds while McClendon’s widow and/or kids receive nothing due to the state of his finances?
I am a huge fan of using legally binding pledge commitments when appropriate and even filing claims to collect on them – when appropriate.
But here, I wonder if this was the right move. I know they had to file a claim before the deadline – and only afterwards will they know the answer as to whether there is enough to go around. Still, the first negative bullet point already came to fruition today.
Irrevocable Bequests?
With the number of so-called “real” planned gifts (CRTs, CGAs, CLTs, and even BLTs way down:{) since 2008 for most planned giving programs, the issue of “Irrevocable Bequests” comes up often.
Is there such a thing as an Irrevocable Bequest? No and yes.
Why no? There is virtually no way to fix someone’s will. It is a document by definition that is superseded by your next/latest will.
Why yes? Well, what if your donor signs a legally binding pledge agreement to pay a certain amount in exchange for something like recognition? Whether it is clear in the pledge agreement or not that charity is getting the funds from the donor’s estate, the charity IS legally owed the unpaid pledge amount from the pledge agreement (at least that is the case in most states).
Does this mean that upon the passing of the donor the charity need just submit their properly signed, legally binding pledge document to the executor of the estate and wait for the funds. It isn’t that simple.
The rest of this article was written to guide nonprofits in this tricky area of so-called “Irrevocable Bequests.”
The most important point to know is that an irrevocable bequest pledge agreements (i.e. a written promise to include a campus in a donor’s will/estate plans) is that they are legally no different than standard pledge agreements. New York courts in particular have historically enforced written pledge agreements for naming recognition gifts, regardless of whether the pledge intention is a lifetime pledge or a pledge to include a nonprofit in a will or other estate planning instrument.
In fact, it is relatively common within capital campaigns to offer donors the option of fulfilling pledges partially or completely through one’s estate plans – depending on the campaign’s goals and guidelines.
While the use of irrevocable bequest pledges can be a tremendous lift for a campaign, as the nonprofit world has seen for several years, there are several steps that a nonprofit should follow to ensure an irrevocable bequest pledge’s viability.
- Get it in writing: Always make sure there is a clear, signed written gift agreement with the donor. Verbal pledges or those inferred from various letters or notes could be rejected by an executor, possibly with no legal recourse.
- File it: Keep very good records, especially a copy of the signed gift agreement, in a file that may someday be needed to provide the basis and background for the pledge.
- Be transparent: Your donor and his or her family need to be informed of the irrevocable nature of the commitment (i.e. that his or her estate may be called upon to pay off the pledge). Copies of letters and notes clearly explaining this should be left in the file.
- Get in the Will: Technically, a signed pledge agreement can be submitted to the estate executor as an unpaid obligation for payment. Practically, if you want to ensure that the campus will likely receive the funds from the pledge, strongly encourage the donor to include the gift in his or her will. Include a request for a copy of the relevant portion of the will or other testamentary option on the pledge form itself. Relying only on a signed pledge form for a bequest promise should be the last resort if all other efforts have failed.
- Recognition: Donor recognition is always important but for bequest pledge commitments, it is even more important. Save clippings, pictures, press releases, and anything else showing the recognition given to the donor for his or her commitment. And, copies must all end up in the donor file.
- Treat as a real gift: Many finance departments may be reluctant to include an irrevocable bequest pledge as an actual asset of the organization. They should be informed that legal and accounting standards actually require properly documented bequest pledges to be counted as assets/accounts receivable in the financial records of the charity.
- Stay in touch: Continued donor contact is very important for ensuring continued commitment to the pledged gift. It is an easy step to ensure that there are no later problems in receiving the gift.
These steps are important because there may come a time in the future, after the donor has passed away, when the development staff will be called upon to provide substantiation of the pledged gift. If not included in the will or estate plans of the donor, the nonprofit may be required to show proof of the pledge and any facts surrounding the commitment. All of the aforementioned steps are offered to ensure that either the donor includes and keeps the nonprofit in his/her estate plans or there is sufficient documentation favoring the commitment to increase the likelihood that the gift will come to fruition even without being actually named in the estate plans.
Irrevocable bequest commitments, in particular, involve several potential legal issues that could affect whether the ultimate gift is received or not. Additionally, the law in the donor’s state of residence controls the enforceability of pledge; not every state is as favorable as New York is in regards to pledges. It is strongly recommended to review all potential bequest pledge gifts and agreements with legal counsel.
If you pledge money to a cause and then die, is the pledge enforceable?
I saw this question (the title of this post) pop up on the WordPress feature that shows me what search terms or phrases people are using to reach this site and thought it was worth while sharing a general answer since I have dealt with this issue so many times.
Typical lawyer: it depends. Here are all the “depends” on this one:
- Was the pledge in writing and signed by the donor?
- Is it clear from the pledge document that the donor knew and intended to be legally bound by the pledge? Inferring knowledge from notes or donor letters or even donor payments isn’t great for this.
- What state did the donor live in? Some states enforce pledges based on some of the following additional “depends.”
- Is there “consideration” spelled out in the pledge document? In other words, did the donor receive something of value in return for the promise to make the specified gift? (just not tangible enough to ruin his/her deduction) In New York, a naming opportunity (building, scholarship, etc…) is considered consideration even if it only happens once the pledge is fully paid.
- Was there reliance by the charity on this pledge to the charity’s detriment? Some states rely on this legal theory to enforce pledges (including New York again – which by the way happens to be very favorable toward pledge enforcement from a case law standpoint).
- Do you live in a state like New Jersey that holds that pledges are enforceable by virtue of “public policy?” I believe only one other state has this approach.
- Most importantly, is there opposition from the family or executor? (THE MOST IMPORTANT QUESTION!)
Almost every Will starts off by asking the executor to pay off all debts, pledges, etc… If you represent a charity, don’t cheer just because you have some sort of pledge form signed by the deceased donor. IF your signed pledge form doesn’t meet the donor’s state law requirements for legal enforceability, an executor can reject it right off the bat.
And, even if you do have a clear pledge form under the applicable state jurisdiction, executors can push back anyway if the family doesn’t want to pay the pledge. Then, you would be forced to file a claim with the Surrogate (or other state equivalent) court WITHIN what ever time frame the state requires for filing claims against estates. I believe it can be several months from the date of date or longer depending on the state involved, but not that long and charities notoriously sit on their rights on this point (or, the charity may not even be informed of the donor’s passing in time since the estate is only required to notify heirs and named beneficiaries and publish a tiny notice in some obscure paper letting potential creditors know about the death).
Too many times have I seen estate paperwork a few years old and a charity wondering if they will ever get paid on that pledge from the deceased donor’s estate. Sorry Charlie.
But, do you file a claim if the executor doesn’t readily accept your pledge documentation as a valid claim against the estate when you are sure your form should have worked?
So tricky. So many times I have explored this option and NOT ONCE has the charity involved decided to file a claim (often with strong pledge evidence).
Why not file? Charities hate the thought of angry family or a story in the local press about how a charity is “suing” a poor widow. Whatever the reason, charities are generally not in the business of inflaming and/or exacerbating anger against them for a few dollars.
For new readers to this blog, don’t misunderstand my approach on this topic, I am very in favor of the use of legally enforceable pledges that even include intent that an estate pay off any unpaid amounts of the pledge should the donor pass away. But, you will find a lot pieces of advice (search the site) on how to ensure your charity gets paid and it usually involves making sure the donor actually includes your charity in the estate, avoiding the need for even thinking about going to court to enforce a pledge.
So, the answer to the question is: it depends!