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Three Hazards for PGOs

Planned Giving Today

Originally Published in Planned Giving Today.

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Three perennial hazards face the planned giving officer in interactions with prospective donors: conflicts of interest; undue influence; and the unauthorized practice of law. Any one of these hazards can mean at least embarrassment and poor donor relations, and at worst a protracted lawsuit. The employment of simple safeguards can greatly reduce such risks.

Conflicts of Interest

It can be easy to overlook the fact that underneath the commonality of interests between donor and charity lurk some potentially serious divergences of interest. Implicit in any charitable gift is at least some tension between the needs and desires of the donor and those of the charity.

In the case of a charitable remainder trust, for example, the interests of the donor may conflict with those of the charity on a number of points. Concerned about the irrevocability of the transaction and the attendant loss of control over assets, the donor might prefer to act as trustee, if given the choice. At the same time, the charity may have grave doubts about the donor’s ability to manage the trust effectively.

Similarly, the charity may not feel that its best interests are served if the donor reserves the right to change the charitable remainderman under the trust. Yet the donor may prefer such a provision, in part to help guarantee that the charity will not ignore him/her after the ink has dried on the signature lines.

If one of the donor’s primary concerns in creating the trust is to assure a dependable income stream for life, the donor might prefer a “straight” unitrust to an “income only” or “net income with makeup” unitrust. It may be in the charity’s interest, on the other hand, to avoid a “straight” unitrust in order to avoid having to liquidate trust corpus or minimize the amount available for distribution at the end of the trust term.

Such conflicts of interest between donor and charity are by no means unique to the charitable remainder trust setting. They can and often do exist in virtually all types of gifts. The more sophisticated the gifting technique, the greater the likelihood that the donor is dependent upon the planned giving officer to point out the choices available, even when some of these choices may not square with the charity’s own desires. The unpleasant truth is probably that some planned giving officers simply fail to point out alternatives to the donor, and so attempt to mask the inherent conflict of interest.

A fundamental safeguard against a donor’s injured feelings or worse is to insist, or at least urge, that the donor’s competent, independent legal counsel review all options and alternatives, and point out such potential conflicts. Certainly it is appropriate for a charity to develop its own policy guidelines for the sorts of charitable remainder trusts it is willing to accept, but where such policies limit the alternatives available to potential donors, the planned giving officer should so advise the donor.

Undue Influence

A long-standing equitable principle applied by the courts provides that, if a lifetime or testamentary gift is the product of “undue influence” exerted by the gift recipient, then the gift is invalid and the gifted property must be returned. Most typically, the doctrine is asserted where a child, friend or employee prevails upon an elderly individual to make the gift instead of a more “natural” disposition of the property.

The planned giving officer should be aware that a charity as well as a friend, employee or family member can also be held to have exerted undue influence over an individual, such that the attempted gift could fail. Even if there is no real substance to the charge of undue influence, the charity may find itself faced with having to defend against the charge in court.

Consider the situation in which an elderly individual makes a substantial gift to a charity following a series of meetings with the planned giving officer, and the individual’s children do not support the gift. The children may seek to invalidate the gift by asserting that the planned giving officer exerted undue influence over the individual, and in effect substituted the planned giving officer’s own wishes and desires for those of the individual.

The planned giving officer should be vigilant against actions which may come under court scrutiny in an undue influence claim. Ideally, the donor’s family can be involved in the decision to make the charitable gift. The planned giving officer should guard against gifts which are motivated more by a personal relationship the donor has with the planned giving officer than by charitable intent.

If the planned giving officer has any reason to doubt the mental capacity of the donor, then the gift should not proceed, at least perhaps until a guardian or conservator can be appointed. Once again, the most prudent course to avoid against allegations of undue influence is to insist upon, or at least urge, the involvement of the donor’s legal counsel.

Unauthorized Practice of Law

Many charities have developed their own legal forms for charitable remainder trusts, charitable gift annuities and the like. This is a good practice, which can benefit both donor and charity by helping to ensure against a disqualification of the gift on technical grounds. However, the planned giving officer should seek to avoid any appearance that the charity is engaged in the unauthorized practice of law.

All states prohibit the practice of law by non-attorneys, in varying degrees. The reason for these prohibitions is that only attorneys who have passed the state bar examination have demonstrated the legal skills appropriate to represent clients. These laws fail to take into consideration that, quite frequently, a planned giving officer may possess greater legal sophistication as to planned giving documents than the donor’s attorney.

The best way of avoiding prosecution for the unauthorized practice of law is, once again, to insist that, before any gift is accepted, the donor’s qualified, independent legal counsel has reviewed and approved of the transaction, including the charity’s forms.

IRS Circular 230 Disclosure: To the extent this message contains tax advice, the U.S. Treasury Department requires me to inform you that any such advice, whether in the body of the message or in any attachment, is not intended or written by my firm to be used, and cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. Advice from my firm relating to tax matters may not be used in promoting, marketing or recommending any entity, investment plan or arrangement to any taxpayer.

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