Unrestricted cash donations are the easiest type of donations for public charities to accept. In these situations, a donor provides a public charity with an unrestricted contribution in the form of a check or currency, and the funds can be spent however the charity deems appropriate. However, is your organization set up to handle other types of donations, such as restricted donations or non-cash donations? This article discusses a few of the other types of donations that charities can receive and items to consider before accepting these types donations.
Restricted donations
There are two types of restricted donations, temporarily restricted and permanently restricted. Temporarily restricted donations are donations received with donor-imposed stipulations that will be met by actions of the organization or by the passage of time. Permanently restricted donations are donations received with donor-imposed stipulations that will not be met by action of the organization or by passage of time. When a charity receives a permanently restricted donation, the donor permits the charity to use all or part of the income earned, including capital appreciation, from the related investments for unrestricted or temporarily restricted purposes.
Before accepting restricted donations, the charity should consider the following:
- Does the charity have the ability to use the funds in accordance with the donor’s wishes? Is the restriction in line with the organization’s mission? For instance, if the organization is a private school and the donation is restricted to financial aid, then the donation would make sense for the school to accept. However, if the donation is restricted for a pottery class and the private school doesn’t offer pottery classes and has no intention to start offering pottery classes, then the private school should not accept that donation.
- Is the charity’s accounting system set up to track restricted donations to ensure that the donated funds are spent in accordance with the donor’s wishes?
- Endowment funds, which consist of either (1) permanently restricted donations and any unspent portion of the earnings, thereon, if the earnings are restricted, which are known as permanent endowments or (2) donations where the donor has stipulated that upon the passage of a specific time period or until a certain event has occurred, the principal and earnings thereon can be spent in accordance with the donor’s wishes, which are known as term endowments, have specific rules under the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) that need to be followed regarding spending and investing. Except for Pennsylvania and Puerto Rico, all states, the District of Columbia and the U.S. Virgin Islands have adopted UPMIFA. UPMIFA’s rules include a prudent spending rule, and a prudent spending rate. Items that should be considered when determining a spending rate include, but are not limited to: (1) the duration and preservation of the endowment fund, (2) the purpose of the organization and the endowment fund, (3) general economic conditions, (4) effects of inflation or deflation, and (5) the expected total return from income and the appreciation of the investments.
Stock
Charities can accept donations of publicly traded stock. This is a win for both the donor and the public charity. The donor can make a donation of appreciated stock to a public charity and take an itemized deduction equal to the fair market value of the stock on the date of donation. For the public charity, this is a donation that can easily be converted into cash, assuming that the donation is unrestricted and/or the donor permits the conversion.
Before accepting stock donations, a charity should consider the following:
- The charity needs an account with a brokerage firm so that it can accept stock donations.
- The charity should have a policy in place to determine what will be done with unrestricted stock donations when they are received. Will the stocks be immediately sold or does the charity want to hold onto them as an investment? If a stock donation comes with a donor restriction, then the organization, must follow the donor’s wishes.
Some donors may wish to donate stock in a non-publicly traded company. Although this can be done, there are additional factors that need to be considered, such as the following:
- These stocks are illiquid and will take a lot more time to sell, than publicly traded stock.
- The donor may restrict who the charity can sell the stock to.
- The cost to the charity to liquidate the stock may be significant.
- The charity may be required to file Form 990-T and pay tax on the income earned from the investment.
Real Estate
Charities need to be very careful when considering accepting a donation of real estate as there are many factors to consider. First, the charity needs to consider whether or not it is going to use the property as part of its charitable purpose. If it is going to use the property as part of it charitable purpose, then it would probably make sense to accept the donation. However, if the charity is not going to use the property as part of its charitable purpose, then the following needs to be considered:
- Are there any environmental issues with the property that the charity will be liable for? This should also be considered if the property is going to be used by the charity for its charitable purpose.
- Is it a saleable piece of property or is this property that the donor was unable to sell and is now trying to unload on a charity?
- While the property is owned by the charity, it will be subject to real estate taxes.
- Is the real estate rental property? Will the charity become a landlord? Does the charity want to become a landlord?
Split-Interest Agreements
A split interest agreement is a type of contribution where the benefits are shared between a charity and a beneficiary designated by the donor, which could be the donor. Some of the most common types of split interest agreements are charitable lead trusts, charitable remainder trusts and charitable gift annuities.
A charitable lead trust is an arrangement in which a donor sets up a trust and the charity receives specific distributions over a specified period of time. The charity’s use of the distributions could be restricted by the donor. The distributions may be for a fixed dollar amount, which is called a charitable lead annuity trust, or for a fixed percentage of the trust’s fair value as determined annually, which is called a charitable lead unitrust. Upon termination of the trust, the remainder of the trust assets is paid to the beneficiary designated by the donor.
A charitable remainder trust is an arrangement in which a donor sets up a trust and a beneficiary designated by the donor receives distributions over the trust’s term. Upon termination of the trust, the charity receives the assets remaining in the trust, which could be unrestricted, temporarily or permanently restricted, depending upon the donor’s wishes. Distributions to the beneficiary may be for a specified dollar amount, which is called a charitable remainder annuity trust, or for a specified percentage of the trust’s fair value as determined annually, which is called a charitable remainder unitrust.
A charitable gift annuity is an agreement between a donor and a charity whereby the donor contributes assets to the charity in exchange for a promise by the charity to pay a fixed amount for a specified period of time to a beneficiary designated by the donor. This is very similar to a charitable remainder annuity trust; however, in this case, there is no trust and instead the assets are held by the charity as part of its general assets and the annuity liability is a general obligation of the charity.
A charity should consider the following before accepting these types of donations:
- If the charity accepts a charitable lead trust, it could be a long time before it receives the funds.
- If the charity accepts a charitable remainder trust or charitable gift annuity, the charity will be obligated to make distributions to the beneficiary for the entire term of the trust or agreement, even if the assets run out before the end of the term of the trust or agreement.
- There are specific accounting rules that need to be followed for recording the initial donation as well as the annual activity. Is the charity’s accounting system set up to properly record these transactions?
In conclusion, there are many different types of donations that charities can accept. Each one comes with its own complexities. Charities should become familiar with the pros and cons of each type of donation before making the decision to accept the donation. Charities should consider adopting a donation acceptance policy so there are procedures in place for its employees to follow before accepting donations that are not in the charity’s best interest to accept.
For more information, please contact a member of Withum’s Not-for-Profit Services Group by filling out the form below.
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