How charitable gift restrictions and donor intent work
Key takeaway
Donor restrictions can govern a charitable fund's use, investment, and spending, and state law provides routes to modify restrictions and enforce charitable trusts.
Colorado donor intent and investment
In Colorado, an institution managing and investing an institutional fund must consider its charitable purposes and the fund's purposes, subject to donor intent expressed in the gift instrument.
Except as the gift instrument otherwise provides, individual investments must be assessed within the whole portfolio and an overall strategy with risk and return objectives reasonably suited to the fund and institution.
Under that same qualification, diversification is required unless the institution reasonably determines that special circumstances make the fund's purposes better served without it.
Institutions may pool funds for management and investment, subject to the donor intent obligation.
Colorado endowment spending
In Colorado, an institution may appropriate or accumulate endowment assets prudently for the fund's uses, benefits, purposes, and duration, subject to donor intent expressed in the gift instrument.
It must act in good faith with the care of an ordinarily prudent person in similar circumstances.
Relevant considerations include duration and preservation, institutional and fund purposes, economic conditions, inflation or deflation, expected total return, institutional resources, and investment policy.
Unless the instrument says otherwise, assets remain donor restricted until appropriated for expenditure.
A gift instrument must specifically state a limitation on statutory appropriation or accumulation authority.
Generic endowment, income only, or preserve principal wording creates permanent duration unless other instrument language limits duration or purpose. That generic wording does not otherwise limit the statutory authority to appropriate or accumulate.
Colorado modification routes
Donor consent
In Colorado, donor consent recorded in a record allows an institution to release or modify an institutional fund's management, investment, or purpose restriction in whole or part.
The change cannot permit a purpose other than a charitable purpose of the institution.
Court modification of management or investment restrictions
On the institution's application, a Colorado court may modify a management or investment restriction under any of these conditions:
- The restriction has become impracticable or wasteful.
- The restriction impairs management or investment of the fund.
- Circumstances the donor did not anticipate make modification further the fund's purposes.
The institution must notify the attorney general and provide an opportunity to be heard. Any modification must follow probable donor intention to the extent practicable.
Court modification of purpose or use restrictions
A Colorado court may also modify a purpose or use restriction on the institution's application if it becomes unlawful, impracticable, impossible to achieve, or wasteful.
The change must remain consistent with charitable purposes expressed in the gift instrument. This route also requires notice to the attorney general and an opportunity to be heard.
Two related terms
Gift instrument
In Colorado, a gift instrument is a record or records, including an institutional solicitation, under which property is granted to, transferred to, or held by an institution as an institutional fund. A record may be tangible or electronically stored information retrievable in perceivable form.
Donor advised fund
A donor advised fund is separately identified by donor contributions, owned and controlled by a sponsoring organization, and provides the donor with advisory privileges, or a reasonable expectation of them, over distributions or investments because of donor status. The definition excludes single organization funds and certain grant funds.
A perspective on planning around your objectives
"So we define that as a strategic process where an advisor discovers an owner's individual, family, business, charitable and estate planning objectives, then creates a comprehensive, holistic plan to optimize benefits and mitigate taxation."
Common questions
Does every purpose restriction defeat a charitable deduction?
No. Federal conditional transfer rules distinguish a gift awaiting an act or precedent event from a charitable interest already vested when given.
For a transfer awaiting an act or precedent event, the possibility that it will not become effective must be so remote as to be negligible.
For an interest passing to or vested in charity at the gift date, the possibility of subsequent defeat must appear similarly negligible at that date.
These tests do not replace other deduction requirements.
Who may enforce a Wisconsin charitable trust?
In Wisconsin, the settlor, the settlor's designees, a charitable entity named in the instrument, the attorney general, a cotrustee, or another person the court finds sufficiently interested may enforce a charitable trust.
Designees may be identified within or outside the trust terms. The final category requires a court determination.
What happens when a Rhode Island charitable purpose cannot be fulfilled?
In Rhode Island, a complaint may seek cy pres application when the donor's purposes in a charitable gift of real or personal estate by deed or will cannot literally be fulfilled.
The proceeding seeks to carry out donor intent as nearly as possible so the charity does not fail. The same complaint may seek replacement trustees under statutory provisions or the court's general equity powers.
Sources
- Colorado Revised Statutes, Title 15, institutional fund definitions, donor intent, investment, endowment spending, and modification provisions.
- Internal Revenue Code §4966(d)(2), donor advised fund definition and exclusions.
- Treasury Regulation §1.170A-1(e), conditional charitable transfers and subsequent defeat.
- Wisconsin Statutes §701.0405(3), charitable trust enforcement.
- Rhode Island General Laws §18-4-1, cy pres application and replacement trustees.