Intentions and Costs
(Added 4/4/2015)
My organization is the beneficiary of a $1 million irrevocable charitable remainder unitrust that was signed about 10 years ago. The agreement is to use the trust to fund and name a research lab that was to study an area of biomedical research that we are no longer studying. The agreement states a specific value: $1 million with the condition that the funds be used for the facilities and programs of the science lab to be named for the donor. I wanted to offer the widow an opportunity to redirect the funds to another laboratory and another area of study, with the attendant naming. My vice president, however, says that naming a lab now costs $3 million, not $1 million, and that therefore we can't do it. My opinion is that this is unethical, and we should honor the original agreement price, even if our costs have gone up.
The actual amount of the remainder when a trust finishes up is pretty much never the same amount, either in nominal or present-value dollars, that the trust was funded with. The best way I know of to do what your organization wanted to do 10 years ago is to calculate, before the trust is established, the estimated future interest of the gift and the estimated future cost of the project. The original funding amount should then be based on the results. (I briefly outlined this process in my March 2013 column, “Promises: Part I.”) The results, admittedly, are still just estimates, and they most certainly won’t align, but keep in mind that the remainder value calculation itself – despite the precision (and agony) of the math – is based on assumptions. One of the essential aspects in this situation is for the charity to agree, given that the future-funding calculation is conducted, to name the project or program regardless of any difference between what is needed and the amount available.
Your organization made a promise at the outset: we’re going to name something in exchange for the proceeds from the trust. It’s not the donor’s fault that the amount isn’t the same as what was predicted or that the cost of the project has increased over time, and it would take an incredible flexibility of logic to argue that no one had any idea that costs would rise when agreeing to the naming opportunity. So, for this reason, I disagree with your vice president. While the higher-than-predicted cost of a new lab (naming an existing lab costs nothing) is important to a charity’s finances, in this case the gift was made with the expectation that the promise would be fulfilled. The higher-level issue here is not the amount written in the agreement (although that point seems not to have been adequately thought through), but that a lab would be named. That the remainder is a lesser amount from what is now needed is no relief from responsibility and it should not be used as a barrier. If your organization denies the agreement – in effect, breaks a promise – what credibility will exist when it approaches other donors?
This, right now at least, is an ethical issue insofar as your vice president is ignoring an understood intention. But it could also become a legal issue. The chances of the widow going to court are small, but if she does, although some states are more receptive than others, she might have an argument.
The immediate fix might be financially expensive – you have to come up with the difference – but the ongoing fix is fairly simple. Either do the math to estimate what will be needed for a project in the future or don’t permit deferred-gift donors future naming opportunities. I think the former is better, as it is more donor-centered and involves acceptable (to me) risk, but every charity’s fundraisers and other leaders must assess that for themselves. A policy on the issue would be most helpful (as would one accounting for the possibility that a charity might not conduct a particular brand of research into forever). The key consideration is that a charity does not break its bond with a donor’s intentions or its own promises.