Why Organizations Must Honor Donor Intent

June 18, 2018 By: Katherine M. Finley, CAE

When donors give to a specific fundraising campaign or state how they wish their gift to be used, organizations need to pay attention. Failure to use donated funds in the way the giver intended is unethical and can lead to legal and financial consequences.

For any association involved in fundraising, honoring a donor’s intent for a gift is key to avoiding ethical and legal landmines. More broadly, using charitable contributions in accordance with donors’ wishes reinforces trust between donors and the organizations they give to, whether the gift is large or small. This trust is critical to an organization’s ability to maintain a stream of donations in the future—and for the future of philanthropy in general.

Donor intent refers to how a person making a charitable contribution intends the money to be used. For example, if a donor makes a gift to an association’s general operating fund, then the donation can be used for anything related to running the organization. However, a gift made to a specific fund or campaign—such as a scholarship, award fund, or capital campaign—must be used for that purpose. The donation is recorded as restricted income and is not reflected in the organization’s operating revenue.

Jeffrey Cain, in Protecting Donor Intent: How to Define and Safeguard Your Philanthropic Principles, notes, “When donor intent is violated … it undermines the bedrock of trust on which all charitable giving rests.” In a 2005 survey by Zogby American Adults, 53 percent of respondents said they definitely would not give again to a charity if funds were not used for intended purposes, and another 25.7 percent said they probably would not continue giving to that organization. That’s strong evidence that using funds as donors intended is not only an ethical responsibility, but also of the utmost importance on a practical level.

In a 2005 survey, 53 percent of respondents said they definitely would not give again to a charity if funds were not used for intended purposes.

Failing to honor donor intent may have legal consequences as well. Donor intent is protected by both federal and state law, and donors have successfully sued organizations for not using their gifts for the intended purpose. In one highly publicized case, country singer Garth Brooks won his lawsuit against an Oklahoma hospital after giving $500,000 toward the construction of a women’s center on its campus. In an oral agreement, the hospital promised to name the center after his late mother. It did not honor the agreement. Finding that the hospital had violated the donor’s intent, the court ordered it to return Brooks’ original donation and pay him an additional $500,000 in punitive damages.

The responsibility to honor a donor’s intent applies equally to foundation grants and is part of grant compliance. Grant money should be used only for the purposes spelled out in the grant agreement. For example, if the grant does not specifically include money for staff or overhead related to the project, the money cannot be used for those purposes, even though those expenses support the project (unless the foundation agrees to a reallocation of the funds). To prevent the accidental use of grant money for other purposes, the money should not be comingled with other funds, and the grant recipient should have an accounting system that allows the money to be handled separately.

Problems With Honoring Intent

When your association is offered a restricted gift, do not accept the gift if it will place an undue burden on the organization because it cannot honor donor intent. Problems with intent can arise in a variety of ways.

In some situations, circumstances may occur that make it no longer feasible for the organization to honor the donor’s intent—for example, when a funded education program is no longer relevant to the industry or no longer viable due to competition from other providers. In such a case, the association should inform the donor and either obtain permission to use the funds for something else or give the gift back.

When a donor has provided an endowed fund for an ongoing program, issues with intent often arise after the donor has died, usually because no instructions were provided in writing when the gift was given about what to do with the funds after the donor’s death or when the original purpose is no longer valid. For example, an award fund named for the donor may no longer be relevant, or the fund may not have enough money in it to continue paying out awards from interest and earnings. In that case, can the association dip into the principal to meet the award amounts? Or should it stop giving the award?

To avoid situations like this—and perhaps legal entanglements with a donor’s estate—organizations accepting restricted and endowed funds should always get a written agreement with the donor that addresses future relevancy and whether the fund can be spent down.

By understanding the importance of donor intent to future giving, and by recognizing the problems that can arise when donor intent is not honored, organizations will avoid ethical and legal dilemmas that can damage their reputation and financial future—as well as tarnish the entire fundraising profession.

Katherine M. Finley, CAE

Katherine M. Finley, PhD, CFRE, CAE, is executive director of the Organization of American Historians in Bloomington, Indiana.