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Gift acceptance: To accept or not to accept? That is the question.
Accounting, tax and philanthropy considerations for a strong gift acceptance policy.
Jan. 13, 2022 · Authored by Kevin O'Connell, Rachel Decker, Detroit Philanthropy LLC
Gifting vehicles to not-for-profit (NFP) organizations have grown more complex in recent years, causing various challenges from an accounting, tax and philanthropy standpoint. Crafting a comprehensive, yet easy-to-follow gift acceptance policy is paramount in guiding fundraising professionals and donors through an area of increasing sophistication. Failure to create and adhere to strong gift acceptance policies can lead to costly consequences from both a financial and a donor relations perspective.
In this article, Baker Tilly Principal Kevin O’Connell along with Rachel Decker, founder and president of Detroit Philanthropy LLC, highlight key issues that can be addressed through a robust gift acceptance policy.
Valuation
In the past, accounting teams have often struggled to value gifts of closely held stock and nonfinancial assets, such as real estate or intangible assets. The emergence of cryptocurrency as a rapidly appreciating asset has created an environment ripe for donors to gift these assets to not-for-profits. However, when there is not an active market for valuing an asset, the organization’s accounting team takes on the burden of having to determine the value of the asset on the date of donation, which could mean having to hire a valuation specialist. In addition, the organization may need further assistance at the end of each reporting period in which the asset has not been sold.
Liquidation
The issues with accepting noncash gifts without an active market (e.g., real estate, closely held stock, intangible assets) do not end with obtaining a valuation on the date of donation. When there is no active market for an asset, it can create difficulties in liquidating the asset. Organizations may spend months or years preparing a nonmarketable asset for sale and finding the right buyer, which can lead to unanticipated costs and cause liquidity problems. Furthermore, it could strain the organization’s resources as it can take additional time and effort for team members who are not specialists in selling nonmarketable assets.
Administration
When it comes to administrative burdens, the issues are not limited to nonmarketable securities. Organizations should clearly define what types of restricted or conditional gifts they will accept. An organization that does not regularly receive gifts with restrictions or conditions should be prepared to spend time tracking these requirements. Moreover, certain donor-gifting vehicles, including split-interest agreements or endowments, could cause an undue administrative burden for organizations that do not regularly receive such gifts.
Having a well-thought-out and detailed gift acceptance policy will ensure donors are aware of the types of gifts your organization is prepared to accept. For instance, should a donor offer to gift you a parcel of land, you will need to have procedures in place for properly valuing the land, transferring the asset and either taking on the burden of holding the land or selling it to realize the gains. The policy should also define which party is responsible for the costs associated with these steps as well as what gifts staff are authorized to accept versus what requires approval from the board of directors. Saying “yes” to accepting the land without having this work done in advance can lead to misunderstandings with the donor, which may negatively affect your relationship.
Conversely, having a gift acceptance policy aligned with best practices allows your organization a polite way and formal reasoning for turning down a gift if it is determined accepting the gift is not in the organization’s best interest. Donors often believe that any gift from them has value and they may not have a strong sense of the work, costs and liability of accepting some gifts. Detailed policies that place at least some of the decision-making process on the board of directors can help ensure feelings are not hurt and the donor’s relationship with your organization is not soured.
For instance, an individual may offer to donate works of art to your organization that they believe are highly valuable. In actuality, the art may have a limited resale market that restricts its value. Knowing this, the process of having the art appraised and auctioned may be too time intensive and costly for the organization to realize any meaningful gains. A policy that lays this out and that can be shared with the potential donor will minimize the possibility of the donors’ feelings being hurt by the organization declining the gift because it is not worth enough.
What to do next
Not-for-profit organizations should take an honest look at their structure and clearly define what types of gifts they are willing to accept. There is no one-size-fits-all approach to creating gift acceptance policies. While the prospect of receiving real estate through a charitable remainder trust may seem enticing at first, it may not align with an organization’s structure or capacity to take on such a gift. Other organizations may have the infrastructure in place to accept highly complex gifts in a manner that benefits both the organization and its donors. Consider these leading practices:
- Clearly define what types of gifts your organization will and will not accept, and how the receipt of these gifts will be handled, recognized and tracked.
- If your organization decides it will consider accepting complex gifts, create a gift acceptance committee to make recommendations to the board of directors regarding the acceptance of complex gifts on a case-by-case basis. Develop a process for obtaining board approval for the acceptance of all complex gifts.
- For nonmarketable gifts, create a policy for valuing those gifts, including consideration related to donor-obtained appraisals.
Note: Bear in mind, donor-obtained appraisals may have an inherent bias to inflate the value of the gift.
If you will not accept donor-obtained appraisals, detail who is responsible for the costs associated with a new appraisal. - Consider an immediate liquidation policy for all assets gifted to the organization.
- If the organization accepts split-interest agreements or endowments, create policies for administering the gifts, including setting a minimum donation.
- Consider consulting with tax, accounting and planned giving professionals before diving headfirst into new arrangements.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
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