So You Want to Monitor Your Donation?

Adele C. Smithers recently passed away in Santa Monica, California. She played a big role in empowering today's benefactors and their families to oversee their charitable contributions. Her story is very instructive on the subject of restricted gifts, and the need to pay close attention to gift instruments—the contract donors make with charities when they donate.

Mrs. Smithers' late husband, R. Brinkley Smithers, donated $10 million to St. Luke’s-Roosevelt Hospital Center in Manhattan. The saga began in 1973 when Mr. Smithers, a recovering alcoholic, began a discussion with the hospital on alcoholism treatment and rehabilitation. A key part of Mr. Smithers' rehabilitation idea was to create a setting that was not in a hospital ward. He believed that a secluded, homey and tranquil atmosphere was a better recipe for success.

Mr. Smithers started his support in 1973 with a $1 million gift used to acquire a mansion in Manhattan that was to become the centerpiece of the Smithers recovery program. At the time, he pledged an additional $9 million to build an alcoholism treatment and training center at Roosevelt Hospital. Smithers indicated in a letter to the hospital that money from the $10 million pledge would be supplied as needed, and that he was to approve the detailed project plans and the program’s staff appointments.

It appears that much of the discussion about this large gift occurred verbally and in letters such as the one noted above. The relationship between Smithers and the hospital quickly became rocky, and in 1978, Smithers wrote to the hospital that he believed the leadership was not living up to the terms of the gift and that he was not going to furnish any additional funds. That got the hospital’s attention!

The hospital re-ignited discussions with Mr. Smithers, and in 1981, Smithers wrote a letter to the hospital indicating he had no objections to the sale of the building—the centerpiece of his treatment program. Smithers was ready to give up on his idea. The hospital wrote back to Smithers indicating that they were still committed to the Smithers Alcoholism Program, and saw no reason to sell the building. Over the next two years, the president of the hospital repeatedly assured Smithers that the hospital would strictly adhere to the terms of the gift and carry out Mr. Smithers' intent.

Eventually, Mr. Smithers was satisfied, and wrote that “the time has come to complete the funding of the project.” The final contribution was for an endowment fund with the income restricted to the support of the Smithers Center. The funds were accepted by the hospital “subject to the restrictions set forth by Mr. Smithers” in his letter.

The hospital asked Mr. and Mrs. Smithers to organize a Silver Anniversary Gala in 1992, which raised millions of dollars for a total restoration of the building. Although Mr. Smithers died in January 1994, Mrs. Smithers remained involved in fundraising efforts for the program on behalf of the hospital. But in 1995, the hospital announced that it was going to sell the building and move the Smithers Center into a hospital ward. Mrs. Smithers was shocked.

The hospital provided inconsistent financial reasons for making the change, and Mrs. Smithers became suspicious that the hospital was using the endowment money for expenses other than those to which it was restricted. She demanded an accounting of the Smithers Center’s finances. The fight became public, and the hospital agreed.

The hospital admitted that it had misappropriated monies from the endowment since before the death of Mr. Smithers. The New York attorney general was notified and commenced his own investigation resulting in the hospital returning approximately $5 million to the Smithers Endowment Fund. Mrs. Smithers tried to negotiate a resolution with the hospital. The attorney general participated in the negotiations, but a settlement was never reached.

Eventually, the attorney general entered into an agreement with the hospital, granting permission to sell the building. The hospital stood to make millions from the sale. However, the AG did not require the hospital to return the entire proceeds to the Smithers program or the endowment. In September, Mrs. Smithers sued the hospital and the AG over mishandling of the endowment fund. The hospital and the AG filed to dismiss the action due to Mrs. Smithers' lack of standing. Both claimed that only the attorney general has legal standing to enforce the terms of a charitable gift. The New York Supreme Court agreed with the AG.

The status of legal standing was denied to Mrs. Smithers because the gift did not have a reversion clause wherein the gift would be returned to the donor if the hospital did not comply with the restrictions. Therefore, the court concluded that Mrs. Smithers did not have a financial interest in the gift. Essentially, the court indicated that the donor and his family had no rights after the gift was completed. Enforcement of the gift restrictions was the responsibility of the attorney general. Yet, the hospital continued to involve and discuss the program with the Smithers long after the gift was completed. Obviously, the Smithers represented good fundraising assets for the hospital.

However, had it not been for the vigilance of Mrs. Smithers, none of this would have come to light. The New York attorney general had no procedure in place by which to insure compliance by the donor. It is the same in every state. Donors must not rely on the system to enforce the terms of their gifts—there is no system in place!

Mrs. Smithers appealed the court’s ruling, and at that time, there was a new attorney general in office who reversed his predecessor’s contention that Mrs. Smithers had no standing to bring the suit.  The new AG wanted the court to rule on the AG’s resolution of the matter. So the New York Supreme Court reviewed the case in detail, including the question of standing for Mrs. Smithers, which is what is most important to other donors.

After consulting numerous cases close to the issues at hand, the court concluded that the donor of a charitable gift is in a better position than the attorney general to be vigilant, and, if he or she is so inclined, to enforce his or her own intent. To deny the donor standing would mean that the donor’s intent has no protection under the law.

The court also noted that the attorney general's interest in enforcing gift terms is not necessarily congruent with that of the donor. The AG usually becomes involved in such matters when seeking to enforce gift terms on behalf of the gift’s beneficiaries. The court found that the interests of the donor are concurrent with those of the AG, and each must be accorded standing in these matters.

What have we learned? Anticipate the worst when completing your gift instrument. Charities need and want your money, but they are not in the compliance business so it is easy to become non-compliant unintentionally. Regardless of the amount of wining and dining, your gift still represents a legal contract between you and the charity. The devil is in the details—a reason why the right philanthropy consultants can be so important.

And remember: The state AG does not have your back. We have seen this numerous times. Who is watching over charitable endowments? There is a law governing endowments, but the AG is not enforcing it and checking compliance with laws and regulations is not really an auditor responsibility.

Perhaps it is time to start including in gift instruments a clause that says the charity’s independent auditors must review donations/endowments and provide donors assurance that the charity is in compliance with the terms of their gift instrument. This can’t take more than a few hours, and even if the charity charges the additional audit cost against a donor's fund, it would be well worth it.