Your Big Benefactor Just Died. Now What? Collecting a Pledge from a Donor’s Estate

In a previous post, I discussed the legal enforceability of a charitable pledge agreement. Yet when the pledging donor has passed away before the pledge is completed, it raises a whole new set of concerns and circumstances. Let's dig in. 

The most obvious difference between a pledge from a living donor and one from a deceased donor is the fact that in the latter, the donor is no longer around to provide clarity to the transaction. Second, the donor’s heirs may have a different level of philanthropic intent than the donor and may be more inclined to renege on the pledge than the original donor. Lastly, many states have enacted so-called “dead man’s statutes” that prevent a witness from testifying in regard to conversations or transactions with the deceased. This statute may significantly reduce the charity’s ability to present testimony relative to the pledge agreement.

There is, however, a good deal of case law coming out of the state of New York that supports the collection of pledges from the estates of deceased donors. One of the more important cases goes back to 1927 in the case of Allegheny College. v. National Chautauqua County Bank. Here, the court ruled in favor of the college indicating that such a decision was supported by many considerations of public policy and reason. Up until 2014, this case made the enforceability of charitable pledge agreements after a donor’s death almost absolute.

In 2014, however, in the Matter of Estate of Kramer, the Kings County Surrogate’s Court denied a charity’s claim that a pledge agreement was enforceable. This decision has caused both lawyers and laypeople alike to rethink the Allegheny College assumption. But one must study the facts of the Kramer case before rethinking the Allegheny guidance.

In the Kramer case, the charity did not seek to collect the pledge during Kramer’s lifetime. In addition, it did not work on the project to which Kramer’s gift had been restricted. It was not until Kramer’s death that the charity suddenly sought to collect the $1.8 million pledge. In ruling against the charity, therefore, the court was actually ruling that the pledge lacked sufficient consideration to be considered an enforceable pledge. Thus, although Kramer is a case involving a deceased donor, the merits of the case have nothing to do with Kramer’s being deceased.

In situations where a donor has made partial pledge payments prior to death, the collectability of the remaining pledge payments after death are very secure. Charities should act quickly upon the death of a pledge donor to make sure their receivable is listed among the deceased’s debts. An estate lawyer should be consulted as soon as possible to take care of this matter. Such filings should be looked upon as general good business practices and charities should not shy away from this course of action. It is much easier to collect from the trustee of an estate than it is from the other heir(s) after the assets of an estate have been distributed.

An interesting case unfolding in the California courts right now involves the Saint John’s Health Center Foundation’s suit against the Estate of Paula Kent Meehan, and her foundation, trust, etc. This case was filed in Los Angeles Superior Court on July 19, 2015. Ms. Meehan died on June 23, 2014 but had entered into a $5 million pledge to the foundation on November 12, 2007 (payable upon her death).

Most interesting is a statement that Ms. Meehan included in her estate that read as follows:

I wish to document my commitment by execution of this Estate Note and intend that my commitment be fully enforceable against the Meehan Trust, the Foundation and my estate. This commitment shall be an obligation legally binding on me and my heirs, executors, administrators, personal representatives, and assigns. Recognition for my planned gift will be tree named for me on the Saint John's Health Center Campus. I understand that this recognition opportunity is contingent upon the receipt of this Estate Note and will not be in force until an original copy has been executed by me and returned to Saint John's.

This paragraph is instructive to both donors and development officials for two reasons.

First, this statement clearly indicates that Ms. Meehan’s death should have no impact on the payment or collection of her pledge commitment. When dealing with an elderly (or any) donor, it is in both the donor’s and charity’s best interest to anticipate the worst and make provisions to follow the donor’s wishes. Making the donor’s wishes extremely clear and with a specific reference to the potential death of the donor is the way to assure this.

The second item to notice in Ms. Meehan’s words is that she indicated what the donor recognition for her donation should be. I have been involved in donor recognition disputes that would have been entirely unnecessary had the donor and charity had a clear donor-recognition agreement in writing such as this.

In addition, this donor recognition sentence is important from the charity’s viewpoint as it documents the pledge consideration that is so important if a charity must go to court to enforce the terms of the pledge agreement.

In the Meehan case, on March 19, 2013 representatives of Ms. Meehan sent a letter to the foundation purportedly reneging on Ms. Meehan’s obligations under the estate note. When she died over a year later, the trustees of her estate indicated that they are not fulfilling the pledge. The foundation’s suit claims, “The recognition and positive publicity received by Ms. Meehan during her lifetime, and prior to March 19, 2013, as a result of the Estate Note was material and was a bargained for exchange.” Therefore, the foundation is claiming that the pledge and positive publicity was an executed contract that the courts must enforce under the general provisions of contract law. We will have to wait and see how the California court rules in this interesting case.

In summary: Recognize the fact that if a donor passes away before fulfilling their pledge, collecting the pledge may become a bit more complicated. This is not in the charity’s best interest and may not be what the donor would like to have occurred, either. Anticipating the potential for the inevitable is the way to avoid issues. In any event, the charity should act in a timely manner when a donor dies with an unpaid pledge remaining.

What if a donor’s estate cannot fulfill a pledge? If a donor has died unexpectedly, it is more likely that they were anticipating fulfilling their pledge out of future earnings that coincided with the pledge payment dates. In this situation, an estate trustee might consider a bankruptcy filing on behalf of the estate, even if the charity expresses understanding at the situation. Remember, a charity may be obligated to attempt to collect a pledge.