Opinion: Charitable donations can stray from intended use

To ensure a foundation continues after the donor’s death, the donor names a bank or law firm as the foundation’s trustee. Regardless of the chosen method, donors want their gifts used as intended.

Donor’s intent ignored

Unfortunately, those who receive or manage the donor’s gift do not always honor the donor’s wishes, especially after the donor’s death. Failure to follow a donor’s specific intent for a gift is unethical and can result in litigation.

A good example is the ongoing legal dispute between Tulane University and the descendants of Josephine Newcomb. In 1887, Josephine Newcomb gave Tulane University $3.6 million to build a women’s college in honor of her deceased daughter, Sophie. With Josephine Newcomb’s money, Tulane built the H. Sophie Newcomb Memorial College for Women, a separate degree-granting women’s college at Tulane. Josephine Newcomb’s original gift is now worth more than $41 million.

Recently, Tulane officials dissolved Newcomb College and combined it with the university. The move outraged Josephine Newcomb’s descendants and Newcomb College graduates. Officials justified their action as necessary to the university’s reorganization following Hurricane Katrina, and they contend that Newcomb College’s traditional programs continue under what is now the Newcomb Institute.

Tulane’s explanation did not satisfy Josephine Newcomb’s descendents, the college’s graduates, or its current 2,000 students. Newcomb’s descendants assert that Tulane University acted unethically and illegally in violating her intent with the gift. They want Newcomb College restored or the donation returned to her heirs.

Orphan foundations

More ethics issues arise when donors leave their foundations in the hands of banks or lawyers, and donors die without heirs to influence future gifts. These are so-called orphan foundations or trusts. Those who previously received gifts from a foundation often find themselves cut off after the donor’s death.

Banks and lawyers gain prestige from controlling foundations and deciding who will receive gifts. It is not uncommon for them to make gifts to organizations in which they or their families have interests.

Also, banks and lawyers receive fees for managing foundations left in their control. The foundation’s size decides management fees and not the size or number of gifts made. This encourages some banks and lawyers to give only a minimum amount of money from the foundations. The foundations become profit centers.

For example, Leonard Felix set up the Helen Fuld Health Trust, named after his mother, and endowed it with $25 million from his stock market and real estate earnings. Marine Midland Bank managed the trust. As Fuld wished, the bank made grants to develop nursing schools in out-of-the-way places and gave needy nursing students money to further their educations.

Sometime after Fuld’s death in 1965, HSBC Group took over Marine Midland Bank and the trust’s control. The trust now has $136 million in assets, but it is questionable whether its gifts honor Fuld’s original wishes. For example, in 2002, HSBC gave $6 million from the trust to Duke University’s School of Nursing. Duke University is neither out-of-the-way nor in need of money. When HSBC made the gift to Duke, HSBC’s vice president was a member of the board of visitors of Duke’s Terry Sanford Institute of Public Policy. She also had two children who attended Duke. In 2006, HSBC charged the trust almost $600,000 in management fees.

Another example: In 2004, the Internal Revenue Service began looking into five orphaned foundations managed by two Manhattan lawyers. From 1998 to 2005, one of the foundations lost 60 percent of its assets’ market value. Two others lost more than 35 percent of their value during that same period. The other foundations showed no growth. In 2003, the attorneys paid themselves $99,000 each in management fees. One of the foundations made a gift of only $500, but the attorneys paid themselves $6,500 each for managing the foundation.

Philanthropic caution

The point is that a donor must be careful in making gifts or in deciding who will manage their foundation. It is not necessarily illegal to fail to honor a donor’s intent. Unless a donor specifically conditions a gift’s use, the donor’s original wishes may not be honored after the donor’s death. It is viewed, however, as unethical.

Billionaire philanthropist Warren Buffett said it best: “When people see donor intent get ignored or twisted, it has to discourage philanthropy.”

John D. Copeland, J.D., LL.M., Ed.D., is an executive in residence at The Soderquist Center for Leadership and Ethics and professor of business at John Brown University in Arkansas.