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When a donor attempts to cancel or withdraw from a charitable pledge, many organizations choose not to enforce the pledge in the spirit of donor and public relations. However, it is important to understand that charitable pledges can be legally enforceable obligations. Following is a summary of Texas law regarding enforceability of pledges.
To be enforced under general contract law, the charity should offer consideration in exchange for the pledge, whether this takes the form of donor recognition, naming rights, or other benefits to the donor. Benefits provided immediately (for example, putting the donor’s name on a park bench upon finalizing a pledge) may give the organization a better argument for enforceability in the future. In addition, any consideration given in exchange for a pledge should be clearly stated in the pledge agreement. Generally, the value of the consideration provided by the charity is not required to be equivalent to the contribution. In fact, consideration will generally be deemed adequate unless it is “grossly disproportionate” to the pledged donation. In determining the consideration to provide, it is important to ensure that donor benefits do not rise to the level of creating a “quid pro quo contribution,” requiring that the donor’s charitable deduction be reduced by the value of benefits received.
In addition to (or in lieu of) consideration, an organization can help ensure enforceability of a pledge by taking actions in reliance on the pledge. For example, beginning construction on a new building wing or purchasing equipment in reliance on a donor’s pledge could support enforcement. Reliance can take many forms, including inducing other donors to donate by publicizing the pledge, entering into contracts, or making long-term budgetary decisions. Any reliance anticipated at the time of pledge should be clearly stated in the pledge agreement, preferably with an acknowledgment by the donor that he or she understands that the organization will take action based on the pledge. An organization should also maintain detailed records of any consideration for or reliance on a pledge.
In addition, courts often seek to enforce charitable pledges, including viewing unilateral cancellation of a pledge by a donor as against public policy.
If you have any questions regarding enforcing charitable pledges, please feel free to contact one of the attorneys listed below. You may also view the alert in the PDF linked below.
This alert is for informational purposes only and is not intended to be legal advice. Transmission is not intended to create and receipt does not establish an attorney-client relationship. Legal advice of any nature should be sought from legal counsel.
To ensure compliance with requirements imposed by U.S. Treasury Regulations, Haynes and Boone, LLP informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
*Board Certified – Estate Planning and Probate Law and Tax Law by the Texas Board of Legal Specialization.