Making Charitable Pledges
/In philanthropy, a pledge is a promise to make a donation in the future. When Jeff Bezos pledged $10 billion in 2020 to fight climate change, for example, he didn’t immediately donate $10 billion to the cause that year. He pledged to donate $10 billion over 10 years through the Bezos Earth Fund.
Pledges are especially common for major capital campaigns or long-term donors giving multi-year support. In such situations, the donor usually provides one installment toward the total pledge in the first year, and sets a schedule for donation payments in subsequent years. But pledges can also be used for one-time gifts. For example, if a donor says they will make a large donation for a capital campaign, they don’t necessarily move the funds immediately — they pledge to make that donation on a timeline agreed upon by the donor and the receiving nonprofit.
Why a Pledge Instead of a Normal Donation?
It may be advantageous for either the donor or the nonprofit to announce a large pledge to show commitment to a particular fundraising campaign or to the organization itself, and the timing of receipt of the donation can then be spaced out in ways that work best for the donor. A donor usually makes a pledge after discussions with the receiving organization about conditions and stipulations associated with the donation. It often involves a formal pledge agreement or a somewhat less formal but still legally binding “pledge card.”
A pledge can be a written or oral agreement, but if you pledge to give a substantial amount to a nonprofit, you will likely be asked by the nonprofit to sign a gift agreement, putting your pledge in writing. A simple “pledge card” might be used, or a more detailed donation pledge form spelling out the specifics of your timeline and any binding promises the nonprofit is to agree to (such as naming rights, scholarship specificities, etc.). Those are the most common ways nonprofits confirm pledges in writing. But to facilitate online giving, nonprofits are increasingly using “pledge” options on a normal donation website page and text-to-pledge functions, both of which can also be legally binding.
A formal gift agreement will be developed for most large gifts, and it will state the amount of the pledged gift and the timeline for payment or payments, as well as any terms relating to the pledge. The gift agreement may also clarify what the nonprofit can do if you are no longer able to make payments as promised. There may be a clause stating that in the event of your death, your estate will be expected to fulfill the pledge. These clauses are important to protect nonprofits when it comes to pledges with a long payment timeline.
Once you have made a pledge, the organization you are funding will assume and trust that the funds will be forthcoming as promised. Your pledge becomes part of their budget as they plan future operations and programs.
Pros and Cons
The enforceability of a pledge is governed by general contract law as well as applicable state laws. Not all pledges are enforceable contracts, but charitable pledges that are documented in writing usually are. As with many legal matters, it can get complicated. You can read more about the legal issues relating to pledges on IP’s resource page on pledge enforceability. Most importantly, we suggest you have an attorney review any gift agreement or contract before you sign.
Things think about when you are considering making a charitable pledge:
Be sure you are committed. Pledges are not to be taken lightly. Especially if the pledge is a large dollar amount, the nonprofit receiving your pledge will budget and make other substantial plans around it. When you pledge a gift, they will make budgets and plan programs with the expectation of that funding coming through. If there is a remote possibility that your financial situation may change significantly, a pledge might not be right for you.
Be ready to give details. If you make a pledge, especially one for a large amount, its conditions will likely be delineated in writing in the form of a gift agreement. Stipulations about naming rights, acknowledgements and program specifics tied to the pledge all need to be spelled out. Conversations about the details may produce some friction or quandaries about what happens in certain problematic scenarios, so be prepared to consider what happens if things don’t go according to plan.
DAFs and private foundations can’t fulfill a personal pledge. A personal pledge is just that. Payments from private foundations, charitable trusts or donor-advised funds cannot satisfy pledges made by an individual. A private foundation itself can make a pledge, but not on behalf of a person serving on its board or otherwise associated with the foundation. The IRS considers it an act of self-dealing for a private foundation to satisfy the pledge of an individual. If you want to make a grant from a foundation or DAF, you need to indicate at the time of making the pledge that the contribution will not be from you personally but from the foundation or DAF.
A pledge obligates your estate. If you die before fulfilling a charitable pledge, your estate is expected to fulfill the pledge. Legally, it is a debt that your estate contractually owes. Sometimes, the executor of an estate will successfully contest a pledge, but considerable case law has substantiated the general obligation of an estate to pay pledges.
Enforceability cuts both ways. Even though they have case law on their side, nonprofits generally try to avoid the bad press of publicly seeking enforcement of pledges that have not been fulfilled. Donors who pledge a donation but don’t feel their wishes are being fulfilled, or those who have a falling out with the nonprofit or have changed financial circumstances sometimes pursue claims and threaten to break the pledge agreement. Lawyers can get very expensive and reputations are priceless, so enforcement of pledges is usually a last resort for both donors and nonprofits. A pledge is considered the charity’s asset as soon as it’s made. So a nonprofit’s board may consider litigation against a donor to recover pledged assets part of its fiduciary duty.
Timing of tax considerations. Only contributions made during the tax year are deductible. If you pledged this year to donate $1 million to your favorite charity but pay the charity only half in this calendar year with the other half scheduled for next year, you can deduct only $500,000 this year. Paying a pledge with appreciated property is generally treated the same as selling that property and paying off the debt with the proceeds, which triggers capital gains tax on the appreciation. But there are no capital gains when satisfying a binding pledge with appreciated property. A charitable pledge satisfied by a donation of property that’s depreciated in value doesn’t entitle the donor to take a deductible loss.
Taking Action
Think long and hard. Be certain about your gift before making a pledge. Discuss it with the organization you want to give to, your financial advisor and others. Make a pledge when you are sure you want to and are certain you (or your estate) will be able to fulfill it.
Stay in contact after the pledge. If for any reason you cannot fulfill the pledge on the agreed-upon timeline, communicate this clearly to the recipient organization. Nonprofits plan operations and programs based on pledged funding, and it’s important to let them know as soon as possible if funding will not be forthcoming on the agreed-upon schedule. There may be room for negotiation or adjusting the payment timeline, but in any case, you’ll want to communicate early and clearly in order to avoid negatively impacting the organization.
