When Donors Can't Keep Their Pledges

Wall Street Journal, By Shelly Banjo

As wealthy donors watch their portfolios shrink, a number of philanthropists are finding they may not be able to fulfill a multi-year pledge or continue annual contributions to charities they support.

"We are seeing individuals and families reconsidering amounts they are able to give on both an annual or regular basis," says Robert Seaberg, a managing director at Citi Global Wealth Management, a unit of Citigroup Inc.

Although a pledge is a legally enforceable contract in most states, charities typically don't enforce them. But a donor's ethics and reputation may still be on the line.

If you have been a steady supporter of a charity but have to cut back on your usual gifts this year, get in touch with the charity right away and consider alternative forms of donations.

Donors are likely to put off the uncomfortable or embarrassing situation of telling a charity they are suffering financially and can't meet a promised obligation, but it's important not to "procrastinate communicating with the charity," says Kim Wright-Violich, president of Schwab Charitable, a unit of Charles Schwab Corp.

Charities count on contributions from wealthy donors to help them overcome the financial pressures resulting from the deep decline in donations and dip in endowments. Since organizations typically treat pledges like receivables -- money they can rely on to fund program and operational costs -- the sooner you disclose your financial situation, the sooner they can form contingency plans to make up for the lost funds, Wright-Violich says.

Pledge Deferrals

Once pledge-fulfillment issues are on the table, advisers and charities can approach donors with a grant workout -- a strategy fit to benefit both the donor and charity. It may be helpful to include your lawyer in the discussion.

Most nonprofits will work with donors to restructure pledges and keep donors involved with the organization, says Doug Bauer, senior vice president of Rockefeller Philanthropy Advisors.

The goal is to "figure out what the donor needs to do to make the agreement work for the charity and what the charity can do to make it work for the donor," he says.

For instance, the charity might have earmarked funds from your pledge for a new building or program without having the resources to fully support the initiative. In that case, you may be able to withdraw the pledge and redirect whatever funds you can donate to a more pressing need within the organization.

The most straightforward solution to modify your gift is to reduce the amount of the grant or restructure the payment schedule. You may be able to delay the start of a gift agreement or put a pause on the pledge to resume the next year. You may also be able to spread the pledge out over a longer period of time to give, say, $50,000 over five to seven years instead of the common three-year period.

But be careful not to stretch it out too long, as financial situations and the values of gifts will likely change with time, Wright-Violich says.

If the donation is tied to a specific asset that has declined in value since you made a pledge, such as a vacation house or a stock you intended to sell, you may be able to ask charities if they can accept the equivalent value based on what the asset is worth today.

Explore Alternatives

Instead of an outright charitable gift, consider making a bequest in your will that a specific amount of money, a percentage of your estate or piece of property be given to the charity at death -- this move will show the charity you are still invested in the organization's mission.

If you still want to make the pledge now but want a steady income stream, a charitable gift annuity offers you a fixed monthly or quarterly check for your lifetime, after which the remainder will be given to charity. The annuity payments are considered to be a partial tax-free return of the donor's gift spread over years.

To make up for pledges you are unable to fulfill, offer to help raise money on behalf of the charity by hosting a fundraising event at your home or office. You could also appeal to your firm to provide pro-bono services in such fields as accounting or technology, or donate in-kind donations, such as paper or postage.

Write to Shelly Banjo at shelly.banjo@wsj.com