Protecting Gifts to Institutions at Risk of Failing

Giving to one’s alma mater (or child’s alma mater) has long been one of the most popular choices that clients use for tax-advantaged giving. But what if the client’s school isn’t around in the future?

A Huron Consulting report found that more than one in four U.S. private colleges are at risk of closing over the next decade. Further, five out of six (86%) college and university leaders are worried about their schools’ long-term financial viability, according to a survey by the American Council on Education. What’s more, one in five college and university presidents say they’ve had serious discussions about merging with another university or college, according to Hanover Research in collaboration with Inside Higher Ed.

These sobering statistics should give pause to any of your clients who make (or plan to make) significant gifts to their alma maters or other institutions they support.

There are myriad reasons for colleges closing. Here are four of the biggest that I see:
1. Demographics (decreasing birth rate means fewer available students to enroll).
2. Visa restrictions mean fewer foreign students.
3. Financial pressure from rising costs makes school unattainable for many.
4. Relevance. Artificial intelligence may make many degrees irrelevant or unnecessary, and colleges aren’t keeping up with emerging trends.

Restricted vs. Unrestricted gifts

If an institution your client supports may be at risk of closing, make sure your client gives on an unrestricted rather than a restricted basis. A restricted gift means the funds must be used for a stated purpose, such as a named program, scholarships or emergency relief to a specific chapter or location.

Unrestricted donations are generally more flexible and may be used wherever leadership determines they’re most needed. That doesn’t mean unrestricted gifts can be used for any purpose. The spending must still support the institution’s mission and comply with governance, budget and legal obligations.

Because unrestricted funds can be more easily deployed, there’s less likelihood of a donor pushing back or suing. For instance, I know of a case in which a donor left funds to their church specifically for maintaining the beautiful stained-glass windows. It was undeniably a restricted gift. However, over time, the church’s denomination changed, and the building fell into complete disrepair. The church battled with the family for years over the use of the funds. Sadly, a well-intentioned gift became a family-legacy nightmare. The gift wasn’t well thought out and consequently caused the family a lot of heartache rather than joy. Don’t let this happen to your clients.

Practical Guidance for Donors

If someone is considering a large endowment gift to a small or mid-sized private college today, it’s important to know the institution’s financial stability and long-range plan. I’m especially concerned about “planned gifts” that may not mature for 20 or 30 years and won’t be delivered at least until the donor passes away. That could be a generation later. That means the institution must be economically viable for a very long time. Most clients I work with use a donor-advised fund as an intermediary so that the ultimate destination can be determined more in “real time” rather than years in advance.

Here are some steps you can take, before, during and after clients commit to their gifting:

Pre-gift due diligence

Review the institution’s audited financials, bond rating and enrollment trend before a major or restricted gift.
Check independent financial-health assessments (for example, Forbes college rankings, Huron Consulting risk forecasts) for tuition-dependent institutions.
Ask how the institution has handled restricted funds during past budget shortfalls.
Treat clear, public donor communication about financial risk as a positive signal. Treat its absence as a red flag.

Structuring the gift

State the restriction unambiguously in the gift agreement, including the exact charitable purpose.
Add a reversion clause: funds return to the donor, the estate, a family foundation or a named alternate charity if the institution closes, merges or materially changes mission.
Pre-designate a cy-près substitute. Name an acceptable alternate purpose or institution rather than leaving that decision to a court down the road.
Require fund-specific accounting so the gift’s use can be tracked and enforced.
Consider a distress-trigger clause that’s activated by a bond downgrade, a deficit threshold or an announced closure. This gives the donor or estate standing to act early.

Adjust the timing

Weigh a permanent endowment against a time-limited or term-funded gift (for example, funding a program for 15 years rather than in perpetuity).
Consider general operating support rather than a narrowly restricted fund in which the donor trusts the current leadership.
For new programs, discuss “front-loading” a gift to seed the program fully rather than relying on small perpetual payouts.

Planning for heirs and successors

Draft the gift instrument so it’s enforceable by heirs or trustees, not dependent on the donor’s personal memory or informal correspondence.
Discuss the gift’s intent and structure with the family in advance, so successors understand what to expect and how to act if a dispute arises.

Ongoing monitoring post-gift

Revisit the institution’s financial health periodically for large or ongoing commitments. I’ve found declines typically unfold over a decade before a crisis hits.
Encourage clients to maintain regular contact with development or gift stewardship officers, not just at the time of the gift.

Nothing lasts forever, even deep-pocketed universities and other institutions that were founded centuries ago. One of the most valuable things you can do as an advisor is make sure you build contingencies into client gift structures to protect both their intent and the family’s legacy.