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Friday, March 10, 2017

When Should You Pursue Pledged Donations From an Estate?

Posted by Jason Gilbert

Duke University suffered a heavy blow to goodwill—and to its cash flow for years to come—due to public backlash over the school’s legitimate claim against the estate of a loyal supporter.

Last August, The Wall Street Journal (WSJ) reported that Duke University had made a claim on the estate of Aubrey McClendon for about $9.94 million in unfunded commitments. The claim was for nearly half of McClendon’s $18.75 million pledge, which was earmarked for athletics funds, scholarships and campus improvement projects.

Less than a week later, Duke withdrew the claim. “While submitting such claims is generally a routine procedure, in this case our action was misperceived as adversarial to the McClendon family, which was never the intention,” a Duke spokesman told the WSJ.

Technically, Duke did nothing wrong. When the estate went into probate, the only way for the school to collect any portion of that nearly $10 million commitment was to get in line with other unsecured creditors—who stand behind the secured creditors, the IRS and other government agencies.

Walking away from that $10 million had to be a tough decision that could place a significant financial strain on the organization. What could Duke have done to change the outcome? Maybe nothing. It’s always dangerous to Monday-morning quarterback these decisions without all the facts.

With that said, there is a lesson here: Perception is everything―and be aware of the other unsecured creditors. In the Duke case, we can only assume that one of the other creditors leaked the claim to the media to try to get Duke to withdraw it. Media outlets are going to take notice, especially when it comes to high-dollar gifts, a high-profile donor and a large, respected institution.

Perhaps the school could have done more to get out in front of the story. Maybe a public relations team could have found a way to drive home the point that Duke had done nothing wrong and to emphasize the positive things those dollars would achieve for the school and its students.

Once the story hit mass media, however, the school likely concluded that the reputational cost of pursuing that money was greater than the financial loss of not pursuing it. This is understandable when you think about the potential chilling effect on other donors, who might think twice about making a large commitment to an organization that has a reputation for being adversarial.

Weigh Financial Loss Against Public Perception

So the question remains: Under what circumstances should a nonprofit organization pursue pledged donations from an estate?

Ultimately, you and your board members have a fiduciary responsibility to do what is in the best interests of the organization and its constituents. It comes down to determining the financial impact if your nonprofit does not collect on the pledge.

For example, if major capital projects that were to be funded by the pledge already are underway, and the organization can’t absorb the costs without detrimental impact to its constituents, then decision makers would have to strongly consider making the claim.

Short of that extreme―as Duke found out―it might be better to just walk away.

Jason Gilbert

Jason has more than 10 years of public accounting experience, with specialized expertise in the real estate lending sector, including private equity funds, real estate crowdfunding and peer-to-peer portals. In addition to annual assurance services, he helps these clients with day-to-day accounting, the structuring of offering documents, financial close, back office operations and fund management software.

He is also a key member of the private education practice. He has extensive experience helping private schools with value-added initiatives, including key performance indicators and peer-to-peer benchmarking.

Jason is a member of the American Institute of Certified Public Accountants, the California Society of Certified Public Accountants, the California Mortgage Association and the American Association of Private Lenders. He earned his BS in business administration and his MBA from California State University, East Bay.

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