Iowa Supreme Court Finds Use of Charitable Gift Subject to Restriction

On November 8, 2019, the Iowa Supreme Court ruled that a restriction of alienation placed on a charitable gift could not be modified. The Court found the restriction did not make the purpose of the gift impracticable, and therefore could not be modified under the Uniform Prudent Management of Institutional Funds Act or the common law doctrine of cy pres.

Background

In 1932, a wealthy hotel owner commissioned the famous Iowa artist Grant Wood to paint a mural for his hotel in Cedar Rapids. The mural became known as “The Fruits of Iowa.” Twenty-five years later, the owner had the mural taken down and separated into seven different paintings. The owner loaned the paintings to a local college with the understanding the paintings could be taken back any time after one year passed.

At some point, the ownership of the paintings transferred from the hotel owner to his foundation. In 1976, the foundation terminated the hotel owner’s agreement with the college and donated the paintings under a different set of stipulations. The five paragraph gift letter stated the paintings would “be given to [the college] and that this would be their permanent home, hanging on the walls of [the] Library.” The gift letter also stated additional instructions detailing how the paintings must be displayed and the generosity of the hotel owner recognized.

For many years, the college accounted for the paintings as unrestricted assets able to be sold and transferred. This greatly increased the value of the college’s endowment fund until eventually the paintings would make up seven percent of the value. During an annual audit in 2016, the college auditors determined the unrestricted asset classification to be a mistake. The auditors believed the paintings should be reclassified as permanently restricted net assets due to the restrictions stated in the gift letter regarding the “permanent home” of the paintings. This caused the value of the college’s endowment fund to decrease.  

In 2018, the college sought judicial interpretation of the terms of the gifts. The college argued the paintings were an unrestricted gift and should return to the unrestricted assets classification. Alternatively, the college asked the court to lift any restriction which came with the gift. This case came before the Supreme Court to decide whether the gift letter created a permanent restriction on the paintings and, if it did, whether the Court may modify any such restriction.

Permanent Restriction on Alienation

Charitable gifts may be made with conditions limiting the transferability of the gift. This is known as a restraint on alienation. Here, the issue is whether the donor intended the word “permanent” to refer to permanent ownership—rather than a temporary loan—or permanent location—to remain at the college. The Court found the foundation gifted the paintings with the intent the college would be the “permanent home.” The gift letter also described in great detail how the hotel owner would be recognized and connected to the paintings. The foundation devoted four out of the five paragraphs in the gift letter to specific requirements regarding the hotel owner memorial. The donor required a marble and bronze plaque be made commemorating the life of the hotel owner and recognition of his gift to that specific college.  This shows the intent to create a symbiotic relationship between the paintings and the memorial. To accomplish this goal, the paintings must be kept at the college next to the plaque. Therefore, a restriction does exist on the paintings requiring them to remain at the college.

Modifying Restrictions on a Charitable Gift

Because such a restriction did exist, the Court next determined whether it may be removed or modified. The Iowa Legislature created the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in 2008. Iowa Code § 540A. Under this law, there are three ways to release or modify the management, investment, or purpose of a trust. These include donor consent, court modification if the charitable purpose becomes unlawful, or court modification if the restriction becomes impracticable. The first two methods are inapplicable here. The foundation which donated the paintings dissolved in 1977 and therefore could not consent to any change. Additionally, there are no claims of illegality in this case. This left the college with the final option, court modification due to impracticability.

The UPMIFA is similar to the doctrine of cy pres which is codified in Iowa Code ch 125, § 86. Cy pres allows a court to modify a charitable trust in order to carry out the donor’s intent if the charitable purpose has become impracticable, unlawful, or impossible to fulfill. This prevents a trust from failing and the gift reverting to the donor rather than serving the intended charitable purpose.

Unless the trust states otherwise, cy pres may be used if:

• There is a charitable trust;
• The purpose of the trust has become impracticable, illegal, or impossible; and,
• There is a general charitable intent of the donor.

While there was no specific language in this case explicitly creating a charitable trust, the court found restrictions in the gift letter. In that way, the letter may be deemed to create a charitable trust. This trust was created to display paintings of a famous local artist which is a great benefit to the community. This demonstrated a charitable purpose. The issue in this case then hinged on whether the trust purpose had become impracticable.

Nothing indicates the purpose of the trust to honor the hotel owner and beautify the campus with famous paintings had become impossible or impracticable. There was no evidence of the need to relocate or sell the paintings. Additionally, the court found no sign the college wished to sell the paintings or change the permanent location. The college’s endowment did drop $5.4 million due to the reclassification of the paintings as a restricted gift; however, there was no evidence of financial difficulties because of this. If there was evidence of financial difficulties, this case may have had a different outcome. Therefore, the Court declined to use either UPMIFA or cy pres to amend the restrictions.

Charitable Agricultural Gifts

During estate planning, many begin to think of the legacy they will leave not only to their family, but also to the community. Some agricultural land owners choose to leave farmland to a charitable organization. There are many considerations to giving such a gift.

First, it is important to determine whether a charity can benefit from your land and what you hope to accomplish. Not all charities would benefit from owning farmland or be able to manage such a gift. Another important tip is to make your intentions known to your heirs. This can prevent any surprises down the road for your family. One other consideration is what you would like to happen to your gift if the charity no longer exists or cannot use it.

There may be both emotional and financial benefits to giving to a charity. No matter what you decide, it is important to consult an attorney who can help you find the best way to accomplish your estate planning goals.