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Donor control at stake – Lawsuit has huge implications

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To what extent can donors control their philanthropic gifts decades after they die?

That question lies at the heart of a lawsuit in New York with major implications for philanthropy throughout the U.S.

In the lawsuit, a local charity and community foundation are fighting over the extent to which the foundation may divert funds from causes spelled out by donors, The New York Times reports.

The 150-year-old Community Service Society claims in the highly unusual 1995 lawsuit that the New York Community Trust abused its power to divert donations from the charity originally specified by the donors, the Times says.

The $1.9 billion-asset Community Trust, the largest community foundation in the U.S, unfairly diverted $8 million in donations dating back to 1971 that should have gone to the Community Service Society, the group claims.

The trust says it acted properly.

A Manhattan judge backed the claim of the society, ruling that while community foundations may divert funds, the trust erred in the case of the society, which aids the poor.

The judge set a strict new standard, ruling that funds could be diverted only when a “change of circumstance” affected a charity so much that it “would be likely to cause the donor to withdraw her support,” the Times reports.

The ruling is being reviewed by a state appellate court, and a decision is expected this spring or summer, the newspaper says.

The trust says the ruling guts a key role of community foundations in deciding where bequests are best spent, the Times says.

The outcome of the case could affect the way more than 500 community foundations throughout the U.S. hand out money to local charities.

Community foundations represent one of the most rapidly growing segments of the philanthropic world, managing more than $25 billion in trust funds created by wealthy benefactors.

Community foundations from throughout the U.S. have filed legal briefs backing the trust. The Council on Foundations, a national group that represents foundations, also backs the trust.

The state attorney general’s office supports the ruling and has called for an even stricter standard that would require community foundations to report all diversions to the state.

“This goes to the core of philanthropic giving in America,” David R. Jones, president of the Community Service Society, told the Times. This is a serious threat to people donating money if they don’t have security as to how it’s going to be used.”

But Malvin E. Bank, a Cleveland lawyer representing nine community foundations, says it’s “a mistake to undercut a concept and a system that has worked so well.”

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