Question: When Should We Use a Letter of Intent (LOI) vs. a Signed Pledge Agreement and Why?
Question: There has been some internal debate recently about when we should be using an LOI vs. a pledge agreement to document a gift commitment. When Should We Use a Letter of Intent (LOI) vs. a Signed Pledge Agreement and Why?
Answer:
LOIs are a common solution used to document a donor’s intention of supporting your organization, usually for gifts spread over no more than five years. Unlike a pledge agreement where the total amount of the pledge is accounted for the month and the year the pledge is signed, an LOI accounts for the gifts in the year the gift is received.
This is a particularly important distinction for unrestricted gifts to the annual fund.
Let’s say a donor agrees to give $5,000 per year over the next 5 years to the annual fund for a total of $25,000. It’s important to the donor to receive gift credit and recognition for $5,000 each year.
If a pledge agreement is signed, Financial Accounting Standards Board (FASB) rules require that the entire $25,000 be accounted for when the pledge is signed. Your financial reports would show $25,000 in year one and nothing in the subsequent four years. That’s a major disconnect with your donor’s intent.
In this example, an LOI could be used to document the donor’s intent of $5,000 per year to the annual fund. Your financial reports would account for the gifts across all five years they are received.
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