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New Laws Affect Endowment Gifts

May 18, 2012

How UPMIFA law impacts the spend of interest and dividends.

There have been two law changes affecting charitable endowments. The first was the Uniform Management of Institutional Funds Act (UMIFA) that was passed in the early 70’s. In 2009 this law was updated and the Uniform Prudent Management of Institutional Funds Act (UPMIFA) was signed into law by most states.

Many endowment donors continue to make endowment gifts to the charity of their choice and in their gift instrument, they indicate that the charity may spend the interest and dividends generated by their gift but should retain the rest in perpetuity. As those of you who are familiar with UPMIFA, the concept of spending interest and dividends and retaining the rest (net capital gains) has been replaced by a total-return investment management concept wherein the annual spending about is determined via the implementation of a spending policy applied to the endowment’s market value. The question for today is whether the donor’s wishes override the provisions of the UPMIFA laws.

As with most questions of this nature, the answer is not easily stated. Getting to the correct answer is a process of additional questions and answers.

The UPMIFA laws are clear in stating that donor wishes are to be followed above all else. Therefore, a gift instrument that instructs the charity to spend interest and dividends each year should not be ignored. However, the UPMIFA law also clearly indicates that gifts given prior to the UPMIFA law containing language that specified the spending of interest and dividends does not change the UPMIFA requirement for the charity to adopt a total-return investment management practice and determine annual appropriations via the implementation of a spending policy applied to the endowment fund’s market value.

It would appear that the first thing a charity must do when it receives a new gift requiring the spending of interest and dividends, is to meet with the donor, explain the UPMIFA law, and then determine if the donor actually is requesting the charity implement a fund that the donor requires be administered differently from the charity’s other endowment funds. I believe that such donors are simply using century’s old language and will be pleased that their gift will be administered according to the UPMIFA laws.

In the event that the donor is actually requesting a fund that will be administered in a unique manner, the charity should first decide if it has the desire and capacity to administer unique fund requirements. Remember, once you accept a gift it constitutes a contractual relationship between the charity and the donor and the charity is contractually obligated to perform according to the terms of the gift instrument.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements.

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