Most non-profits understand that if a fund is a permanent endowment, the principal must be preserved in perpetuity. Still, in my practice I am often surprised by how little some fundraising professionals understand about the mechanics of gift restrictions – particularly the implications of permanent restrictions and legal meaning of the term “endowment.”
Forever is a Really Long Time. The maintenance of permanent endowment funds is usually unquestioned until the organization is being acquired by another organization or the donor’s intent for which the funds are to be used is impracticable, impossible, wasteful, or otherwise impairs the management of the fund. Non-profits are sometimes surprised that they can’t simply transfer endowment funds to another charitable institution without permission from the original donor or the courts.
The Default Rules. The default law that governs endowment spending in most states, including Arizona, is the Uniform Prudent Management of Institutional Funds Act (UPMIFA). UPMIFA is a relatively new development that replaces the similarly named previous uniform act, known as UMIFA. UPMIFA’s more flexible spending rules permit spending based on a prudence standard that takes seven factors into consideration.
Understand the Meaning of the Message. Most fundraisers know that the use of the term “endowment” without any reference to a limited term creates a perpetual fund under UPMIFA. Fundraisers should also be aware that any words indicating the funds are not expendable on a current basis can override the favorable spending rules in UPMIFA. For example, any reference to “historic dollar value” or a direction to spend only “income”, “interest”, “dividends”, or “rents, issues, or profits”, or “to preserve the principal intact”, or will result in a fund with less flexible spending rules than UPMIFA’s prudence standard. UPMIFA’s favorable spending rules can be overridden by any “gift instrument” so it is important for non-profits to understand what a gift instrument is.
What are Gift Instruments? Under UPMIFA, virtually any record can serve as a “gift instrument” that legally restricts the gift. For example, an e-mail, a jotted down note clipped to the check, a statement in the memo portion of the check or even the text of the solicitation letter can serve as part of a gift instrument that will override UPMIFA.
Consistency is Key. When communicating with donors about a fundraising campaign, consistency is key. It is not uncommon for a fundraising campaign to span several years and for each solicitation to have different wording regarding what the funds will be used for. We have had cases where we struggled mightily to track the various restrictions that emerged from numerous inconsistent solicitation letters. It’s important to choose your messaging carefully at the beginning of a campaign and to be consistent.
Modification of Restrictions. If unforeseen circumstances cause the non-profit to be unable to live up to its side of the bargain (that is, maintaining the restricted funds forever) there is a process for modifying the restrictions. UPMIFA permits the non-profit to obtain written agreements from the original donors modifying the restrictions so long as the funds will be used for another charitable purpose. Alternatively, the non-profit may request a court order releasing or modifying the restrictions under certain circumstances. In states that have adopted UPMIFA, there is a new process for releasing small, old funds without going to court by giving notice to the state Attorney General.