From time to time, charities are faced with what to do with a restricted gift when the terms of the donor’s restriction can no longer be fulfilled. The doctrine of cy pres permits the courts to modify the charitable purpose of a charitable trust to a purpose that reasonably approximates the designated purpose, where the designated charitable purpose becomes unlawful, impossible, or impracticable to carry out or where it becomes wasteful to apply all of the property to the designated purpose. The doctrine of cy pres may be applicable, for example, where funds are raised for a disease that is later cured or where the funds are greater than what is needed to achieve the stated purpose. In determining how to use the trust funds, the court will consider evidence of the settlor’s attitudes and interests that motivated the settlor’s selection of the original purpose. It is insufficient, however, to demonstrate that the trust funds could be better spent on some other purpose.
In the case of nonprofit corporations, the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) has codified a comparable process to modify inappropriate gift restrictions. A Michigan court faced with the issue of whether UMIFA § 7 (UPMIFA’s predecessor – adopted as A.R.S. § 10-11807 in Arizona) was a codification of the common law cy pres doctrine concluded that there are no significant differences between §7 and cy pres. The court reasoned that the differences between the operative terms in UMIFA – “obsolete, inappropriate or impracticable” – and the terms used under cy pres – “illegal, impossible, or impracticable, ,” are insignificant. In the case of small, old restricted gifts, UPMIFA provides a streamlined procedure for nonprofit corporations to release gift restrictions without seeking donor or court approval provided that they have given the Attorney General 60 days advance notice and both of the following apply:
- The amount of the gift is less than $25,000, ($50,000 in Arizona); and
- More than 20 years have elapsed since the donation.
In plain terms, if the exact wishes of the donor cannot be carried out, a charity may seek a release from the donor if the donor is still living. If a donor release cannot be secured, the doctrine of cy pres or UPMIFA’s provisions may be used to unilaterally release small old funds petition the court to modify the restriction. A court will take into consideration the original intent of the gift and determine a use that is as similar as possible to the intent of the donor.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.