While the market was near its lowest point in March of 2009, the North Carolina General Assembly adopted the Uniform Prudent Management of Institutional Funds Act, known as UPMIFA. Both Virginia and Texas had adopted their own versions of UPMIFA earlier. This new technical law gives increased flexibility to charities handling their endowments, permitting them better control over spending funds and more ability to alter endowment terms. These improvements for charities can also simplify the work of CPAs auditing charities or preparing IRS Forms 990 for them. Also knowledge of this new law can help charities to utilize this new law to fulfill better their charitable missions.
UPMIFA governs endowment funds, which are funds held by institutions for exclusively charitable purposes, not wholly spendable on a current basis. CPAs refer to these funds as permanently restricted, as contrasted to temporarily restricted funds such as funds a charity designates itself as an “endowment fund” for its own use. Recent changes in the accounting rules and reporting on new IRS Form 990 make these classifications critical.
UPMIFA provides standards of conduct for managing and investing institutional funds which are important for boards to consider, but also to document. But the real key of UPMIFA is its flexibility for spending endowment funds. While donor intent expressed in a gift instrument is always of paramount importance, UPMIFA makes it clear that provisions requiring use of only income or dividends (or to preserve the principal intact, or similar terms) do not control the board’s ability to expend or accumulate endowment fund assets unless the donor has expressly said so by taking the funds out of UPMIFA or specifying percentage or dollar limits.
Without more express limitations, the institution can spend funds as it determines to be prudent for the purpose of the fund. In doing so, the charity must consider (1) the duration and preservation of the fund, (2) the purposes of the institution and fund, (3) general economic conditions, (4) possible effect of inflation or deflation, (5) expected total return, (6) other resources of the institution and (7) investment policy of the institution. If the charity addresses the preceding points (and preferably documents its analysis) it can spend more than the income of an endowment fund, and may spend into the original (historic) value of assets of the fund.
UPMIFA’s predecessor statute limited spending to only growth/income above the original historic gift amount. That limitation froze many funds during the recession, leaving charities with strong endowments and no legal way to use them when perhaps they needed them most. As a result of the recession, all but one state have now adopted UPMIFA, allowing charities to tap their endowment resources when needed.
As important as the spending rules of UPMIFA are, the provisions to alter an endowment under UPMIFA may prove even more valuable in the long run. If a charity can demonstrate to a Superior Court and the Attorney General that the limitations in a gift instrument are unlawful, impracticable, impossible to achieve or wasteful, then the restrictions can be changed. Management and investment restrictions can be for similar reasons but also if they impair the fund or if there are circumstances the donor did not anticipate. A living donor can generally consent to release any restrictions.
For smaller funds that have been in existence for a number of years, the institution itself can modify restrictions consistent with the charitable purpose without court approval after giving notice to the Attorney General. (In North Carolina this provision applies to funds under $100,000 that have been in existence for 10 years; in Virginia funds under $50,000 for 20 years; and in Texas funds under $25,000 for 20 years. Virginia also allows non-judicial modification of any fund less than $250,000 with the Attorney General’s approval.). Many charities have hundreds of tiny endowment funds left from the fundraising customs of years ago. Proper utilization of these UPMIFA change provisions could eliminate complicated record keeping and accounting for these tiny funds, through the UPMIFA modifications.That simplification could greatly assist the charity.
UPMIFA is a powerful tool allowing charities to best utilize all of their assets to fulfill their charitable missions.