Res Ipsa Loquitor
ThePrudent Management of Institutional Funds Act)
Law of Endowments
(The Uniform
By Erik Dryburgh | Adler & Colvin
I. WHAT IS AN ENDOWMENT?
A. To a donor, an endowment is a sum
of money given to a charity for charitable
purposes, with only the “income” being
spent and “principal” being preserved.
B. To an accountant, it is a fund which
is “permanently restricted.”
C. To a lawyer, it is an institutional fund
not wholly expendable on a current basis
under the terms of the gift instrument.
D. Thus, a “true” endowment is one
established or created by the donor. A
board-restricted endowment (or “quasiendowment”) is created when the Board
takes unrestricted funds and imposes a
spending restriction.
II. WHAT WAS UMIFA AND WHY
WAS IT ADOPTED?
The Uniform Management of Institutional
Funds Act (UMIFA) is a uniform law which
provides rules regarding how much of an
endowment a charity can spend, for what
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purpose, and how the charity should invest
the endowment funds. UMIFA was the
governing law in California through December
31, 2008. It was adopted because charities
and their lawyers were unsure how to define
“income” in the context of an endowment.
Many looked to trust law, which generally
defines “income” as including interest,
dividends and the like, but defines gains
as “principal.” Thus, charities invested
endowments in bonds and high-dividend
stocks, but passed by investments with
favorable growth prospects if they had a
low current yield. Consequently, long-term
yield suffered. The drafters of UMIFA
thought charities should be able to spend
a prudent portion of the gains earned by
an endowment.
III. SO WHAT IS UPMIFA?
A. UMIFA is thought to be out of date,
particularly as to management, investment,
and spending issues. In particular, the
post-dot.com “down” market resulted in
many “underwater” endowments, exposing
the flaws in the UMIFA spending rules.
B. UPMIFA (“Uniform Prudent
Management of Institutional Funds Act”)
was approved by the National Conference
of Commissioners on Uniform State Laws
in July 2006, and has been adopted in
virtually every state.
C. California adopted UPMIFA (Senate
Bill 1329) effective January 1, 2009. It
applies to funds created after that date,
and to decisions made after that date
for existing endowments (i.e., it will be
“retroactive”).
IV. HOW DOES AN ENDOWMENT
GET CREATED?
A. An endowment fund is a fund not
wholly expendable by the institution on
a current basis under the terms of the
applicable gift instrument. UPMIFA
makes it clear that the term “endowment
fund” does not include funds that the
charity designates as endowment (these
are “quasi-endowment” funds).