The Law of Endowments
B. UPMIFA defines a gift instrument as
being a “record” – information inscribed on
a tangible medium or stored electronically
– including an institutional solicitation,
under which property is given. UPMIFA
thus makes it clear that a gift instrument
must be in writing, but expands the
definition to include email. Governance
documents, such as Bylaws, may be part
of the gift instrument. A record is part
of the gift instrument, however, only if
the donor and the charity were, or should
have been, aware of its terms.
V. HOW SHOULD A CHARITY
INVEST ITS ENDOWMENT?
A. Investment is a matter of state law.
In California, the Board is subject to
the rules on prudent investments as set
forth in both the Corporations Code and
UPMIFA (which unfortunately are not
entirely consistent).
B. The Corporations Code provides that
in making investments, a Board must
“avoid speculation, looking instead to
the permanent disposition of the funds,
considering the probable income, as well
as the probable safety of funds.” This is
an “old fashioned” and fairly conservative
statement of the prudent investor rule.
C. UPMIFA articulates a standard of
care for both managing and investing
an endowment. It requires the charity
to consider the charitable purposes of
the charity, and the purposes of the
endowment fund. It requires the Board
(and others responsible for managing and
investing) to act in good faith and with
the care of an ordinary prudent person,
and notes that the charity may incur only
appropriate and reasonable costs.
The charity must consider:
1. General economic conditions,
2. Effects of inflation and deflation,
3. Tax consequences,
4. The role of each investment in
the overall portfolio,
UPMIFA makes it clear that the term
“endowment fund” does not include funds
that the charity designates as endowment (these
are “quasi-endowment” funds).”
5. Expected total return from
income and appreciation,
6. The charity’s other resources, and
7. The needs of the charity and the
fund to make distributions and
preserve capital.
D. UPMIFA provides that an individual
investment must be analyzed in the context
of the total portfolio and the overall riskreward objectives, and that a charity can
invest in any kind of property that is not
inconsistent with the standard of care.
E. UPMIFA imposes a duty to diversify.
VI. HOW MUCH OF AN
ENDOWMENT CAN A CHARITY
SPEND?
A. UMIFA provided that “The governing
board may appropriate for expenditure
for the uses and purposes for which an
endowment fund is established so much
of the net appreciation, both realized and
unrealized, in the fair value of the assets
of an endowment fund over the historic
dollar value of the fund as is prudent ….”
Net appreciation includes realized gains
and unrealized gains.
Historic dollar value is “the aggregate
fair value in dollars of (1) an