LEGAL ASPECTS OF FUND MANAGEMENT
SECTION 4
CHANGES TO FUNDS
LAW OF RESTRICTED GIFTS
• Basic Rule: comply with donor intent
• Charities began in trust law – now primarily
nonprofit corporations
• Merging of legal concepts: corporate fiduciary
principles applied to trustees of trusts AND
trust law modification rules applied to gifts to
nonprofit corporations
APPLICATION OF TRUST LAW
• Courts have applied trust concepts of cy
pres/equitable deviation to nonprofit
corporations
• UPMIFA applies cy pres and equitable
deviation to charitable endowments held by
nonprofit corporations
MAKING A CHANGE
• State trust law doctrines of cy
pres (to change purpose) if
purpose becomes impossible,
impractical, illegal or perhaps
wasteful.
• Equitable deviation to change
implementation and
administration if purpose is
possible.
• Difficult to distinguish!
INDIANA TRUST LAW: CY PRES DOCTRINE
IC 30-4-3-27: (a) If property is given to a trust for a
benevolent public purpose and the property is to be
applied to a particular charitable purpose, and it is or
becomes impossible, impracticable, wasteful, or illegal
to carry out the particular purpose, and if the settlor
manifested a more general intention to devote the
property to charitable purposes, the trust need not fail,
but the court may direct the application of the property
to some charitable purpose which falls within the
general charitable intention of the settlor.
FEDERAL LAW
COMMUNITY FOUNDATION DEFINED
Treasury Regulations Section 1.170A-9(e)(10)(14) create the six “single entity” requirements
to combine multiple trusts, nonprofit
corporations or unincorporated associations into
a single entity known as a community
foundation for tax purposes.
EXCEPTION
Unless your organizing documents (bylaws
and/or articles of incorporation) state
otherwise, if a community foundation is a
nonprofit corporation that uses fund accounting
– i.e., it does not hold any fund in separate trust
or corporation – it is not required to meet the
six single entity requirements.
SINGLE ENTITY REQUIREMENTS
1. Commonly known as a “Community
Foundation”, “Community Trust” or
“Community Fund”
2. Common instrument – master trust or
agency agreement – binding separate entities
3. Common governing body
SINGLE ENTITY REQUIREMENTS
4. Committed to a reasonable return on
investments – balancing return of income
with growth of principal
5. Financial reports required – showing all funds
as components of the single entity
VARIANCE POWER
6. The power of the governing body to modify any
restriction or condition on the distribution of
funds for any specified charitable purpose or to
any specified organization, if in the sole
judgment of the governing body, such restriction
becomes unnecessary, incapable of fulfillment,
illegal or inconsistent with the needs of the
community.
Treas. Reg. Sec. 1.170A-9(e)(11)(v)(B)(1).
LIMITS ON VARIANCE POWER
• Exercised by the governing board
• Must be done in good faith
• Must be relative to charitable purpose or
organizational recipient – beware of
undesignating a restriction for endowment
• While a federal requirement, there may be state
law considerations pursuant to signed
agreements or contracts – resulting in review by
the Attorney General and local court of
jurisdiction
MODIFICATION UNDER UPMIFA
UPMIFA MODIFICATION: LIVING DONOR
IC 30-2-12-13 (a) With the consent of the donor in a
record, an institution may modify or release, in
whole or in part, a restriction in a gift instrument on
the management, investment, and purpose of an
institutional fund.
(b) A release under this section may not allow an
institutional fund to be used for purposes other
than the charitable purposes of the institution
affected.
MODIFICATION: DECEASED DONOR
(d) An institution may petition a court to modify,
in a manner consistent with the gift instrument,
the charitable purpose of a fund or a restriction
on the use of a fund if the charitable purpose or
use becomes unlawful, impracticable,
impossible, or wasteful. An institution shall
notify the attorney general of a petition under
this subsection. A court shall provide the
attorney general an opportunity to be heard on
the petition.
MODIFICATION: DECEASED DONOR
(c) An institution may petition a court to modify, in a manner
consistent with the donor's intentions to the extent practicable, a
restriction in a gift instrument concerning the management or
investment of an institutional fund if:
(1) the restriction is impracticable or wasteful;
(2) the restriction impairs the management or investment of the
fund; or
(3) due to unanticipated circumstances, the modification will
further the purposes of the institutional fund.
An institution shall notify the attorney general of a petition under
this subsection. A court shall provide the attorney general an
opportunity to be heard on the petition.
MODIFICATION: SMALL AND OLD FUNDS
Small – less than $25,000
Old – Over 20 years
(e) If an institution determines that a restriction in a
gift instrument on the management, investment, or
purpose of an institutional fund is unlawful,
impracticable, impossible, or wasteful, the
institution shall notify the attorney general. Not
more than sixty (60) days after providing notice
under this subsection, the institution may release
or modify all or part of the restriction if:
MODIFICATION: SMALL AND OLD FUNDS
(1) the value of the institutional fund subject to
the restriction is less than twenty-five thousand
dollars ($25,000);
(2) the institutional fund was established more
than twenty (20) years earlier; and
(3) the institution uses the institutional fund in a
manner consistent with the charitable purposes
expressed in the gift instrument.
CHECKLIST FOR MODIFICATION TO A FUND
CHECKLIST: LIVING DONOR
1. Is donor requesting change? If board approves –
OK. Create new agreement for signature.
2. If CF board requests the change ask permission
of donor.
a. If approved by donor, create new agreement for
signature
b. If denied by donor, consider approval by board of
next steps:
1) Attorney general review
2) Petition court for approval
3) Expect donor to file opposition!
FAVORED CRITERIA FOR CHANGE
IF LIVING DONOR DISAGREES
1)
2)
3)
4)
Unlawful,
Impracticable
Impossible, or
Wasteful
CRITERIA FOR CHANGE: DECEASED DONOR
2. Is donor deceased?
If so, then:
a. Ask approval by board
b. If fund is old (over 20
years) and small (less
than $25,000), give
notice to attorney
general and wait 60
days
NOT OLD AND SMALL: TWO OPTIONS
3. If fund is NOT old and small,
then determine whether
change is to:
a. management or
investment of an
institutional fund, or
b. charitable purpose of a
fund or a restriction on
the use of a fund
CHANGE TO
MANAGEMENT OR INVESTMENT
4. If change is to management or investment of
an institutional fund, determine whether
a. the restriction is impracticable or wasteful;
b. the restriction impairs the management or
investment of the fund; or
c. due to unanticipated circumstances, the
modification will further the purposes of the
institutional fund.
CHANGE TO
MANAGEMENT OR INVESTMENT
5. If so, determine if change is
consistent with the donor's
intentions to the extent practicable.
If so,
a. Ask for board approval
b. Notify attorney general
c. Petition court for approval
CHANGE TO A CHARITABLE PURPOSE
6. If fund is NOT old and small, and change is to
charitable purpose of a fund or a restriction on
the use of a fund, then determine if the
charitable purpose or use is
a.
b.
c.
d.
unlawful,
impracticable,
impossible, or
wasteful
CHANGE TO CHARITABLE PURPOSE
7. If so, determine if change is
consistent with the donor's
intentions to the extent practicable.
If so,
a. Ask for board approval
b. Notify attorney general
c. Petition court for approval