UMIFA Drafting Committee Meeting – January 2006
Issues for Discussion (as of
The following issues were raised
by Susan Budak, an observer who has been involved in our project. Following some comments I have added my
thoughts or questions for the committee (indicated “SNG”).
Section
2 – definition of endowment fund
Budak: The definition of an endowment fund contains
the phrase “or any part thereof.” Is
that phrase necessary? Can a single fund
be part endowment and part non-endowment?
Section
2 – definition of gift instrument
Budak: The definition of a gift instrument says that
a solicitation can be a gift instrument “if the solicitation indicates the
intent of the institution that the solicitation constitutes a gift
instrument.” I don’t see that
phraseology on solicitations I receive. Would you expect that UMIFA would
change the wording on solicitations as a result of its enactment—or were you
trying to describe current practice?
SNG: The
term gift instrument is trying to pin down, to the extent possible, what rules
govern a charity’s use of a fund. It has
to be something in writing, to protect both the charity and the donor. Budak’s comment raises the question of
whether an institution could say, “oh but we didn’t intend that solicitation
card to be a gift instrument.” If the
solicitation card is the only written document and the donor relied on it, I
don’t think the charity should be able to say it doesn’t control. Should we change the definition or add
clarifying language to the comments?
Budak: I think it would be helpful to discuss the
circumstances in which bylaws and minutes could be part of a gift
instrument. Perhaps I am too concerned
about the donor, but because a donor typically does not see these two types of
documents, it seems improper that his or her gift would be subject to language
in them. For example, what if the bylaws
or minutes of the governing board said that for all gifts received the
institution had the unilateral power to change the donor’s purpose (referred to
as variance power by community foundations and accounting literature). If the donor gives without knowledge of that
power and without the incorporation by reference of those minutes or bylaws
should the gift be subject to them? And
what about minutes of meetings or changes to the bylaws that occur after the
donor’s gift is given? Perhaps you could
state that specific bylaw sections or minutes of a particular meeting can be
one of several records constituting a gift instrument if they are incorporated
by reference in one of the other records for that gift.
Section
4 – spending rule
Budak: Do you need to make clear whether traditional
income (dividends, interest, rents, royalties) becomes
part of the fund or remains separate?
For example, let’s say a fund earns 2% of its fair market value this
year as dividends and interest. Can the
institution then spend 9% (2% + 7% of the fund) before triggering the
imprudence test? I don’t think that is
your intent since that is not how most spending rate policies are implemented,
but because there still are institutions that use the traditional
income/principal split and spend only income, I think it would help to make
that clear by stating that the total return of the fund (dividends, interest,
rents, royalties, and net realized and unrealized gains and losses) is added to
the fund.
SNG: Do we need to add anything to the statute or
comments?
Budak: Could UMIFA require that each year the
governing board make a binding determination of how much of the return is added
to hdv; how much is appropriated, and how much is saved for future years? The amount added to hdv would then be deemed
“principal.” This approach wouldn’t
solve the underwater endowment problem, however.
Budak: Section 4(a)(6)
tells the institution to consider “other resources of the institution.” The comments refer to “present and reasonably
anticipated resources.”
SNG: Is the statutory language ok as is?
Section
6(c) equitable deviation
Budak: In subsection (c) should the italicized
language be added:
“If, because of circumstances not anticipated
by the donor, a modification of a restriction contained in the gift
instrument will further the purposes of the institutional fund, or a
restriction contained in the gift instrument becomes impracticable or
wasteful and impairs the management or investment of the fund, the court, upon
application of an institution, may modify the restriction. [the last clause read: may modify a restriction contained in
a gift instrument on the management or investment of an institutional fund.]
Section
6(d) – Small, old fund modification
Budak: Should you also consider whether this should
be based on a percentage of the total assets of the institution? For some institutions, $25,000 is a significant
amount; for others $25,000 (or even $250,000) might be clearly insignificant.