UPMIFA vs. UMIFA
So here is the scoop on UPMIFA's notable changes:
Elimination of Historic Dollar Value. UPMIFA makes some important
changes to the law. Most notably, it eliminated the concept of historic
dollar value in accounting for endowment funds. Historic dollar value
posed a problem because it fixes value as of an arbitrary moment in
time. It also created confusion regarding how much could be spent
when a fund’s value dropped below historic dollar value. Some people
thought that interest and dividend income could not be spent until the
fund returned to historic dollar value. Others thought that the fund
could distribute interest and dividend income despite being
“underwater.” Unless a donor specifically addresses the question,
charities can apply a spending rate to the fund’s value (regardless of
whether it is above or below historic dollar value) and distribute
interest, dividends, and appreciation to the extent of that rate. The
critical question is that the rate of spending must be prudent.
Donor Specificity. Donors who want to exercise more control have to
be very clear in providing a specific restriction. Terms in a gift
instrument designating a gift as an endowment, or a direction or
authorization in the gift instrument to use only “income”, “interest”,
“dividends”, or “rents, issues, or profits”, or “to preserve the principal
intact”, or words of similar import do create an endowment fund of
permanent duration unless other language in the gift instrument limits
the duration or purpose of the fund; but do not otherwise limit the
authority to appropriate for expenditure or accumulate to the extent the
appropriation is prudent.
Spending Rate. As for setting a spending rate, UPMIFA doesn’t
specifically set a maximum rate. However, it does contain an optional
provision permitting a state to create a presumption that a spending
rate in excess of 7% is imprudent. The drafting committee points out
that setting a statutory percentage can pose problems in times of
unstable prices (inflation or deflation). Utah adopted this rebuttable
presumption, but South Dakota did not.
Cy Pres and Deviation. UPMIFA addresses the question of cy pres and
equitable deviation in the context of nonprofit corporations. It provides
that these doctrines should be applied by the courts to restricted
charitable funds held by nonprofit corporations.
Small Endowments. One of the more interesting reforms made by
UPMIFA is with respect to small endowments. These can be particularly
burdensome to charities when it becomes impractical, impossible,
wasteful, or unlawful to adhere to the terms of a restricted gift. In
recognition of this fact, UPMIFA permits a charity to release or modify
the restriction if each of the following conditions is satisfied: (i) the
particular fund’s value is below $25,000; (ii) more than 20 years have
elapsed since the fund was established; (iii) the charity adheres to the
donor’s intent to the extent possible; and (iv) the charity provides the
state attorney general with 60-days advanced notice. We would have
liked to have seen the $25,000 set at $100,000. In any event, those
states enacting UPMIFA should consider an annual inflation adjustment.
The charity can act even if the donor is still alive, but that might not be
wise if the charity is expecting additional money from the donor.
Donor Release of Restrictions. As was true in the past, the charity can
modify any restriction if the donor consents, but the fund must continue
to benefit the particular charity. UPMIFA grants no consent rights to
anyone other than the original donor.