SECTION 4

CHANGES TO FUNDS

LEGAL ASPECTS OF FUND MANAGEMENT

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 aninstitutional 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 mannerconsistent with the donor's intentions to the extent practicable, arestriction in a gift instrument concerning the management orinvestment of an institutional fund if:

(1) the restriction is impracticable or wasteful;(2) the restriction impairs the management or investment of thefund; or(3) due to unanticipated circumstances, the modification willfurther 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 FUNDSSmall – 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 signatureb. 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 CHANGEIF LIVING DONOR DISAGREES

1) Unlawful,2) Impracticable3) Impossible, or 4) Wasteful

CRITERIA FOR CHANGE: DECEASED DONOR

2. Is donor deceased? If so, then:a. Ask approval by boardb. 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; orc. due to unanticipated circumstances, the

modification will further the purposes of the institutional fund.

CHANGE TOMANAGEMENT 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 approvalb. Notify attorney generalc. 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. unlawful, b. impracticable, c. impossible, or d. 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 approvalb. Notify attorney generalc. Petition court for approval