ENDOWMENT GIFTS: More Than Plug and Play
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Article reprinted with permission from Crain's Cleveland Business.
By Matthew A. Kaliff
Endowment funds fulfill a variety of functions for charitable organizations, from support for current operations to reserves for unexpected contingencies. For donors, endowment gifts represent an opportunity to provide ongoing support to a favorite organization or cause while leaving a personal charitable legacy. A basic endowment gift plan may provide for an annual distribution in perpetuity. In practice there are a variety of endowment fund types, spending models, and other considerations that planners should keep in mind as they assist clients in structuring testamentary and current endowment gifts.
It is important to note that the Ohio Uniform Prudent Management of Institutional Funds Act (UPMIFA) governs donor-restricted endowment funds held by charitable institutions. Among its provisions, UPMIFA provides default rules for the administration, spending and investment of donor-restricted endowment funds when the donor’s instructions in the gift instrument are not clearly specified. While UPMIFA is widely perceived as a sensible piece of regulation, its presence reinforces the importance of clearly expressing donor intent when drafting a gift instrument or endowment agreement in order to avoid UPMIFA’s default provisions supplanting donor intent.
As historically understood, a donor-restricted endowment arises from a gift of property to an institution for a specific or general charitable purpose in which the principal is kept intact forever and only the income is used. However, absent clear, detailed donor instruction to limit spending to income only, a common contemporary spending practice is to distribute a percentage of the endowment fund’s average asset value over a set time period. This approach is explicitly sanctioned under UPMIFA and overrides a donor instruction such as “use income only,” or “keep principal intact,” unless a more detailed instruction is provided. When considering an endowment gift, check whether the beneficiary organization has a board-approved endowment spending policy so as to estimate the value of the distribution the endowment can be expected to generate each year. Alternatively, a donor can specify a customized spending rate for a particular endowment gift.
Restrictions on endowment purpose can take several forms. A field of interest fund specifies support for an issue or program area, e.g., “hunger relief,” “scholarship.” A designated endowment fund provides a more narrow restriction, requiring distributions to support one or more identified programs of an organization. Many community foundations accept and administer designated funds for the benefit of other qualified charitable organizations. A term endowment gift typically requires the organization to spend all of the fund’s assets over a stated period of time. Finally, an unrestricted endowment gift gives the organization full discretion in determining what purposes will be supported with the annual distributions.
While most endowment gifts may fit into one of the types described above, creative planning can result in hybrid forms. For example, restrictions could combine term, designated and unrestricted endowment features, e.g., “to provide annual distributions to support the food delivery program for 10 years, and thereafter for unrestricted purposes.”
For any type of donor-restricted endowment gift, it is imperative to clearly memorialize the donor’s intent with the beneficiary organization. Often instructions in a will or trust direct the establishment of an endowment gift, e.g., “…to ABC Charity to create the Smith Endowment Fund of its unrestricted endowment.” While such minimal language may suffice for a standard unrestricted endowment gift, best practice calls for more detail for restricted gifts. At a minimum, endowment gift documentation should describe funding source, purpose, investment and spending policy, duration (if not permanent), timing of distributions, reporting, and recognition. An additional critical element is direction for alternative uses in the event changed circumstances prevent the organization from carrying out the original gift purpose as intended by the donor.
Typically a gift agreement conveys donor intent and endowment gift restrictions. Some organizations prepare fund guidelines in consultation with the donor in lieu of an agreement. A fund is established by the organization, to be operated in accordance with the guidelines, and the donor then directs in a lifetime or testamentary gift instrument that the gift be added to the fund and administered according to the fund’s guidelines. For example, a donor’s will, IRA, or life insurance policy could direct proceeds for an endowment gift to a charitable organization. Meanwhile, an agreement or guideline on file with the organization could more specifically define the purpose and other terms. Either approach is a flexible planning tool because these documents may be modified later without amending the underlying planned giving documents. Separate gift documentation has the added advantage of notifying the beneficiary organization in advance of the actual gift.
Early communication among the donor, estate planner and beneficiary organization maximizes the potential for smooth implementation of the gift and the preservation of the donor’s intent.
Matthew Kaliff is Assistant Director for Endowment Development, Jewish Federation of Cleveland. Contact him at 216-593-2831 or email@example.com.