Section 4 Changes to Funds

1. Legal Aspects of Fund Management Section 4 Changes to Funds

2. 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

3. 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

4. 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!

5. 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.

6. Federal Law

7. 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.

8. 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.

9. Single Entity Requirements • Commonly known as a “Community Foundation”, “Community Trust” or “Community Fund” • Common instrument – master trust or agency agreement – binding separate entities • Common governing body

10. Single Entity Requirements • Committed to a reasonable return on investments – balancing return of income with growth of principal • Financial reports required – showing all funds as components of the single entity

11. Variance Power • 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).

12. 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

13. Modification Under UPMIFA

14. 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 purposeof 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.

15. 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 fundif 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.

16. 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 investmentof 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.

17. 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:

18. 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 consistentwith the charitable purposes expressed in the gift instrument.

19. Checklist for Modification to a Fund

20. Checklist: Living Donor • Is donor requesting change? If board approves – OK. Create new agreement for signature. • If CF board requests the change ask permission of donor. • If approved by donor, create new agreement for signature • 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!

21. Favored Criteria for ChangeIf Living Donor Disagrees • Unlawful, • Impracticable • Impossible, or • Wasteful

22. Criteria for Change: Deceased Donor • Is donor deceased? If so, then: • Ask approval by board • If fund is old (over 20 years) and small (less than $25,000), give notice to attorney general and wait 60 days

23. Not Old and Small: Two Options 3. If fund is NOT old and small, then determine whether change is to: • management or investment of an institutional fund, or • charitable purpose of a fund or a restriction on the use of a fund

24. Change to Management or Investment 4. If change is to management or investment of an institutional fund, determine whether • the restriction is impracticable or wasteful; • the restriction impairs the management or investment of the fund; or • due to unanticipated circumstances, the modification will further the purposes of the institutional fund.

25. Change toManagement or Investment 5. If so, determine if change is consistent with the donor's intentions to the extent practicable. If so, • Ask for board approval • Notify attorney general • Petition court for approval

26. 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 • unlawful, • impracticable, • impossible, or • wasteful

27. Change to Charitable Purpose 7. If so, determine if change is consistent with the donor's intentions to the extent practicable. If so, • Ask for board approval • Notify attorney general • Petition court for approval