You are here

How can I stop my Church from withdrawing money from the “principal” of our endowment?

Your Legal Questions Answered

How can I stop my Church from withdrawing money from the “principal” of our endowment?

How can I stop my Church from withdrawing money from the “principal” of our endowment? Our church raises $100,000 a year but spends $250,000. Our pastor says we should be thankful we have the endowment for this purpose.

The first question is whether the “endowment” is really endowment. True endowment is donor-restricted money received from a donor who says to hold the principal in perpetuity and spend only the income for charitable purposes. In general terms, the principal of that money may not be spent.
 
Much of the money that charities call “endowment,” however, is actually set aside by the Board of the charity and is not restricted by the donor. Such funds are often called “funds functioning as endowment” or “quasi-endowment.” For financial accounting purposes they are “unrestricted,” while true endowment is “permanently restricted.” The Board-designated endowment is essentially a reserve fund of the organization, and as such can be spent by the organization for proper organizational purposes.
 
In those states in which the Uniform Management of Institutional Funds Act still applies, appreciation above the historic dollar value of the original gifts may be spent under certain circumstances. (See Ready Reference Page: UMIFA Sets Rules for Charitable Endowments.") In those states in which the Uniform Prudent Management of Institutional Funds Act has been passed, the rules may allow more leeway in spending. (See Ready Reference Page: "New UPMIFA Sets Rules for Management of Charitable Funds.")
 
Obviously, unrestricted reserve funds cannot be spent continually without facing serious financial issues. But whether to spend the reserve funds is a decision for the Board and such spending is not illegal. If the “endowment” is true donor-restricted endowment, that raises a different issue. The Board does not have the unlimited right to spend principal from true endowment. If the Board doesn’t respect its limitations with true endowment, the Attorney General should be very interested.
Thursday, February 3, 2011

Sign-up for our free weekly Q&A

Comments

With UPMIFA now the law in 46 states and introduced in two others, I wonder whether there really is "true endowment" anymore, in the restricted sense used in the answer. Absent VERY specific language in the gift instrument, the endowment board would have broad discretion to use income and principal for any proper purpose.

Unfortunately I think there is something to what you say, since trustees have wide latitude in determining what should be spend from "endowment." There is still some concept of fiduciary duty to the organization, however, and the need to retain some of the purchasing power of the gift. In fact, most large charities spend their "endowment" at a rate between 4.5% and 5%, thus retaining a significant portion as permanent endowment. In addition, FASB tells accountants that they should get boards operating under UPMIFA to say what portion of a gift is to be considered permanently restricted. Although that has no force of law, for the reasons I have previously expressed, I think it all ought to be considered permanently restricted under UPMIFA. (See Ready Reference Page: "Permanently Restricted Assets Should Be Considered Permanently Restricted Under UPMIFA.")

Add new comment

Sign-up for our weekly Q&A; get a free report on electioneering