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Must percentage of endowment interest be spent annually?

Your Legal Questions Answered

Must percentage of endowment interest be spent annually?

Our 501(c)(3) corporation has an endowment fund. Is there, by law, a requirement that a certain percentage of the interest be spent annually?

If your organization is a public charity and not a private foundation, there no federal tax law requirement, and no state law requirement that I am aware of, to spend a certain percentage of endowment funds every year. (See Ready Reference Page: Calculating Public Support Percentage.”)
If your organization is a private foundation, you are required to use or distribute 5% of the value of your net investment assets each year for charitable purposes. These answers apply whether the fund is a true endowment, i.e. given by a donor or donors with a prohibition against spending anything but income, or merely accumulated surpluses and reserves set aside to be treated as endowment by the Board.
Under the Uniform Management of Institutional Funds Act, which has now been superceded in the states that had enacted it, a charity may spend appreciation above the “historic dollar value” — i.e. the original value — of a donor-restricted endowment gift. (See Ready Reference Page: “The Uniform Management of Institutional Funds Act Sets Rules for Charitable Endowments”) All states except Pennsylvania have now adopted the newer Uniform Prudent Management of Institutional Funds Act, which permits expenditures without regard to the historic dollar value, but may limit the amount that is deemed to be prudent to a maximum of 7% of the fund per year. (See Ready Reference Page: "New UPMIFA Sets Rules for Management of Charitable Funds”)  Pennsylvania has a separate law that permits charities to determine income on donor-restricted endowment funds to be an amount between 2% and 7% of the average value of the fund over three years.  Such minimum has to be treated as available to spend, but does not necessarily need to be spent during the year and can be carried forward for spending later.
Sen. Chuck Grassley (I-IA), ranking member of the Senate Finance Committee and one of the prime movers of the charitable “reforms” in the Pension Protection Act in 2006 (See Ready Reference Page: “Congress Passes Charitable Reforms, Approves Limited Giving Incentives”), has been suggesting that public charities, especially educational institutions, should be required to spend at least 5% of their endowments annually, like private foundations. He seemed to have a better argument before the stock market tanked in 2008-2009 and endowments followed suit.
Tuesday, January 19, 2010

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