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Using Endowment Funds During Any Emergency Situation, Such As Covid-19


If your organization has endowment funds, you may be tempted to dip into them for operating expenses in a situation like we have today with COVID-19. Many nonprofit organizations have endowment funds, which are donor-restricted funds that are intended to be invested and used in perpetuity to support the nonprofit’s charitable programs.

Nonprofits need to be cautious about how much they spend from their endowment funds to be in compliance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA) (Probate Code § 18502, et seq.). Spending more than 7% of the fair market value of an endowment fund may create a presumption of imprudence (Prob. Code, § 18504, subd (d)).

Before your organization decides to invade principal or borrow against the principal, which is not permitted, the board should contact the donors to inquire whether they are willing to release or modify restrictions to allow for more spending authority. (Prob. Code, § 18506, subd. (a)).

Charitable organizations that hold endowment funds that are more than 20 years old, and the total value of the funds is less than $100,000, may release or modify the restrictions on the endowment funds after 60 days written notice to the Attorney General and the donor’s last known address. (Prob. Code, § 18506, subd. (d).) In the notice to the Attorney General, the nonprofit must show how the endowment has become unlawful, impossible, impracticable, or wasteful to operate with the restrictions. The notice should also propose an alternate use that is consistent with the charitable purposes expressed in the gift instrument. (Prob. Code, § 18506, subd. (d)).

For endowment funds over $100,000, charitable organizations may seek court approval to modify restrictions in endowment funds. The Attorney General must be given notice of the petition. The organization should be prepared to demonstrate either the purpose of the restriction has become unlawful, impracticable, impossible to achieve, or wasteful, or that restrictions in the gift instrument regarding management or investment have become impracticable, or wasteful, or that due to circumstances not anticipated by the donor, a modification on the restriction will further the purposes of the fund. (Prob. Code, § 18506).

Notice to the Attorney General can be made to the following addresses:

For Petitions related to Northern California:

Office of the Attorney General, Charitable Trusts Section
455 Golden Gate Avenue, Suite 11000
San Francisco, California 94102-7004

For Petitions related to Southern California:

Office of the Attorney General, Charitable Trusts Section
300 South Spring Street
Los Angeles, California 90013-1230

If a nonprofit organization does not follow the rules, it is possible that the Attorney General could bring an action to enforce the terms of a restricted gift. An officer, director, or voting member might be able to challenge a breach of trust. See, e.g., Corp. Code §5142 (for California nonprofit public benefit corporations).

Before your organization is tempted to spend more than is allowed under UPMIFA, be sure you have the correct procedures in place.

For questions or more information about this article, please contact Donita Joseph at djoseph@windes.com or at 844.4WINDES (844.494.6337).