“Gift agreement” means here a written agreement between a donor and a charity concerning endowment funds the donor will give to the charity. The typical endowment fund has a specified purpose and a name, most often the donor’s name. Many endowment fund gift agreements also contain a spending rate provision, which spells out how much of an endowment fund and its earnings the charity may spend each year.

So what is the law concerning such gift agreements? The bedrock body of law is a state law that goes by the acronym UPMIFA. UPMIFA stands for Uniform Prudent Management of Institutional Funds Act. Just think of it as UPMIFA. UPMIFA is in force in every state except Pennsylvania. It is fairly uniform from state to state, but some states such as New York have tweaked the basic UPMIFA provisions a bit.

UPMIFA is essentially a body of rules. Some of its rules (for example, as to spending rate) can be overridden by the written gift agreement between donor and charity. Some of its rules can cause problems. What sort of problems? Here’s a real-life example:

• Donor is interested in making a very large endowment gift to Charity for Purpose X. Donor’s savvy lawyer, however, advises Donor to set up a private foundation instead. Why?
• Because the lawyer knows that under UPMIFA, if Charity violates the gift agreement sometime down the road by using the fund to support Purpose Y, the only party who will have standing to challenge Charity’s breach of Donor’s gift agreement in court will be the state attorney general.
• Upon learning this, Donor is aghast. Knowledgeable donors, by the way, have come to learn this without having to be so advised by their lawyers. That’s one reason a lot of endowment money has been diverted into DAFs (Donor Advised Funds).

Click here to download our free white paper “Everything You Need to Know About UPMIFA” for more information.

by Jon Tidd