August 21, 2023
Managing Charitable Funds
Take-Away: Changing the restrictions of a charitable gift is possible, but not everyone can participate in the legal proceedings brought to modify, or eliminate, that restriction or condition.
Background: Like many states, Michigan has adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Yes, yet another acronym to remember. The introduction to this statute states that it is “to establish duties and obligations of nonprofit, charitable institutions, in the management and use of funds held for charitable purposes.” [MCL 451.921-931.] The law covers endowment funds and gift instruments under which property is granted to, or held by, an institution as an ‘institutional fund’, i.e., defined as used exclusively for charitable purposes. The law also applies to any charitable trust that had both charitable and noncharitable interests, but only after all noncharitable interests have been terminated. The law does not apply to or affect the validity, construction, interpretation or management of any other trust, estate or other governing instrument, e.g., a discretionary trust with a charitable beneficiary.
Duties: Subject to the donor’s intent as expressed in a gift instrument, an institution that manages and invests an institutional fund shall consider the charitable purposes of the institution and the purposes of the institutional fund. [MCL 451.923(1).] In addition to the duty of loyalty, each person who is responsible for managing and investing an institutional fund must manage and invest the fund in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. [MCL 451.923(2).] To meet these duties, the institution may incur only costs that are appropriate and reasonable in relation to the assets, the purposes and the skills available to the institution.
Investments: The law also contains extensive provisions with regard to the management of investments, e.g., modern portfolio theory, prudent investor rule, diversification, retention or disposition of gifted assets, rebalancing, etc. [MCL 451.923(4); 451.924; 451.925.] For those who sit on a nonprofit board, they would be wise to review the factors that must be taken in consideration when investing institutional funds. [MCL 451.943(5).]
Modification of Restrictions: The UPMIFA also confers on a court, on application of an institution, the authority to modify a restriction contained in a gift instrument with regard to the management or investment of an institutional fund if the restriction has become impracticable or wasteful, if it impairs the management of investment of the fund, or if, because of circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the charitable fund. [MCL 451.926(2)] In such a proceeding the institution must notify the attorney general of the application, and the attorney general is then given an opportunity to be heard. “To the extent practicable, any modification shall be made in accordance with the donor’s probable intention.” Similarly, if a particular charitable purpose or a restriction contained in a gift instrument on the use of an institutional fund becomes unlawful, impracticable, impossible to achieve, or wasteful, a court on application of the an institution, may modify the purpose of the fund or the restriction on the use of a fund in a manner consistent with the charitable purposes expressed in the gift instrument. The institution must give notice to the attorney general, and the attorney general will be given an opportunity to be heard. Note, however, that the statute does not give the donor, or the donor’s successors, an opportunity to be heard unless that right has been retained in the gift instrument.
While there are few reported court cases dealing with the UPMIFA, a recent New Hampshire Supreme Court decision clarified who may bring an action to participate in a proceeding under the UPMIFA to remove a restriction on a charitable gift.
In re Robert T. Keeler Maintenance Fund for the Hanover Country Club at Dartmouth College, WL 4497988 (New Hampshire Supreme Court, July 13, 2023.)
Facts: A restricted endowment fund had been created under a decedent’s Will to support upgrades and maintenance of the Dartmouth College golf course. After deciding to close the golf course, Dartmouth College filed a petition under New Hampshire’s version of the UPMIFA to modify the restrictions and allow the remaining endowment funds to support the College’s varsity golf program and other physical education and recreational golf programs run by the College. New Hampshire’s law contemplates such a petition only by the institution and the state attorney general, like Michigan’s statute. In this case, the Foundation was a contingent beneficiary in the decedent’s Will and the fiduciary of the decedent-donor’s estate. Accordingly, the Foundation petitioned the court to intervene in the College’s petition based on its claim of ‘special interest’ standing. The Foundation claimed that the Will directed that the remaining maintenance funds should be directed to the Foundation because such funds were ‘in excess’ of what was necessary to upgrade and maintain the Dartmouth College golf course (and not for the purpose of maintaining the College’s golf program.)
Trial Court: The trial court denied the Foundation’s petition to intervene in the College’s initiated legal proceeding to modify the restrictions of the golf course endowment.
Supreme Court: The New Hampshire Supreme Court agreed that the Foundation did not have legal standing to participate in the legal proceeding to modify the restrictions that accompanied the golf course’s endowment fund.
UPMIFA: In lawsuits that involve charitable trusts, the general common law rule is that ‘potential trust beneficiaries may not bring an action to enforce the terms of such a trust.’ The Supreme Court did not feel that an exception to this general common law rule was warranted, even if there was a clearly identified class of potential beneficiaries. The Court felt that there was adequate protection by virtue of the state having adopted the UPMIFA with regard to the management of an ongoing charitable trust or endowment and that modifications of the endowment’s restrictions was clearly anticipated by the Legislature and covered by the statute.
Cy Pres: The Foundation also claimed that it had a right to intervene because the cy pres doctrine at common law allowed for modification of a trust upon the satisfaction of certain conditions, one of which is a general charitable intent to benefit the general public. However, the Supreme Court found that New Hampshire modified its cy pres doctrine with its adoption of the Uniform Trust Code, which does not require a general public charitable intent. Specifically, the Court found that the UPMIFA does not require proof of a general charitable intent. “When the charitable purpose of a fund or restriction becomes unlawful, impracticable, impossible to achieve or wasteful, the UPMIFA allows a court to modify the purposes of a fund or a restriction on the use of the fund in a manner consistent with the charitable purposes expressed in the gift instrument without being bound by the common law cy pres doctrine.” [See MCL 700.7413(1) which provides Michigan’s definition of cy pres, which only refers to the settlor’s general charitable intent.]
Conclusion: This judicial interpretation of the UPMIFA should provide some comfort to colleges, universities, foundations and other nonprofit organizations, that third-party intervenors will not be granted standing to intervene where the petitioner seeks to modify restrictions that govern an institutional fund that has been created and completed by a charitable gift. The New Hampshire decision also should serve as a prudent reminder to donors that if restrictions are imposed on their charitable gift, it is critical to document those restrictions and conditions along with the settlor’s intent/purpose in the gift agreement, or a separate gift agreement that is incorporated by reference into the gift instrument, that provide legal standing to the donor, or the donor’s successors and heirs, if the intent is for those successors to participate in any future modification of the donor’s charitable gift restrictions.