FAQs - Endowments and Other Restricted Funds

What is an endowment fund?
An endowment is a gift to charity which, under the terms of the gift, may not be spent in its entirety. Typical endowment terms permit the expenditure of income but not principal, or limit on the percentage or amount of the fund that can be spent in any year.

How is an endowment created?
An endowment may be created by an gift agreement between a donor and a charity. An endowment may also be created when a donor leaves a gift to charity in a will or charitable trust. In each case, the gift document determines how much of the endowment may be spent by the charity.

What is a “board-designated endowment”?
The board of directors of a not-for-profit corporation may decide to treat funds as an endowment even though the donors of those funds did not impose any restriction on spending. A board-imposed spending restriction may be lifted by the board. Court approval is not required.

How much of an endowment may be spent without court approval?
The amount that may be spent is determined primarily by the gift document. For example, if the gift document contains a specific limit – for example, spend no more than 7% of the fund’s current value each year – the charity must abide by that limit. If gift document says spend income only, or simply says that the gift is “to be held as an endowment” (or words to that effect), then generally speaking the charity may spend only the income generated by the fund, and may not spend below the fund’s “historic dollar value,” or the original amount of the gift.

What if the endowment fund grows in value over time?
If an endowment appreciates, the law permits a board to spend the appreciated value, net of expenses, to the extent that it is prudent to do so. This determination must be made on a fund-by-fund basis. In other words, appreciation in one endowment fund may not be used to offset depreciation in another endowment fund. See “Advice for Not-For-Profit Corporations on the Appropriation of Endowment Fund Appreciation,” available on the Charities Bureau website (http://www.ag.ny.gov/bureaus/charities/pdfs/endowment.pdf).

What is a use restriction?
A use restriction is a donor-imposed limit on the purpose for which charitable funds may be used. For example, a donor may specify that funds be used for a certain type of medical research, to benefit the needy, to support educational or religious activities, or for a myriad of other specific charitable purposes. The law requires charities to abide by a donor-imposed restriction on use. Also, if a charity solicits funds for a particular purpose – for example, a building campaign – the funds must be used for the purpose stated in the solicitation, unless the donor agrees otherwise or the restriction is released by a court.

What happens if the charity needs to spend more of the endowment?
Basically, there are two ways to lift an endowment spending restriction. If the donor is available, the donor may agree in writing to lift the restriction on spending. If the donor is deceased or cannot be located, the spending restriction may only be lifted by a court.

What is cy pres?
Cy pres is a court proceeding to lift or modify a donor-imposed restriction on the spending or use of a charitable gift. Cy pres relief requires notice to the Attorney General and the donor’s consent if the donor is alive. Cy pres petitions should be submitted to the Attorney General’s Charities Bureau for review and comment before being filed in court.

Is there an alternative to cy pres to release an endowment spending restriction?
If the gift agreement can be amended by the donor, a spending restriction may be released by consent of the donor in writing. Cy pres is required, however, if the donor is deceased or cannot be located, or if the gift agreement cannot be amended by the donor (for example, an irrevocable trust).

Is there an alternative to cy pres to release a restriction on use?
A restriction on the use of an “institutional fund” held by a not-for-profit corporation may be released under Section 522 of the Not-for-Profit Corporation Law. That law allows a use restriction to be lifted or modified with the written consent of the donor; if the donor is deceased or cannot be located, a court order is required. Section 522 may not be used to lift an endowment spending restriction. Petitions for relief under Section 522 should be submitted to the Attorney General’s Charities Bureau for review and comment before being filed in court.

What is UPMIFA?
The Uniform Prudent Management of Institutional Funds (UPMIFA) was introduced in the New York State Legislature in 2009. As of this writing it has not been enacted into law. Among other things, UPMIFA would permit a not-for-profit corporation to spend its endowment funds if the board of directors determined that such spending was prudent after considering several enumerated factors. The spending of endowment funds would be permitted without court approval in some cases in which court approval is required under current law. The Attorney General’s Charities Bureau is monitoring the status of UPMIFA in the Legislature and will issue further guidance at the appropriate time.