Many not-for-profits (“NFPs”) accept and rely on donations to carry out their missions. These donations vary in kind: one-time or recurring liquid gifts, physical assets, appreciated securities, digital gifts (like cryptocurrency), and more. Some gifts are general, donated so that the NFP can decide how to best utilize the contribution; other gifts come with restrictions (“donor restrictions”). Donor restrictions can specify how money is invested, spent, or for what the funds may be used. Restrictions are typically permanent and cannot be redirected to other purposes (without donor permission). NFPs are bound by law and their fiduciary duty to adhere to any restrictions attached to a gift.
All these donations support the NFPs’ immediate needs and long-term goals. Endowments are a type of planned gift that focuses on supporting the longevity of an NFP or a particular initiative. The original amount is invested and restricted in perpetuity; the income generated from the investment of the principal is used for the donor-specified purpose. Over time, this income supports an ongoing and long-term donor-designated initiative. At the same time, the donor-designated initiative is not guaranteed to foresee any changed circumstance that may render compliance with the restriction difficult.
Because NFPs serve a public interest and there are significant tax incentives to encourage charitable giving, charitable contributions and their use are highly regulated. By highly regulating these contributions, the IRS intends to prevent fraud, ensure funds are used for their intended public benefit purposes, and manage the associated tax incentives. As such, NFPs must ensure accurate reporting and proper usage of funds on their annual tax returns. Improper reporting or use can result in: severe fines, loss of tax-exempt status, lawsuits, and reputational damage.
The Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) is a model law governing endowments, adopted by 49 states including Illinois (760 ILCS 51, adopted in 2009). It specifically governs donor-restricted endowment funds, applying to true endowments and term endowments. UPMIFA does not apply to trusts, operating reserves, short-term investment accounts, or donor-restricted gifts that are not held in perpetuity. It guides NFPs on how to prudently invest and use endowment funds.
In 2006, UPMIFA replaced the Uniform Management of Institutional Funds (“UMIFA”) to strengthen protections for nonprofit assets by requiring prudent management and focusing on preserving a fund’s purchasing power to honor donor intent over time. The principal distinctions between the two acts concern spending authority and the framework for reconciling donor intent with an organization’s mission amid changing organizational and economic conditions.
Under UMIFA, an NFP could spend funds from endowments only up to the amount of appreciation above the historic dollar value (“HDV”), but never below. This resulted in NFPs being largely unable to use endowment funds because of external market forces affecting the market value of the endowment. Now, NFPs are better able to spend endowment funds regardless of the HDV because of the emphasis on a prudent approach to utilizing funds. UPMIFA provides specific factors for NFP governing boards to consider in evaluating and determining the prudence of spending endowment funds. This approach to determining how to spend endowment funds is more holistic and flexible than UMIFA’s HDV evaluation. By offering a more holistic and flexible approach dovetailed with a prudence standard, UPMIFA better supports s approach is more consistent with honoring the donor’s intent, which is to support the NFPs mission or particular initiative.
UPMIFA further preserves honoring the donor’s intent by providing opportunities for NFPs to modify the restriction. While appearing counterintuitive at face value, over time, modifying the donor restriction may be necessary to fulfill the donor’s original intent. There are a variety of reasons that may require modifying the donor restriction including: changed circumstance or obsolescence, inability to fulfill the restriction as necessary, mission alignment and effectiveness, financial stability and administrative efficiency, regulatory or legal changes, and equity and access considerations. Altogether, these reasons often support modification under doctrines such as cy pres or applicable versions of UPMIFA, where the goal is not to disregard donor intent, but to preserve it in a manner that remains practicable and impactful over time. Financial challenges or organizational preferences are insufficient to justify the modification of donor-imposed restrictions if they do not satisfy the donor’s original intent.
In Illinois, UPMIFA provides that NFPs may modify restrictions in one of three ways: 1) by obtaining written permission from original donor(s) to remove the restriction; 2) by petitioning a court for modification, particularly if the original restriction is impossible or impractical; or 3) if the funds falls within specific parameters, by providing notice to the AG. Each of these modification attempts should be accompanied with evidence of the donor’s intent and governing board approval of seeking such modification with appropriate justification.
If the donor is available, the most straightforward way to modify the restriction is by seeking written permission to remove or to modify the restriction. The new written restriction then becomes the governing restriction.
If the donor is unavailable to grant written permission or otherwise is unwilling, an NFP may bypass the donor and petition the court instead. When petitioning a court for modification, UPMIFA resembles the doctrine of cy pres, where the original purpose of the contribution is demonstrated to be impossible or wasteful. The NFP must draft a petition, provide notice to the Attorney General, who may clarify the reason for modifying the petition or seek additional explanation for how the modification satisfies the original donor’s intent, and then the court makes a final determination on the modification. The court’s determination on the modification then becomes the governing restriction if different from the original.
The third possibility to modify a donor-restriction relates to “small, old funds.” If the fund in question is over 20 years old and contains $50,000 or less in value, then the NFP may simply provide 60 days’ written notice to the Attorney General of the intent to modify the restriction. If the Attorney General objects to the modification, then the NFP must file a court petition seeking modification.
Opportunities to modify donor restrictions, and the requirements governing them, illustrate the careful balance UPMIFA establishes between organizational needs and donor protections. The enactment of UPMIFA represents a modernization of nonprofit fund governance, aligning legal standards with contemporary investment practices while safeguarding the donor’s charitable purpose and maximizing public benefit. Notably, it shifts from rigid historic-dollar-value limitations to a prudence-based framework, enabling nonprofits to manage and expend endowment funds responsively to changing economic conditions, provided donor intent is honored. UPMIFA acknowledges that adhering to donor intent may sometimes require measured flexibility, permitting adaptation of restrictions when strict compliance would hinder rather than advance the donor’s charitable objectives. These principles embody a deliberate equilibrium between respecting donor intent and ensuring charitable assets remain effective, relevant, and impactful over time.
NFPs are legally obligated to honor the original restrictions imposed by donors. Failure to do so can expose the organization to significant consequences, including severe penalties under IRS rules. Accordingly, any consideration of modifying donor-restricted funds should be approached with caution and only after obtaining appropriate legal counsel. This ensures that any adjustments are fully compliant with both UPMIFA and federal tax requirements while preserving the donor’s charitable intent.
For questions about the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), please contact Mollie E. Werwas at mwerwas@airdowerwas.com or Elvira Kovachevich at ekovachevich@airdowerwas.com.