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July 8, 2024 Focus | Nonprofits

Here’s how to avoid common pitfalls when managing charitable assets

If one was to ask the leadership of a nonprofit about the biggest challenge facing the organization, the most common response likely would revolve around the organization’s financial sustainability and stability.

These leaders routinely are tasked with accomplishing more with less. At the same time, they may not have a firm grasp on the laws governing the expenditure of charitable assets.

A better understanding of these rules can help organizations satisfy their budget requirements and avoid several common pitfalls.

In Connecticut, the management of charitable assets is governed by the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which applies to organizations holding charitable assets as well as government entities holding funds exclusively for a charitable purpose.

Enforcement of UPMIFA is vested in the Attorney General’s office.

UPMIFA unequivocally states that an organization must honor the gift restrictions placed by donors. For example, a gift may be for a specific purpose, such as a capital improvement project.

Timing restrictions can also be specified. Donors also may not want the gift to be fully expendable on a current basis. This could be a new scholarship fund structured as a permanent endowment from which periodic distributions are made in perpetuity.

An organization that does not follow these restrictions may find itself with a donor-relations problem as well as an Attorney General inquiry.

Fiduciary duties

As a practical matter, nonprofit leaders would be wise to consider some immediate first steps to make sure they follow donor intent.

First, does the organization have records describing the gifts it received? If yes, these documents should be organized and the restrictions recorded. If not, the organization should take reasonable steps to assemble records.

Second, the nonprofit should look past the total account balance to see the allocation of organization assets that are unrestricted, restricted for purpose and those that are part of a permanent endowment, which may also be purpose restricted.

This overview will provide leadership with a more accurate summary of what assets are actually available to them for their projects.

And finally, the leaders should educate the full board of directors on these issues, so they can best fulfill their fiduciary duties to the organization.

Donor connections

On a positive note, understanding how UPMIFA impacts organizational finances can empower a nonprofit to fundraise effectively and strengthen its financial position.

While fundraising is often most effective with a specific goal to present to donors, an organization can inform donors of the plans but request that the gift be unrestricted so there is flexibility. Make sure to educate anyone soliciting funds that any promises they make to a donor will be binding on the organization.

And be careful with using the word “endowment” — which implies a permanent restriction — in any solicitation, written or otherwise, when what the organization really means is a financial nest egg.

Informed organizations also use written documents with any donor making a significant contribution. A good written document avoids confusion on how the gift can be used and does not need to be long or complicated.

A nonprofit might consider adding language that gives it the unilateral right to change the purposes and/or timing of the gift’s use, if the current gift terms become impractical or impossible.

And finally, if the donors are still alive, they can agree in writing to amend their gift restrictions. Organizations will find that these conversations do not have to be difficult. To the contrary, these conversations can strengthen their connection with donors.

Ryan Leichsenring is a tax partner with Day Pitney LLP in the law firm’s Hartford office.

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