How Endowment Funds Can Create a Legacy.

            Lake
County has numerous worthwhile charitable non profit organizations that are
both deserve and need of charitable donations.
Endowment funds ensure that your donations will be used by the
charitable organization for certain specific purposes.  Consider, for example, St. Helena Hospital
Clearlake which seeks funds specifically to build a new Emergency Room (ER) in
Clearlake.  Endowments can stabilize the
long term future of the charity and can create a lasting legacy for the donors.  Let’s examine how endowments work.

            Endowments
are created by written agreement between one or more donors and a charitable
organization to use for specific charitable purpose(s).  The agreement expressly states the purpose(s)
for which the donation may be used; how the donations may be invested; how much
may be spent each year; and sometimes how long the fund is intended to last.  The agreement restricts the charity to accepting
the gift according to the express terms of the agreement.  To the extent that the agreement is silent on
any of these issues, California’s “Uniform Prudent Management of Institutional
Funds Act” (“UPMIA”) controls.  Because
the endowment is a restricted fund it is not part of the charity’s general fund
and cannot be used to pay general overhead.

            Once
established with an initial contribution, an endowment fund can receive further
contributions from other like minded donors.
Such additional contributions also become subject to the same fund
restrictions. 

            For
example, a donor may give money to a high school to establish a high school endowment
for the sole purpose of awarding an annual college scholarship to a worthy graduating
senior.  The endowment may specify the selection
procedures.  The endowment may also
specify that the high school may spend only the interest to pay the scholarship.

            If the
endowment fund agreement is silent, then California’s UPMIA law controls issues
related to the fund’s investment strategy, spending strategy, and duration.  Regarding investments, California law says
that the institution managing the fund, “shall manage and invest the fund in
good faith and with the care an ordinarily prudent person in like position
would exercise under similar circumstances.”
Meeting that standard entails consideration of numerous investment requirements,
including that the fund investor has diversified investment portfolio; that the
fund investor balance the competing needs to distribute for present charitable
expenses and for future use; and that the fund investor consider the general
economic conditions in making investment decisions.

            Next,
regarding payments, California law provides that spending over seven percent (7
%) of the funds average value during the last three years is considered to be imprudent
and in violation of the prudent investor rule.
The 7% rule is only a rule of thumb, however, and can be overcome by
showing that it was reasonably prudent under the circumstances to pay
more.  Naturally, the fund agreement can
provide otherwise.

            Endowment
funds can last indefinitely or can last for a term of years.  The endowment agreement can specify whether
the fund is a permanent endowment or term of years endowment.  If the agreement provides that the fund use
“income” only (or a similar concept) then California law treats this as a
permanent endowment.  A permanent
endowment should invest for growth and use only the investment income for
charitable purposes. 

            Anyone
wishing to further a particular charitable purpose may wish to contact those
charities whose mission encompasses the specific purpose.  If a charity already has an existing
endowment fund that is directly relevant then contributions can be made to the
existing fund.  If not, then perhaps the
charity may be willing to establish an endowment agreement for just such
purpose.   Lastly, gifts to an endowment
fund can be made while one is alive, or later through bequest after one dies.