Checklist of Items to Consider when Disbursing From Endowment Funds

12 septembre 2019 | Nicole K. D’Aoust

( Disponible en anglais seulement )

Charities enter regularly into gift agreements with donors who wish to establish or make contributions to endowment funds.  These are very exciting times for the charity and the donor as endowment funds enable the donor to maximize their gift and the charity receives a recurring source of income.  However, when charities ultimately disburse the money contributed to endowment funds, a number of issues can arise if the money is not properly disbursed, that is, if the money is not spent in accordance with the donor’s wishes and the documentation put in place at the time of the gift.  The checklist below is meant to be a resource for charities to consult as part of their due diligence before disbursing money from their endowment funds.

  1. What was the donor’s intent at the time the gift was made?
  2. What documentation is the charity relying on to establish the donor’s intent?
    • Is there a gift agreement?
    • Are there contemporaneous written notes or other documentation of the donor’s intent?
  3. Does the charity plan to use the disbursement in a manner consistent with the donor’s intent?
  4. How is the charity calculating the amount of the disbursement from the endowment?
    • Do the terms of the gift agreement specify only the “income” from the endowment is permitted to be spent, or can the “capital” also be spent?
    • Does the gift agreement contemplate a “total return” approach to disbursements?
    • How are “income” and “capital” defined?
    • Are there terms surrounding the timing of the calculation or the timing of the disbursement?
    • Are there any other relevant terms?
  5. Does the charity have an endowment fund policy and is it consistent with the gift agreement?
  6. Does the charity have an investment policy and is it consistent with the gift agreement?

In situations where there is no gift agreement, or there are inconsistencies between the gift agreement and any other documentation related to the gift, the charity should seek the advice of legal counsel.  It is important to do so since the consequences of not complying with a donor’s wishes are significant.  Charities can be exposed to potential complaints and legal claims.

A particular issue we have noticed in recent years is that some charities have updated their endowment policy in a manner that does not comply with the gift agreements they have entered into in the past and/or they have not updated their gift agreements to match their current endowment fund policy.

The most important thing charities can do to prevent future issues with their endowments is ensure that their gift agreements properly reflect the donors’ wishes and are clear on the terms of the endowment, particularly with respect to disbursements.  In addition, all other documentation related to the gift and the endowment should be consistent, including the charity’s endowment policy.  Finally, as a preventative measure, charities should educate their boards and staff about the types of issues that can arise with endowments and the importance of clear and consistent documentation.  Charities should also adopt document management systems that allow them to preserve documents and easily retrieve documents as needed.

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