Uniform Laws UpdateUniform Laws Update—Probate Editor: Kieran P. Marion, Legislative Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602-1917, kieran.marion@nccusl.org. Guest Editor : Barry C. Hawkins, Shipman & Goodwin LLP, Stamford, Connecticut. Hawkins is a Uniform Law Commissioner and Chair of the national drafting committee for UPMIFA.

Probate & Property Magazine, September/October 2009, Volume 23, Number 5

Uniform Laws Update | Probate

Uniform Laws Update—Probate provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.

The enactment process for the 2006 Uniform Prudent Management of Institutional Funds Act (UPMIFA) has been extremely successful, and the end of 2009 should see just a few states remaining to enact it. As of July 2009, 43 states have officially enacted UPMIFA, and, of the remaining jurisdictions, all but two have indicated that UPMIFA will likely be introduced in 2010. This very rapid enactment process actually exceeds that of the 1972 Uniform Management of Institutional Funds Act (UMIFA), which was itself one of the most widely adopted statutes promulgated by the Uniform Law Commission.

Now that UPMIFA is on the verge of nearly national enactment as the primary state law governing the management, investment, and expenditure of endowments and other funds held for charitable purposes by nonprofit institutions, it is appropriate to reflect on some of the lessons learned, variations in the law, and the challenges going forward.

Optional Variations

UPMIFA contains three major options in bracketed text, and a smaller variation set forth in its Official Commentary to allow tailoring to reflect different state law situations without sacrificing uniformity of approach.

Of the optional provisions, the most widely accepted and adopted has been section 5, "Delegation of Management and Investment." Nearly every enacting state has opted to include the section as part of its enacted UPMIFA. Deleting section 5 from the Act would be appropriate only when existing state law already addresses delegation.

The second major choice in the uniform text is whether to include section 4(d) within the Act. Section 4(d) provides that appropriation for expenditure from an endowment fund by a covered institution greater than 7% of the fund's rolling 36-month average market value (or a shorter time period, depending on the length of time the institution has been in existence) is rebuttably presumed to be imprudent. This option provided for the continuation in UPMIFA of a statutory presumption enacted by a small number of states in their original UMIFAs. Only 14 of the current UPMIFA states have chosen to include this option in their laws, and one state that had the language in its UMIFA statute opted to delete it from its UPMIFA (and it appears likely that another will follow suit soon). There also have been some variations in the enactment of this option. Wyoming lowered the threshold for the presumption to 5%. Ohio went in the opposite direction and reversed the presumption, so that appropriations under 5% are irrebuttably presumed to be prudent.

Section 6(d) of UPMIFA deals with the modification of old and very small funds, and has by far produced the most variations among enacting jurisdictions. Section 6(d) allows the release or modification of a restriction on an old, small fund to be done through the charitable regulator, as opposed to a lengthy court process. Here, only the definition of what is "small" ($25,000 or less) and "old" (20 years) is left in brackets for tailoring to individual state needs, but states have been creative in adding other variations to this theme. The most common decision has been to enact UPMIFA with the default thresholds of 20 years and $25,000. No state has gone lower than $25,000, but amounts of $50,000, $100,000, and even higher have been enacted. Several jursidictions, including Colorado and the District of Columbia, have statutorily included inflation indexing, so that this section of UPMIFA will remain relevant in the future. Only Connecticut has rejected section 6(d) entirely and thus made no choices among the bracketed provisions.

Finally, for the Official Commentary option of requiring small institutions (value of all endowment funds being less than $2 million) to provide the charitable regulator with not less than 60 days' advance notice before spending an amount that would result in the fund having a fund balance below its historic dollar value (HDV), thus giving the regulator the opportunity to intervene and presumably prevent such an expenditure. New Hampshire and Maine are the only jurisdictions to enact this option.

Challenges Going Forward

The state of Maryland has enacted a version of UPMIFA that substantially deviates from the Uniform Act. Although the Uniform Law Commission provisionally considered it to be "substantially similar" to UPMIFA, it has a sufficient number of problems to "target" this enactment for a number of amendments in the future. Among the problematic non-uniform amendments are standards of care taken directly from UMIFA, whereas modifying and clarifying those standards was one of the principal reasons for creating UPMIFA to replace UMIFA.

In addition to carrying over outdated and unclear standards of care from the predecessor statute, Maryland's version of UPMIFA deprives unpaid directors of nonprofit institutions of the ability to delegate investment decisions to carefully chosen investment managers without fear of being "second guessed" for decisions that do not work out quite as expected.

Perhaps worst of all, in Maryland's version of UPMIFA, instead of clarifying previous ambiguities in UMIFA in the application of cy pres and equitable deviation principles, the state has amended its version of UPMIFA to make these principles even less clear, requiring courts to determine whether the donor of a gift had "manifested a general charitable intent" (whatever that may mean!)

In those states that have enacted UPMIFA substantially intact, the chief challenge in actual application is to resolve seeming conflicts between the law, as represented in UPMIFA, and the accounting presentation of endowment funds as required by the Financial Accounting Standards Board (FASB) in its guidance document FSP 117-1. That is an ongoing challenge, which will likely be reviewed in future articles dealing with so-called "underwater funds."

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