Alert July 16, 2009

Massachusetts Passes Uniform Prudent Management of Institutional Funds Act

Governor Patrick signed the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) into law on July 2, 2009. UPMIFA modernizes the rules governing expenditures from endowment funds, both to provide better guidance on spending from endowment funds and to give institutions the ability to cope more easily with fluctuations in the value of endowments. UPMIFA applies to new and existing institutional funds and governs decisions made or actions taken after
June 30, 2009. As enacted, UPMIFA:

  • Adopts more explicit standards for the prudent management and investment of charitable funds. The standards are consistent with modern portfolio theory for making diversified investments and considering risk and return.
  • Permits delegation of the management and investment of charitable funds to external agents. Institutions are required to use reasonable care in selecting the agent, defining the scope of the delegation and reviewing the agent’s performance. The agent owes a duty of reasonable care in managing and investing the charitable funds.
  • Makes it easier to obtain release or modification of restrictions on charitable gifts. A donor may consent to the release or modification of a restriction contained in a gift instrument. UPMIFA clarifies the courts’ ability to modify restrictions or the purpose of a fund and gives the Supreme Judicial Court authority to rule that modification of restrictions on smaller funds (or such other situations as the court may provide) may be approved by the Attorney General without court action.
  • Changes the rules governing expenditure of endowment funds. The previous rules for appropriation from an endowment provided that net appreciation of an endowment fund could be spent if prudent, but appreciation could not be spent if it would take the endowment fund below its original value (the “historic dollar value limitation”). Under prior law expenditure of more than 7% of the value of an endowment fund in any year was presumed to be imprudent. UPMIFA eliminates the historic dollar value limitation and permits charities to spend the amount the charity deems prudent for the purposes and duration of a given endowment fund, taking into account several specific factors relating to the institution, the endowment fund and general economic conditions. The 7% presumption has been eliminated. Donors would be able to override the provisions of UPMIFA in the express provisions of a gift.