UPMIFA turns 15: Happy birthday, maybe?
It’s been 15 years since the Uniform Prudent Management of Institutional Funds Act, or UPMIFA, was first enacted to replace the Uniform Management of Institutional Funds Act, or UMIFA. Today, even though nearly every state in the U.S. follows UPMIFA, the law’s complexity still poses challenges and questions for nonprofit organizations who administer so-called “donor-permanently-restricted gifts” to which the law applies.
Notably, the law does not apply to charitable trusts (which are governed by their own provisions), nor does it apply to donor-advised funds. UPMIFA also does not apply to endowments established by a charity using its own dollars which the charity either has earned or which originated from donors’ unrestricted gifts.
Following the thread of donors’ permanently-restricted gifts is an accounting imperative, and it’s easier said than done. Naming conventions within that accounting are very important to clearly distinguish between an “endowment” that was created by the charity with its own dollars and therefore not subject to UPMIFA on one hand, and “endowments” funded with gifts from donors with the intent that they be “permanently-restricted” on the other hand.
What's more, the term “endowment” takes on different meanings depending on the source of the underlying assets, adding yet another wrinkle. Indeed, some argue that charities should not refer to a fund as an “endowment” if the charity isn’t following UPMIFA because of the presumptions that may be attached to the term "endowment" in the minds of donors and the public.
UPMIFA requires that charities invest endowment assets to maximize total return. This is a departure from UMIFA, which was based on preserving “historical value,” a concept that became highly problematic following the 2008 economic downturn, when charities were prohibited from using endowment funds for the very purposes for which donors had originally given them--to keep the charity’s mission afloat during tough times to avoid interruption in service.
But “maximizing total return” under UPMIFA carries with it its own challenges. For example, as a charity holding the funds, you must pay close attention to diversification and also ensure that the endowment is in fact providing annual financial support to your organization according to a spending policy.
The long and short of it? The team at the community foundation strongly encourages you to contact us with your endowment questions. Our staff’s deep experience and familiarity with UPMIFA and other laws will help you sleep better at night, especially if you select the community foundation as the investment home and administrative back office for your endowment. The community foundation is dedicated to honoring your donors' intent, complying rigorously with the laws, and doing everything it can to help your mission stay strong for the people who count on your organization.
Space to grow: Advantages of the bargain sale
Whether your mission calls for office space, warehouse facilities, shared space, or all of the above, like most charitable enterprises, you need a physical location to serve your constituents. Unfortunately, you and other nonprofit organizations are frequently left empty handed after searching for competitively-priced commercial property to house operations.
Enter the charitable bargain sale, a giving vehicle that allows a donor to facilitate the transfer of much-needed real estate to your charity at a price you can afford, while at the same time earning the donor a tax deduction.
The bargain sale, frequently heralded as the earliest charitable giving vehicle, results in the real estate owner serving in both the role of a seller for the cash portion of the sale to your organization, and also in the role of a donor to your organization for the donated portion of the property.
As is the case with many types of charitable gifts, establishing fair market value of the subject real estate is critical and requires a qualified appraisal that complies with IRS regulations. Establishing the fair market value in turn determines the charitable donation portion, which is the difference between the fair market value and the lower cash amount paid by the charity to the donor/seller.
A post-pandemic world may create new opportunities for your donors to consider bargain sales of property to your organization. Indeed, nearly $430 billion in commercial and multifamily real estate debt is set to mature this year, opening up conversations about what property is really worth and how owners can most efficiently unlock its value. And of course, bargain sales are not limited to commercial property. The U.S. housing market is estimated to have gained more than $2.5 trillion in value in 2020 alone, bringing the total value of housing in the U.S. to over $36 trillion.
Contact the community foundation to learn how our team can help you find creative solutions to your real estate needs.
A footnote: Keeping up with tax law
If you’re having trouble keeping up with changes to the tax laws, you are not alone! If you are a subscriber to the Wall Street Journal, we highly recommend its recently-released tax guide. For a guide that does not require a subscription, Kiplinger offers a helpful summary of the changes effective for tax year 2020.