THE NEW HAMPSHIRE UNIFORM MANAGEMENT OF INSTITUTIONAL FUNDS ACT

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1 THE NEW HAMPSHIRE UNIFORM MANAGEMENT OF INSTITUTIONAL FUNDS ACT A PRACTICAL GUIDE FOR CHARITABLE INSTITUTIONS, PRIVATE TRUSTEES AND THEIR LEGAL ADVISORS (with analysis, interpretation and answers to frequently asked questions) by Mary Susan Leahy Orr & Reno, Professional Association June 2003

3 Table of Contents The Purpose of the Statute...1 Which Institutions and Which Private Trustees?...1 An Overview of the Statute...4 Investment Authority and Responsibility...4 Delegation of Investment Management...5 Distribution of Endowment Funds...6 Authority to Distribute Net Appreciation...6 Limitations on Distribution of Appreciation...6 Right to Accumulate Income in Endowment Funds...8 Obtaining the Release of Unreasonable Restrictions on the Use of Institutional Funds...8 Frequently Asked Questions...9 APPENDICES RSA 292-B: The New Hampshire Uniform Management of Institutional Funds Act...A RSA 564-A: 3-b: The New Hampshire Uniform Prudent Investor Act...B RSA 292: 2-A, II: Private Foundation Required Provisions...C

4 THE NEW HAMPSHIRE UNIFORM MANAGEMENT OF INSTITUTIONAL FUNDS ACT A PRACTICAL GUIDE FOR CHARITABLE INSTITUTIONS, PRIVATE TRUSTEES AND THEIR LEGAL ADVISORS THE PURPOSE OF THE STATUTE RSA 292-B is the codification of the Uniform Management of Institutional Funds Act ( UMIFA ) in New Hampshire. It sets forth principles governing the investment and distribution of institutional funds, including restricted endowment funds, by charitable institutions and the trustees of certain charitable trusts. The purpose of the statute is to promote, by all reasonable means, the maintenance and growth of eleemosynary institutions by encourag[ing] such institutions and those who manage charitable trusts for the benefit of such institutions or other charitable purposes to adopt investment policies whose objective is to obtain the highest possible total rate of return [i.e., the greatest combined income and appreciation] consistent with the standard of prudence. RSA 292-B: 1. Prior to UMIFA and across the nation, there was little statutory or case law governing investing by governing boards of charitable institutions. A study commissioned by the Ford Foundation documented that there were real institutional concerns expressed about potential legal impediments to investing funds to achieve growth and maintain purchasing power. Although the Ford Foundation concluded that these concerns were more legendary than real, some institutions, particularly colleges and universities, wanted statutory law confirming their ability to invest endowment funds to achieve growth and maintain purchasing power. This provided the impetus for the development of UMIFA. Uniform Management of Institutional Funds Act (U.L.A.), Prefatory Note. Some of UMIFA s provisions, such as those giving governing boards the authority to hire investment counsel, to delegate investment management, to pay independent investment advisors and to purchase mutual fund shares confirmed authority that many institutions assumed and/or practiced. One provision of the statute governing endowment funds provided a clarification of the law that caught the attention of institutions and trustees. Depending on the desires of their benefactors or grantors, charitable institutions and trustees may hold institutional funds which are either unrestricted as to use of both principal and income or are restricted endowment funds. Under UMIFA, endowment funds are those institutional funds which are not wholly expendable on a current basis. RSA 292-B: 1-a, III. UMIFA clarified that governing boards may allocate the portfolio appreciation of their endowment funds between income and principal. This gives governing boards the ability to distribute some of the appreciation of an endowment fund to meet current

5 institutional needs rather than reinvesting all of it. This is a core principal around which UMIFA was constructed. In an investment environment in which dividends on stocks had become small or nonexistent, it was difficult or impossible for institutions to invest their endowment funds to produce sufficient interest and dividends for current needs and at the same time maintain the purchasing power of their portfolios. The language in some gift instruments appearing to limit distributions from an endowment fund to the traditional definition of income, that is, to interest and dividends, was seen as prohibiting governing boards from prudently investing their endowment funds to produce the highest total return consistent with a standard of prudent investing. The commentary to UMIFA explains: [T]hat a grantor who makes an outright gift to an educational, religious, charitable or other eleemosynary institution seldom makes a full statement of his intentions and that his unstated intention is usually quite different from the intention of a grantor who makes a gift to a trust for private beneficiaries. The assumption is that the grantor of a gift to an institution: (1) means to devote to the institution any return or benefit that the institution can obtain from the gift [and] (2) acknowledges the responsibility of the institutional management to determine the prudent use of the return or benefit over time.... Thus, in the case of a gift instrument which states no clear intention or merely echoes the rubrics of a private trust, the statutory rule of interpretation should apply. Uniform Management of Institutional Funds Act (U.L.A.), 3, Comment. Unless a gift instrument explicitly prohibits the distribution of net appreciation, restrictions in gift instruments that may appear to limit the distribution of any appreciation of an endowment fund, such as direction to use only income, interest, dividends, rents, issues or profits, or to preserve the principal intact are, in effect, ignored and the statutory provision of RSA 292 permitting distribution of some of fund s appreciation applies instead. RSA 292-B: 3. RSA 292-B also frees institutions from real or imagined investment constraints of the past by defining a standard for prudent investing. It encourages governing boards to adopt investment policies with the objective of producing the greatest total return of appreciation and income consistent with the standard of prudent investing. RSA 292- B:1. In fact, the statute does more than encourage. RSA 292-B: 6 provides that governing boards shall adhere to standards of prudent investment and distribution. This new authority and mandate for prudent investing would not have been sufficient in and of itself to change the way endowment portfolios were invested. On the other side it was also necessary to clarify the rules regarding accumulation of income and to permit governing boards to accumulate some of a portfolio s net income in situations where gift instruments purported to mandate distribution of a fund s income.

6 WHICH INSTITUTIONS AND WHICH PRIVATE TRUSTEES? RSA 292-B: 1-a, I defines an institution as an incorporated or unincorporated organization organized and operated exclusively for educational, religious, charitable or other eleemosynary purposes, or a governmental organization to the extent that it holds funds exclusively for any of these purposes. Thus, the term institution includes public charities, supporting organizations, private foundations, community foundations and any other eleemosynary organization. It also includes any governmental organization holding funds exclusively for eleemosynary purposes. UMIFA commentary cites as an example of a governmental organization holding funds for eleemosynary purposes, a public school with an endowment fund. Uniform Management of Institutional Funds Act (U.L.A.), 1, Comment. However, the New Hampshire statute expressly provides that gifts to and trust funds created by towns under RSA 31:19 and 19-a are not subject to UMIFA. These statutes authorize the establishment of trusts funds by towns for public purposes and acceptance by towns of gifts, legacies and devises for a broad range of public purposes. 1 Thus, it appears as though in New Hampshire UMIFA applies to funds held for eleemosynary purposes by governmental organizations other than towns. 2 New Hampshire is the only state of the forty-six adopting UMIFA that has, by express language, broadened the applicability of the statute to include institutional funds held by a fiduciary other than the institution itself. 3 The New Hampshire statute also governs private trusts where one or more institutions or other charitable beneficiaries are the only beneficiaries. RSA 292-B: 1-a, II. The fact that a non-charitable beneficiary might have rights to a fund upon violation or failure of the purposes of the fund does not disqualify a fund that otherwise has only institutional or other charitable beneficiaries. RSA 292-B: 1-a, II. Charitable remainder trusts and pooled income funds by their very nature have both a non-charitable income beneficiary and a charitable remainder beneficiary. Despite the very clear limitation in RSA 292-B: 1-a, II on the applicability of the statute to only those private trusts of which the only beneficiaries are institutions or other charities, there is one exception. RSA 292-B: 4 authorizes charitable remainder trusts and pooled income funds to pool assets, as more fully discussed below. Consistent with the broadened coverage of the New Hampshire version of UMIFA, New Hampshire has broadened the term governing board to include a trustee or trustees of 1 These public purposes include a town s establishment, maintenance and care of public facilities, libraries, reading-rooms, schools, parks, cemeteries, burial lots, shade and ornamental trees on highways and other public places and other public purposes... not foreign to their institution or incompatible with the objects of its organization. 2 Organizationally, some New Hampshire school districts are within towns. Others are independent or part of city government. Thus, it appears that an endowment fund for a public school will be subject to UMIFA as long as it is not organizationally associated with a town. 3 The Prefatory Note to UMIFA states explicitly that excluded from coverage is any trust managed by a professional trustee even though a charitable organization is the sole beneficiary. The Uniform Management of Institutional Funds Act (U.L.A.), Prefatory Note. The New Hampshire version of UMIFA does not accept this exclusion.

7 charitable trusts where the only beneficiaries are charitable organizations. RSA 292-B: 1-1, III. AN OVERVIEW OF THE STATUTE RSA 292-B: 6 subjects governing boards and trustees to a clear standard of conduct in the investment, management and distribution of all of their institutional funds, including their endowment funds: They must exercise standards of prudent investment described in RSA 564-A: 3-b, which is New Hampshire s version of the Uniform Prudent Investor Act. Further, prudent investing for governing boards requires that it be done in the context of the long and short term needs of the institution in carrying out its educational, religious, charitable, or other eleemosynary purposes, its present and anticipated financial requirements, expected total return on its investment, price level trends, and general economic conditions. RSA 292-B: 6. RSA 292 gives governing boards and trustees five principal tools to aid in their investment and distribution of institutional funds: It gives them broad investment authority (RSA 292-B: 4); it permits them to delegate the management of investments to investment professionals and others (RSA 292-B: 5); it permits them to distribute some of the net appreciation of their endowment funds (RSA 292-B: 2) and to accumulate endowment fund income (RSA 292-B: 3-a); and it provides simplified ways for governing boards to obtain the release of unreasonable restrictions on institutional funds (RSA 292-B: 7). INVESTMENT AUTHORITY AND RESPONSIBILITY RSA 292-B: 4, I authorizes the investment of an institutional fund in any real or personal property deemed advisable by the governing board, whether or not it produces a current return. This authority, combined with the ability both to distribute appreciation from and to accumulate income in endowment funds, gives governing boards the ability to invest for the greatest total return consistent with standards of prudence, distributing some of that return currently while retaining some of that return to maintain or increase the value of the institutional fund, at a rate calculated to at least equal the rate of inflation. Boards must invest their funds taking into account the long-term and short-term needs of their institutions and anticipated returns, price levels and general economic conditions. RSA 292-B: 6. They also most meet the standards for a prudent investor set forth in the New Hampshire Prudent Investor Act. RSA 292-B: 6. The Prudent Investor Act, mandates, among other things, that reasonable care, skill and caution be exercised in investing, not in isolation on an asset by asset basis but in the context of the trust portfolio and as part of an overall investment strategy (RSA 564-A: 3-b, II) and that a portfolio be properly diversified (RSA 564-A: 3-b, III). Leahy, Charles F., Investing for New Hampshire Non-Profits, 37 NHBJ 68 (1996).

8 In addition to the general investment authority and responsibility described above, UMIFA authorizes the pooling of institutional funds with other pooled and common funds, including those common funds maintained by the institution (RSA 292-B: 4, III) and pooled funds managed by others including shares or interests in regulated investment companies, mutual funds, common trust funds, investment partnerships, real estate investment trusts, or similar organizations in which funds are commingled and investment determinations are made by persons other than the governing board (RSA 292-B:4, IV). The authorization to pool investments described in RSA 292-B: 4, III and IV is broadened in scope to authorize the pooling of investments by pooled income fund managers and trustees of charitable remainder trusts, whose beneficiaries include both charitable and non-charitable beneficiaries. These provisions are the exception to the rule that RSA 292-B applies only to funds whose beneficiaries are limited to institutional or charitable beneficiaries. RSA 292-B: 4, II authorizes governing boards to [r]etain property contributed by a donor...for as long as the governing board deems advisable. This authorization is important because it permits an institution to accept in-kind contributions of assets that a governing board would not necessarily consider prudent to purchase and to retain such property for as long as the governing board deems advisable. UMIFA commentary cites an example why governing boards may wish to retain contributed property even though it may not be the best investment: the hope of additional contributions from the donor. Uniform Management of Institutional Funds Act (U.L.A.), 4, Comment. Of course, the governing board s retention of such property is governed by the standard of prudence set forth in RSA 292-B: 6; but the authorization permits a governing board to accept a gift, for example, of stock of a closely held corporation or a very large concentration of a particular stock or other asset and determine when and if the asset should and can be liquidated or otherwise diversified. Presumably, a governing board could also accept a gift of stock, for example, subject to a condition that it not be liquidated, if the board concluded that acceptance was in the institution s best interest. DELEGATION OF INVESTMENT MANAGEMENT RSA 292-B: 5 gives governing boards the power to delegate to committees, employees, officers or agents, including investment counsel, authority to act in place of the governing board in investing and reinvesting institutional funds. It also permits governing boards to contract with and compensate independent investment advisors, investment counsel or managers, banks and trust companies for providing such services.

9 UMIFA commentary explains that the reason for the inclusion of section 5 is to address concerns of some governing boards about their authority to delegate investment decisions. In the past, in the absence of explicit authority to delegate, some governing boards followed or tried to follow the principle of non-delegation applicable to private trustees. Uniform Management of Institutional Funds Act (U.L.A.), 5, Comment. The authority to delegate investment management does not relieve governing boards from the responsibilities of determining prudent investment policy and for prudently selecting and retaining competent agents. Uniform Management of Institutional Funds Act (U.L.A.), 5, Comment. The Prudent Investor Act permits the same delegation with the same safeguard. RSA 564-A: 3-a, IX. Governing boards managing institutional funds should document their exercise of prudence by adopting a written investment policy; by reviewing it from time to time; by reviewing the compliance of their investment advisors and other agents with the policy; and by monitoring the performance of their funds. Ablowich, Michael, Preparing an Investment Policy, 37 NHBJ 64 (1996). DISTRIBUTION OF ENDOWMENT FUNDS Authority to Distribute Net Appreciation RSA 292-B: 2 authorizes governing boards to distribute as much net appreciation of an endowment fund as is prudent. The last sentence of RSA 292-B: 2 explains that this provision is not to restrict institutions from distributing appreciation when they are otherwise authorized to do so, including as permitted under other law or under the terms of a gift instrument or by the charter of an institution. The purpose of this section is to give governing boards authority to distribute appreciation if the gift instrument may not explicitly so provide or if the terms of the gift instrument may appear to restrict such distributions, for example, to traditional interpretations of income only. This purpose becomes clear when RSA 292-B: 2 is read in conjunction with RSA 292-B: 3. RSA 292-B: 2 and 3, read together, provide that some appreciation may be distributed even if a gift is designated as an endowment or when it directs or authorizes the institution to use only income, interest, dividends, or rents, issues or profits or to preserve the principal intact, or a direction which contains other words of similar import. If a donor wishes to restrict the distribution of appreciation, he may do so but the gift instrument must expressly so provide. Limitations on Distribution of Appreciation There are two limitations on the authority to distribute appreciation from an endowment fund. One relates to the historic value of the fund. The other relates to the obligation to distribute prudently.

10 Only appreciation in the fair value of assets in an endowment fund exceeding the historic dollar value of those assets may be distributed. RSA 292-B: 2. Historic value is the fair market value, expressed in dollars, of the fund at the time of its establishment, plus the fair market value of any subsequent donations to the fund at the time of their donation, plus the fair market value of each accumulation to the fund mandated by the gift instrument. RSA 292-B: 1-a, V. To illustrate: $500,000 is placed in an endowment fund with the requirement that it be invested until it has reached $750,000. Thereafter the donor adds another $250,000. In this example, the historic value of the fund is $500,000 at the time of its establishment; it grows to $750,000 as the governing board invests and accumulates within the fund and to $1,000,000 when the subsequent contribution is made. RSA 292- B: 2 prohibits the governing board from distributing any appreciation until the accumulation has been achieved, at which time only appreciation in excess of $750,000 is eligible for distribution. With the subsequent addition of $250,000 to the fund, the historic value increases to $1,000,000. If the fair market value of the fund thereafter is reduced to less than $1,000,000, the governing board is prohibited from making any distribution of appreciation until the fund has been restored to its historic value of $1,000,000. Thereafter, so long as there is appreciation in excess of historic value, the governing board may distribute appreciation in excess of historic value. It becomes clear from the illustration that, in order to apply the historic value rule, the governing board must maintain records documenting historic value. But, the statute is applicable, not only to funds established after the effective date of RSA 292-B, but also to older endowment funds, for which institutions may not have records documenting historic value. For this reason, RSA 292-B: 1-a, V provides that governing boards may make a good faith determination of the historic dollar value of their institutional funds. Such determination made in good faith is conclusive. If a governing board were to conclude that it had insufficient information to make a good faith determination, RSA 547:3(c) provides jurisdiction for the probate court to determine historic dollar value. The second limitation on the authority to distribute appreciation is that it must be done prudently. RSA 292-B: 6 provides that: In the administration of the power... to appropriate appreciation... a governing board shall exercise general standards of prudent investment as defined under RSA 564-A under the facts and circumstances prevailing at the time of the action or decision. In doing so they [sic] shall consider long and short term needs of the institution in carrying out its... purposes, its present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions. RSA 292-B: 6 then goes on to provide that any distribution of appreciation in any year exceeding 7 percent of the fair market value of a restricted endowment fund (calculated on the basis of market values determined at least quarterly and averaged over a period

11 of 3 or more years) creates a rebuttable presumption of imprudence on the part of the governing board. Two things should be noted about this provision. First, the percentage describes the amount of appreciation that may be distributed, not the amount of combined income and appreciation that may be distributed. Second, and of greater importance, the rebuttable presumption of imprudence does not create a safe harbor for a governing board. In other words, a board should not assume that it can safely distribute the income plus up to 7 percent of a fund s appreciation as long as there is a positive spread between current market value and historic value. In fact, many would argue that it would be a highly unusual situation in which prevailing market conditions would permit a governing board to prudently make regular annual distributions from even a well performing endowment fund at a level of 7 percent of its fair market value plus its net income. RIGHT TO ACCUMULATE INCOME IN ENDOWMENT FUNDS RSA 292-B: 3-a and 3-b provide that even though the terms of a gift instrument ostensibly require the distribution of all current income, absent an explicit prohibition on accumulation, governing boards are not required to distribute all of the income of an endowment fund. It is interesting to note that these are a New Hampshire additions to the statute. Curiously, there are no comparable provisions authorizing accumulation of income in the Uniform Act. RSA 292-B: 3-a gives boards the right to prudently accumulate income, either to add to principal or to hold in a reserve for future expenditure. Economic conditions may arise requiring a prudent investor to accumulate income in order to prudently manage an endowment fund. Many will recall the double-digit interest rates in the not too distant past. In such an economic climate, governing boards investing on a total return basis as mandated by RSA 292-B: 1, must consider whether it is imprudent not to accumulate some of the income of their institutional funds. RSA 292-B: 3-b is the counterpart rule of construction for income accumulations to the rule of construction for the distribution of appreciation set forth in RSA 292-B: 3. RSA 292-B: 3-b provides that a restriction against accumulation or addition to principal may not be implied from designation of the fund as an endowment fund or from the direction or authorization in the gift instrument to distribute income, interest, dividends, currently expendable income, rent, issues or profits or similar provisions. OBTAINING THE RELEASE OF UNREASONABLE RESTRICTIONS ON THE USE OF INSTITUTIONAL FUNDS RSA 292-B: 7, I simplifies obtaining the release of a use restriction or an investment restriction imposed by provisions in a gift instrument that make it difficult to administer or

12 invest an institutional fund. Where the donor is available and willing, the governing board may simply obtain the donor s consent to a release of the restriction. Although the donor no longer has a property interest in the fund, if both the donor and the governing board agree that the restriction no longer need apply, the restriction disappears. Uniform Management of Institutional Funds Act (U.L.A.), 7, Comment. The granting of a release is not anticipated to cause federal tax issues for the donor because the donor has no right to enforce the restriction, no interest in the fund and no power to change the beneficiary. The statute gives the donor only the right to acquiesce in a lessening of a restriction already in effect at the request of the institution. Uniform Management of Institutional Funds Act (U.L.A.), 7, Comment. If the written consent of the donor cannot be obtained because of death, disability, unavailability of impossibility of identification, the governing board may apply to the probate court for release of the restriction, with notice to the attorney general and opportunity to be heard. The court may order the release of the restriction if it is found to be obsolete, inappropriate, or impracticable. RSA 292-B: 7, II. The probate court does not have the power to convert an endowment fund to something other than an endowment fund, i.e., it cannot convert a fund that is not wholly expendable... on a current basis to one that is. RSA 292-B: 7, II; RSA 292-B: 1-a, III. Further, RSA 292-B: 7, III provides that a release cannot result in use of a fund for purposes other than the charitable purposes of the institution in question. FREQUENTLY ASKED QUESTIONS Question: WHAT IS THE DIFFERENCE BETWEEN AN INSTITUTIONAL FUND, AND AN ENDOWMENT FUND? Answer: All funds held by governing boards of charitable institutions or by private trustees exclusively for charitable purposes are institutional funds. RSA 292-B: 1-a, II. An endowment fund is an institutional fund that is not wholly expendable to or by an institution on a current basis such as a fund that is restricted to distribution of income only. RSA 292-B: 1-a, III. Question: MAY INSTITUTIONS AGGREGATE THEIR ENDOWMENT FUNDS AS A GROUP OR GROUPS TO DETERMINE WHETHER ENDOWMENT PRINCIPAL IS ABOVE HISTORIC DOLLAR VALUE? Answer: Yes, provided that endowment funds restricted to a particular use be aggregated separately from endowment funds restricted to another use or uses. For example, if one group of library funds were restricted to purchasing science books and

13 another group were restricted to purchasing art books, the historic value of each group of funds would have to be separately maintained. Endowment funds that are not restricted to particular uses or that are for the same use may be aggregated for purposes of determining historic dollar value. Question: DOES THE 7% SPENDING RATE SPECIFIED IN RSA 292-B: 6 SERVE AS A SAFE HARBOR FOR GOVERNING BOARDS? IN OTHER WORDS, IS AN INSTITUTION SAFE AS LONG AS IT HAS A SPENDING POLICY THAT DOES NOT SPEND MORE THAN 7% OF NET APPRECIATION ANNUALLY? Answer: Absolutely not! The statute only provides that distribution of appreciation from endowment funds greater than 7% is presumed to be imprudent. A governing board may make annual distributions of all of the net income of an endowment fund, provided that it is prudent to do so. In addition, to the extent that the fair market value of the endowment fund exceeds historic value, the governing board may distribute annually up to 7% of the fair market value of the fund calculated on a trailing twelve (or more) quarter rolling average without being presumed imprudent. That said all distributions from all endowment funds must always be prudent. There is no safe harbor. There are many prudent investors who do not believe that economic conditions are likely ever to be favorable to the routine annual distribution of 100% of the net income plus 7% of the value of an appreciated endowment fund. Question: IS A GOVERNING BOARD SAFE DISTRIBUTING 100% OF THE NET INCOME OF AN ENDOWMENT FUND? Answer: Not necessarily. For example, in a period of double-digit interest rates, a governing board would have to consider whether circumstances justify the distribution of 100% of the net income of an endowment fund. Achieving the highest total portfolio return might suggest a large commitment to fixed income; but if there is significant inflation at the same time, distribution of all income could result in a loss of purchasing power for the portfolio. Question: UMIFA DOES NOT TALK ABOUT PERMISSIBLE SPENDING OR DISTRIBUTING FROM AN INSTITUTIONAL FUND. RATHER, IT DESCRIBES

14 WHAT A GOVERNING BOARD MAY APPROPRIATE FOR EXPENDITURE. WHAT DOES THIS MEAN? Answer: Appropriate for expenditure is not defined. RSA 292-B: 2 provides that a governing board may appropriate for expenditure... so much of the net appreciation, realized and unrealized, in the fair value of the assets...over the historic dollar value of the fund as is prudent.... UMIFA commentary says: This section authorizes a governing board to expend for the purposes of the fund the increase in value of an endowment fund over the fund s historic dollar value, within the limitations of Section Uniform Management of Institutional Funds Act (U.L.A.), 2, Comment. Then, what does expend mean? Does it mean removing money from the endowment fund? Does it mean encumbering money in the fund? Are funds expended when the boards budget them for expenditure, or when they are encumbered, or when they are actually removed from the fund? In the public sector, the legislative body typically appropriates funds for some purpose by passing a budget bill, but the expenditure of public funds is typically not automatic. Instead, the executive branch must take further action to authorize the expenditure of the appropriated funds. This pervasive practice followed by public governing bodies leads to the question whether UMIFA contemplates a similar bifurcated process. Such a process might suggest that the test of an increase in the value of the fund would be applied twice, once at the time a governing board adopts a budget and again at the time the expenditure is made or otherwise committed. The UMIFA Comment quoted above indicates that appropriate is synonymous with expend and does not refer to appropriate in the bifurcated process typical of governmental bodies. Though the annotation does not elaborate further, expend presumably is used in its ordinary sense, which would include removing money from the fund and placing it, for example, in the board s quasi-endowment or with its board-designated funds; or making a binding commitment to a third party to pay (such as, signing a contract for a purchase, making a grant, writing a check or the like). Where there is uncertainty as to whether a particular action constitutes an appropriation for expenditure, the simplest solution is to remove the appreciation from the endowment fund. What is important is that at the time of each appropriation, the institution must verify there is indeed available appreciation and that the money appropriated is applied to the charitable purposes of the institution. Question: WHAT IS NET APPRECIATION?

15 Answer: Net appreciation is the unrealized gains and losses combined with the realized gains and losses of an endowment fund, net of the fund s expenses charged to principal. RSA 292-B: 2; Uniform Management of Institutional Funds Act (U.L.A.), 2, Comment. Question: MAY A GOVERNING BOARD CHARGE THE PRINCIPAL OF A FUND WITH ITS SHARE OF EXPENSES EVEN IF THE FUND HAS NO NET APPRECIATION? Answer: Yes. UMIFA does not alter the rules requiring a fiduciary to allocate expenses between principal and income. RSA 564-A: 3, III (u). RSA 564:21-a. Question: IN DETERMINING WHETHER THERE IS NET APPRECIATION WHICH MAY BE DISTRIBUTED FROM AN ENDOWMENT FUND, SHOULD A GOVERNING BOARD COMPARE THE HISTORIC VALUE OF A FUND WITH ITS FAIR MARKET VALUE ON THE DATE OF EXPENDITURE OR WITH ITS VALUE DETERMINED ON A TRAILING TWELVE (OR MORE) QUARTER ROLLING AVERAGE IMMEDIATELY PRECEEDING THE EXPENDITURE? Answer: At the time of each appropriation of appreciation, i.e., when the funds are withdrawn or binding commitments are made to third parties to pay appreciation, the institution must determine that the fair market value of the fund as of that date exceeds the historic value of the fund. The trailing twelve (or more) quarter rolling average value of the fund described in RSA 292-B: 6 is a computation that is used exclusively for determining whether there is a rebuttable presumption of imprudence on the part of the governing board with respect to the aggregate of its distributions of net appreciation over the course of an entire year. This computation can be made at the beginning of each year. An institution can decide early in the year the maximum aggregate withdrawals that it will be able to make during that year. However, whether there is net appreciation available for a particular distribution must be determined at the time of the withdrawal. Question: WHAT IF THERE IS NET APPRECIATION ON THE DATE OF AN EXPENDITURE BUT THE TRAILING TWELVE (OR MORE) QUARTER ROLLING AVERAGE VALUE OF THE FUND AS OF THE EXPENDITURE DATE IS LESS THAN THE FUND S HISTORIC VALUE?

16 Answer: In that situation, there can be a distribution of net appreciation; however, if there are total distributions of appreciation that year in excess of 7% of the value of the fund calculated based on the trailing twelve (or more) quarter rolling average, there is a rebuttable presumption that the governing board has acted imprudently. It must be kept in mind that the value of a fund calculated based upon trailing twelve (or more) quarter rolling averages has nothing to do with the determination of whether or not there is net appreciation in excess of the fund s historic value available for any particular expenditure. It is merely used to establish the size of the aggregate annual distributions of net appreciation, which may be made without creating a rebuttable presumption of imprudence. Question: WHAT IF THERE IS NO NET APPRECIATION ON THE DATE OF AN EXPENDITURE BUT THE TRAILING TWELVE (OR MORE) QUARTER ROLLING AVERAGE VALUE OF THE FUND AS OF THE EXPENDITURE DATE IS HIGHER THAN THE ENDOWMENT FUND S HISTORIC VALUE? Answer: This could occur in a falling market. If there is no net appreciation on the date of a desired expenditure from an endowment fund, the expenditure may not be made. There is no net appreciation to expend! It does not matter that the trailing quarter rolling average value of the fund exceeds the fund s historic value. Question: WHAT IF A GOVERNING BOARD PRUDENTLY DETERMINES THAT AN EXPENDITURE OF SOME OF THE PRINCIPAL IN AN ENDOWMENT FUND IS IN THE BEST INTEREST OF THE INSTITUTION, BUT THERE IS NO NET APPRECIATION? Answer: The institution can apply to the probate court for deviation from the terms of the trust with notice to and an opportunity for the attorney general to be heard. Question: WHEN THERE IS NO NET APPRECIATION IN AN ENDOWMENT FUND OR ITS HISTORIC VALUE IS IMPAIRED, MAY THE GOVERNING BOARD NEVERTHELESS EXPEND THE FUND S NET INCOME? Answer: Yes, if it is otherwise prudent to do so. The restriction on spending when historic value is impaired applies only to the distribution of appreciation.

17 Question: IF A GOVERNING BOARD HAS NEVER APPROPRIATED APPRECIATION FROM ITS ENDOWMENT FUND AND HAS SUFFICIENT AVAILABLE NET APPRECIATION, COULD IT IN ONE YEAR DISTRIBUTE 7% OF THE VALUE OF THE FUND BASED ON THE TRAILING QUARTER ROLLING AVERAGE VALUES FOR EACH OF THE LAST TEN YEARS? Answer: It could not do so without creating a rebuttable presumption of imprudence. If the governing board concludes that such a distribution is otherwise prudent, e.g., a one-time distribution for an important capital project, it might consider applying to the probate court for deviation with notice to and an opportunity for the attorney general to be heard. Question: ASSUME A PRIVATE FOUNDATION HAS THE RIGHT TO DISTRIBUTE INCOME. ASSUME FURTHER THAT THE FOUNDATION MUST MEET THE ANNUAL MINIMUM 5% SPENDING REQUIREMENT TO AVOID LIABILITY FOR THE IRC 4942(a) TAX. IF IT HAS NET DISTRIBUTABLE INCOME EQUAL TO ONLY 3% OF THE VALUE OF ITS ASSETS, MAY THE FOUNDATION INVADE PRINCIPAL TO MEET ITS REMAINING 2% SPENDING REQUIREMENT IF THE HISTORIC VALUE OF ITS ASSETS IS IMPAIRED? Answer: Yes. RSA 292: 2-a provides that every private foundation established under RSA 292 is subject to a number of saving provisions whether or not they are set forth in the organization s articles of agreement. One such provision, RSA 292: 2-a, II, provides that every private foundation must distribute for the purposes set forth in its articles of organization amounts at least sufficient to avoid liability for the IRC 4942(a) tax. This statutory provision, in effect, amends the articles of agreement of the foundation. A private foundation is not restricted from distributing principal to avoid the IRC 4942(a) tax liability. Because the foundation is not restricted from distributing principal for that purpose, the provisions of RSA 292-B regarding not impairing historic value are not applicable. Thus, the foundation is not restricted from distributing principal for purposes of avoiding the IRC 4942(a) tax even though it does not have any net appreciation. Question: ASSUMING THE SAME FACTS AS IN THE PRECEEDING QUESTION, MAY THIS PRIVATE FOUNDATION ADOPT A 6% SPENDING POLICY?

18 Answer: Yes, relying on RSA 292-B: 2 and if it is otherwise prudent to do so, the governing board of a private foundation may establish a 6% spending policy and distribute appreciation to meet that requirement, even if the amount of appreciation distributed exceeds that required to avoid the IRC 4942(a) tax as authorized by RSA 292: 2-a _1.DOC

19 APPENDIX A CHAPTER 292-B. UNIFORM MANAGEMENT OF INSTITUTIONAL FUNDS 292-B: 1. Declaration of Purpose. 292-B: 1-a. Definitions. 292-B: 2. Appropriation of Appreciation. 292-B: 3. Rule of Construction. 292-B: 3-a. Accumulation of Annual Net Income; Reserve. 292-B: 3-b. Restrictions in Gift Instruments. 292-B: 4. Investment Authority. 292-B: 5. Delegation of Investment Management. 292-B: 6. Standard of Conduct. 292-B: 7. Release of Restrictions on Use or Investment. 292-B: 8. Uniformity of Application and Construction. 292-B: 9. Short Title. 292-B: 1. Declaration of Purpose. It is hereby declared to be in the public interest and to be the policy of the state to promote, by all reasonable means, the maintenance and growth of eleemosynary institutions by encouraging them and those who manage one or more charitable trusts which are for the sole benefit of eleemosynary institutions or other charitable purposes to establish and continue investment policies, without artificial constraints, which will provide them with the means to meet the present and future needs of such eleemosynary institutions and charitable purposes pursuant to the provisions of this act. To this end it is hereby declared to be in the public interest and to be the policy of the state to encourage such institutions and those who manage charitable trusts for the benefit of such institutions or other charitable purposes to adopt investment policies whose objective is to obtain the highest possible total rate of return consistent with the standard of prudence. 292-B:1-a. Definitions. I. 'Institution' means an incorporated or unincorporated organization organized and operated exclusively for educational, religious, charitable, or other eleemosynary purposes, or a governmental organization to the extent that it holds funds exclusively for any of these purposes. II. 'Institutional fund' means a fund held for or by an institution for its exclusive use, benefit, or purposes, and includes a fund held by a trustee for one or more institutions or other charitable purposes in which no beneficiary that is not an institution or charitable beneficiary has an interest, other than possible rights that could arise upon violation or failure of the purposes of the fund. The term

20 'institutional fund' shall not include a fund held by a town or other municipality under RSA 31:19 or a fund created by a town or other municipality under RSA 31:19-a. III. 'Endowment fund' means an institutional fund, or any part thereof, not wholly expendable to or by an institution on a current basis under the terms of the applicable gift instrument. IV. 'Governing board' means the body responsible for the management of an institution or of an institutional fund or a trustee or trustees of a charitable trust. V. 'Historic dollar value' means the aggregate fair value in dollars of (i) an endowment fund at the time it became an endowment fund, (ii) each subsequent donation to the fund at the time it is made, and (iii) each accumulation made pursuant to a direction in the applicable gift instrument at the time the accumulation is added to the fund. The determination of historic dollar value made in good faith by the institution or one who holds the institutional fund is conclusive. VI. 'Gift instrument' means a will, deed, grant conveyance, agreement, memorandum, writing, or other governing document (including the terms of any institutional solicitations from which an institutional fund resulted) under which property is transferred to or held for or by an institution as an institutional fund. 292-B: 2. Appropriation of Appreciation. The governing board may appropriate for expenditure for the uses and purposes for which an endowment fund is established so much of the net appreciation, realized and unrealized, in the fair value of the assets of an endowment fund over the historic dollar value of the fund as is prudent under the standard established by RSA 292- B:6. This section does not limit the authority of the governing board to expend funds as permitted under other law, the terms of the applicable gift instrument, or the charter of the institution. 292-B: 3. Rule of Construction. RSA 292-B:2 does not apply if the applicable gift instrument indicates the donor's specific intention that net appreciation shall not be expended or that the provisions of RSA 292-B shall not apply to gifts made under the gift instrument. A restriction upon the expenditure of net appreciation may not be implied from a designation of a gift as an endowment, or from a direction or authorization in the applicable gift instrument to use only 'income,' 'interest,' 'dividends,' or 'rents, issues or profits,' or 'to preserve the principal intact,' or a direction which contains other words of similar import. This rule of construction applies to gift instruments executed or in effect before or after the effective date of this chapter. 292-B: 3-a. Accumulation of Annual Net Income; Reserve. The governing board may accumulate so much of the annual net income of an institutional fund as is prudent under the standard established by RSA 292-B:6, and may hold any or all of such accumulated income in an income reserve for subsequent expenditure for the uses and purposes for which such institutional fund

21 is established or may add any or all of such accumulated income to the principal of such institutional fund, as is prudent under said standard. This section does not limit the authority of the governing board to accumulate income or to add the same to principal of an institutional fund as permitted under other law, the terms of the applicable gift instrument, or the charter of the institution. 292-B: 3-b. Restrictions in Gift Instruments. The provisions of RSA 292-B:3-a do not apply if and to the extent that the applicable gift instrument indicates the donor's intention that income of an institutional fund shall not be accumulated or shall not be added to the principal of the fund. A restriction against accumulation or addition to principal may not be implied from a designation of a gift as an endowment fund, or from a direction or authorization in the applicable gift instrument to apply to the uses and purposes of the fund the 'income', 'interest', 'dividends', 'currently expendable income', or 'rent, issues or profits', or a direction which contains other words of similar import. This rule of construction applies to gift instruments executed or in effect before or after the effective date of this section. 292-B: 4. Investment Authority. In addition to an investment otherwise authorized by law or by the applicable gift instrument, and without restriction to investments a fiduciary may make, the governing board, subject to any specific limitations set forth in the applicable gift instrument or in the applicable law other than law relating to investments by a fiduciary, may: I. Invest and reinvest an institutional fund in any real or personal property deemed advisable by the governing board, whether or not it produces a current return, including mortgages, stocks, bonds, debentures, and other securities of profit or non-profit corporations, shares in or obligations of associations, partnerships, or individuals, and obligations of any government or subdivision or instrumentality thereof. II. Retain property contributed by a donor to an institutional fund for as long as the governing board deems advisable. III. Include all or any part of an institutional fund or all or any part of a pooled income fund (as defined in section 642(c)(5) of the Internal Revenue Code of 1954 as amended ('the Code')), as charitable remainder annuity trust (as defined in section 664(d)(1) of the Code), or a charitable remainder unitrust (as defined in section 664(d)(2) of the Code) in one or more pooled or common funds maintained by the institution; and IV. Invest all or any part of an institutional fund, pooled income fund, charitable remainder annuity trust or charitable remainder unitrust in any other pooled or common fund available for investment, including shares or interests in regulated investment companies, mutual funds, common trust funds, investment partnerships, real estate investment trusts, or similar organizations in which funds are commingled

22 and investment determinations are made by persons other than the governing board. 292-B: 5. Delegation of Investment Management. Except as otherwise provided by the applicable gift instrument or by applicable law relating to governmental institutions or funds, the governing board may: I. Delegate to its committees, officers or employees of the institution or the fund, or agents, including investment counsel, the authority to act in place of the board in investment and re-investment of institutional funds. II. Contract with independent investment advisors, investment counsel or managers, banks, or trust companies, so to act, and III. Authorize the payment of compensation for investment advisory or management services. 292-B: 6. Standard of Conduct. In the administration of the powers to appropriate appreciation, to accumulate income or add income to principal, to make and retain investments, and to delegate investment management of institutional funds, members of a governing board shall exercise general standards of prudent investment as defined under RSA 564-A under the facts and circumstances prevailing at the time of the action or decision. In so doing they shall consider long and short term needs of the institution in carrying out its educational, religious, charitable, or other eleemosynary purposes, its present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions. Provided, however, the appropriation of appreciation in any year in an amount greater than 7 percent of the fair market value of the assets of the institution's endowment funds (calculated on the basis of market values determined at least quarterly and averaged over a period of 3 or more years) shall create a rebuttable presumption of imprudence on the part of the governing board. 292-B: 7. Release of Restrictions on Use or Investment. I. With the written consent of the donor, the governing board may release, in whole or in part, a restriction imposed by the applicable gift instrument on the use or investment of an institutional fund. II. If written consent of the donor cannot be obtained by reason of his death, disability, unavailability, or impossibility of identification, the governing board may apply in the name of the institution or institutional fund to the probate court for release of a restriction imposed by the applicable gift instrument on the use or investment of an institutional fund. The attorney general shall be notified of the application and shall be given an opportunity to be heard. If the court finds that the restriction is obsolete, inappropriate, or impracticable, it may by order release the restriction in whole or in part. A release under this subsection may not change an endowment fund to a fund that is not an endowment fund.