Understanding Donation Law is Key to Unlocking Charitable Assets – Nonprofit News | Nonprofit Quarterly

Philanthropy today is a system of wealth accumulation: total assets of charitable foundations reached $1 trillion in 2019, growing to $1.5 trillion in five years. Why do foundations hold all this wealth at a time of intensifying intersecting crises in an era of racial capitalism and climate colonialism?

The reasons vary, but often leaders claim that the law compels them to act. In other words, foundation (also called endowment or endowment) law is manipulated to encourage wealth accumulation, at least among actors who claim not to want to accumulate wealth. Here are three common legal myths of this type:

• Myth: Most foundations have endowments and are legally obligated to maintain them. (No, they don’t.)
• Myth: Foundations must preserve the majority of their assets and give away 5 percent each year. (Five percent is a minimum; most foundations can give away all of their assets right away.)
• Myth: When foundations aren’t giving away money, they have to invest and grow their assets. (This is probably not true. Let’s look at the nuances.)

Following in the financial footsteps, foundations become vehicles (usually white-led) for the perpetual accumulation of stolen wealth.

Foundation law is too often obscured and misunderstood as an obstacle to change. Understanding the legal context of foundation assets and endowments can help you organize to unlock charitable assets.

Giving in an Age of Extinction

Foundations typically employ traditional financial methods to manage their assets. The formula is relatively simple: 95 percent of assets are handed over to Wall Street or private equity fund managers to maximize returns, and the remaining 5 percent is donated to charity. Following the financial formula, foundations become vehicles (usually white-led) for the perpetual accumulation of stolen wealth. If we look closely, we will realize that the desire for endless accumulation is what causes the very crises that philanthropy is meant to address.

But voices from within philanthropy, such as donor organizers at Justice Funders and Resource Generation, are increasingly calling for philanthropic assets to be freed from Wall Street’s exploitative money and redirected to grassroots movements fighting for change. This is urgently needed because Wall Street investments perpetuate and benefit from the current extractive economy characterized by unchecked militarism, the exploitation of land and labor, and overconsumption.

Some foundations are responding with bold promises to pull all their assets from Wall Street and instead funnel them into CDFIs, credit unions, and community-led funds. Others are devising movement-aligned strategies to cut spending rather than being around “forever” (as if that’s even possible).

At their best, these approaches dedicate all of a foundation’s assets to building long-term grassroots power. Movement organizations—organizations that remain combative and radical while wary of demonetization or co-optation—will need all the resources they can get to win just transitions, abolition, and decolonization, and to ensure self-determination and prosperity for all people, communities, and ecosystems.

The US legal system is designed to facilitate colonialist and capitalist accumulation, and it’s not easy to free up assets for social change. It also often makes legal information inaccessible to experts who are willing to charge high fees. My workplace, the Sustainable Economy Law Center, strives to decommodify the law and create values-aligned legal resources to foster movements for change. A closer look at foundation law shows that nearly all foundations can cleverly use the law to free up assets from Wall Street and put them into social movements.

Does the Foundation really have an endowment?

In philanthropy, the word “endowment” is used to refer to money that a foundation doesn’t want to spend or thinks it can’t spend. You might hear, “Sorry, we can’t make more grants; we need to maintain the endowment.”

If the Board establishes a fund, the Board also has the power to dissolve the fund and to spend its monies.

Unfortunately, this statement can be misleading because it is not specifically stated. how Endowments have limitations. For example, a foundation may state that it is free to lift endowment limitations. Let’s distinguish between three types of endowments that people might call “endowments.”

1. Capital “E” Funds: These are: donor When an endowment is transferred to a foundation. If the donor restriction is something like “These funds must be kept forever (but interest earned may be spent),” then the foundation has an endowment that begins with a capital “E.” The restriction may be permanent or it may only be for a certain period of time.
2. Lowercase “e” Fund: This is The Foundation itself Designate it as an endowment. Essentially, a foundation, usually through a board resolution, sets aside a portion of its funds for preservation and investment. This is sometimes called a “quasi-endowment” or “board-designated fund.”
3. Non-endowment: A foundation may use the word “endowment” to refer to the sum of its assets, even if there is no limit. Colloquial Use implies a desire to preserve assets without regard to formal restrictions.

The type of restriction that applies determines how difficult it is to use the funds. If it’s a lowercase “e” fund, it’s easy to use the funds — at least legally. If the board established the fund, the board also has the power to terminate the fund and use the funds. If it’s not a fund, on the other hand, there’s no legal obligation to hold onto the funds.

Endowments with a capital “E” are difficult to spend from a legal perspective. For reference, our team at the Sustainable Economy Law Center looked at the tax disclosures of the 10 largest private foundations in the United States and found that only one has this type of large endowment:

For a particular foundation, you can verify it yourself by obtaining the foundation’s Form 990-PF from the IRS.‘Visit the and review Part II: Balance Sheet. If Line 25, “Donor Restricted Net Worth,” and Line 28 are both zero, your foundation likely does not have an endowment fund that begins with a capital “E.”

However, even capital “E” funds can be “lifted.” If the donor who established the fund is still living, the Foundation can ask the donor to lift the restriction.

In addition, the document establishing the fund (perhaps a gift agreement between the donor and the foundation) may contain a “modification clause” that allows the terms of the fund to be modified under certain circumstances. Modification clauses give the foundation leeway to lift restrictions on the expenditure of the fund when circumstances require, for example, if the current global crisis necessitates expenditures to fulfill the foundation’s charitable purpose.

If these simple strategies are unavailable, foundations can devise more creative legal strategies regarding expenditures of funds. This could involve crafting an argument that the expenditure of funds is “prudent” under state law provisions (more on this below). Alternatively, foundations could ask the court to modify the terms of the funds under either cy pres (“as far as possible”) or equitable deviation principles. Janelle Orsi of the Sustainable Economies Law Center discusses these strategies in more detail in another article.

Should the fund invest “prudently”?

But what happens if the foundation doesn’t use the funds right away? How will the money be managed in that case?

I would prefer that foundations reject the investment approach altogether. Rejecting Wall Street investments is one thing, but this means going beyond investments in the regenerative solidarity economy to purely redistributive ones. As one recent report points out, “radical redistributive and compensatory investments in the solidarity economy mean prioritizing those who are not ready to receive repayable funding.” While worker-owned enterprises and community land trusts may have a “business model” that allows them to guarantee repayment to investors, many radical mutuals and land-return projects are not seeking loans; they lack a business model that can generate profits.

Foundations can decide to manage their assets primarily for social benefit rather than financial gain.

In that sense, the Sustainable Economy Law Center has drafted a board resolution to reject investments that can be made by both nonprofits and foundations in light of UPMIFA (Uniform Prudent Management of Institutional Funds Act), which provides that charities must manage their assets like prudent stewards. Versions of UPMIFA have been passed in every state and territory in the United States except Pennsylvania and Puerto Rico.

Under UPMIFA, a charity has two types of assets.

1. Program-Related Assets: are held primarily to achieve charitable purposes and not for investment purposes.
2. Institutional funds: Essentially any other fund currently held for investment purposes.

UPMIFA’s prudence standard requires balancing financial gain with risk of loss. Reflecting an elite understanding of “prudence,” UPMIFA provides a clear path for charities to sell off the majority of their assets to Wall Street. But nonprofits and foundations have room to resist. Unless they have a capital “E” endowment that requires assets to be preserved forever, they can designate all or most of their funds as noninvestment.

A foundation could decide to manage its assets primarily based on social benefit rather than financial gain, which could look like the foundation simply holding the assets in a credit union account or similar long enough to fund a grassroots movement.

For capital-E endowments, which foundations must maintain, trustees can still argue that divestment from Wall Street and investment in social movements is prudent. UPMIFA, for example, requires fund managers to consider both the “institution’s charitable purposes and the institutional fund’s objectives” and “general economic conditions.” Taken together, these provide a basis for arguing that the racial and climate crises require divestment from Wall Street funds that helped create those crises.

Similarly, UPMIFA could allow foundations to convert their endowments into stable assets, such as land trusts technically owned by the foundation that give stewardship of land to Black and Indigenous communities.

Towards the end of philanthropy

Philanthropy today exists as a system of wealth accumulation embedded in racial capitalism, and it must change and heal itself. The charity sector must learn to free itself from the control of financial and legal professionals that keep it tied to the dominant extractive system, while financial and legal professionals like me strive to transform and heal ourselves. Philanthropy must stop perpetually accumulating wealth and power, and instead move toward movement-led stewardship of the resources we have plundered. Either the charity sector will learn on its own, or movements will organize to put pressure on the charity sector.

I am encouraged by the many initiatives emerging towards a just transition for philanthropy. Inclusion of our extractive economy will require a lot of organizing and movement building, but the philanthropic sector is uniquely positioned to pioneer new ways of thinking and practicing about money and power. While the movement cannot expect philanthropy and its nonprofit industry to liberate us, the least we can do is advocate for philanthropy to not remain shackled to a harmful economy and harmful thinking that undermines the movement.