The State of Texas adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) effective September 1, 2007.  UPMIFA replaces the Uniform Management of Institutional Funds Act (UMIFA) which was approved by the National Conference of Commissioners on Uniform State Laws in 1972 and adopted by the State of Texas in 1989.

UPMIFA was developed to improve the protection of donor intent with respect to expenditures from endowments and applies to charities organized as charitable trusts or as nonprofit corporations and trusts managed by charities. The Act does not apply to funds managed by trustees that are not charities or trusts managed by corporate or individual trustees. UPMIFA provides guidance and authority to charitable organizations concerning the management and investment of funds held by those organizations and imposes additional duties on those who manage and invest charitable funds to provide additional protection for charities and also protect the interests of donors who want to see their contributions used wisely. The Act updates the rules governing expenditures from endowment funds, whether donor restricted or board designated, to provide stricter guidelines on spending endowment funds and to give institutions the ability to cope more easily with fluctuations in the value of the endowment.

In addition to identifying factors that a charity must consider in making management and investment decisions, UPMIFA requires a charity and those who manage and invest its funds to 1) give primary consideration to donor intent as expressed in a gift instrument, 2) act in good faith, with the care an ordinarily prudent person would exercise, 3) incur only reasonable costs in investing and managing charitable funds, 4) make a reasonable effort to verify relevant facts, 5) make decisions about each asset in the context of the portfolio of investments, as part of an overall investment strategy, 6) diversify investments unless due to special circumstances, the purposes of the fund are better served without diversification, 7) dispose of unsuitable assets, and 8) in general, develop an investment strategy appropriate for the fund and the charity.

Has your organization adopted an investment policy that complies with your state’s version of UPMIFA? Review your state’s requirements and make sure your policies conform to the prudent management of funds.

For additional information see http://www.upmifa.org.

For the State of Texas version of UPMIFA see http://www.statutes.legis.state.tx.us/SOTWDocs/PR/htm/PR.163.htm

Organizations that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, foster national or international amateur sports competitions, or for the prevention of cruelty to children or animals are eligible to be exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. Unless the organization is a church, or a related-type entity, or  the organization has annual gross receipts less $5,000, the organization is required to file Form 1023 with the IRS. These charitable organizations must be organized and operated exclusively for one or more exempt purposes (as listed above).

Based on Form 1023, the IRS will classify the entity as either a public or private charity. What are the major differences?

A public charity has a broad base of support (contributions typically exceeding 33 1/3% of total support). A private charity has a small base of public support and the majority of the support is derived primarily from the investment earnings of the organization.  For recent legislative information for private foundations, see this post.

So what type of organization are you? Look at the composition of the organization’s support.

Entities that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes may be eligible for federal income tax exemption. What does exempt from federal income tax mean? The organization does not pay federal income tax on the net earnings of the operation. An organization that has applied and received their exemption under Code 501(c)(3) may be receive charitable contributions that are tax deductible by the donor.

So how does an organization receive exempt status? Read the rest of this entry »

The major differences are in the reporting requirements. While public charities file the 990 Form (newly redesigned for 2008), private foundations file a 990-PF. The 990 tracks activities and attempts to show how the organization is accomplishing its exempt purpose. The 990-PF, while also tracking that information, is very focused on two things:

• Type of investments being made
• Distributions being made

Because they do not have the public support base, private foundations rely on either a minimal number of significant contributors or returns from investments for their income base. Most are considered to be “grant-making” organizations as they do not have any operations. The potential for abuse lies in the ability to direct the types of investments and/or distribute income either back to the contributors, who are usually board members or the original founders, or to non-exempt purposes that can benefit the contributors.

Extra reporting requirements include a detailed list of every investment owned by the organization. Every stock, every mutual fund, every partnership, S-corp, and LLC interest- ooh, did I say LLC? Yep. Certain transactions with flow through entities are considered “Listed Transactions”- assumed to be tax avoidance strategies- and others are being heavily scrutinized. In addition, they are not permitted to hold more than 20% interest in an unrelated business enterprise.

The other difference lies in the distributions. Besides keeping a keen eye out for anything that might possibly benefit a board member or significant contributor, it is imperative the organization make minimum charitable distributions roughly equal to 5% of the fair market value of investments. All distributions made must be detailed on the return with full name and address.

Do you need help in determining “what” should be reported “where” on your 990-PF? Contact us.