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Illinois Enacts Uniform Prudent Management of Institutional Funds Act on June 30, 2009

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) was signed by Governor Pat Quinn on June 30, 2009 and is effective immediately.

UPMIFA replaces the Uniform Management of Institutional Funds Act (UMIFA) approved in 1972. UMIFA provides uniform, fundamental rules for expending funds donated as “endowments” to charitable institutions and for investing funds held by those institutions.

UPMIFA Directs Fund Managers to Act as a Prudent Investor

The new law incorporates the experience gained under UMIFA and provides even stronger guidance for investment management by setting a more exact standard for prudent investing.

UPMIFA directs charity managers to:

• Give primary consideration to donor intent
• Act in good faith with the care of an ordinarily prudent person
• Make decisions on a portfolio basis
• Diversify the fund investments unless the fund is better served without diversification
• Rebalance the portfolio in accordance with the investment policy.
• Retain or dispose of property within a reasonable time of receiving that property
• Use their expertise in managing and investing institutional funds or delegate the management and investment functions to an external agent with the expertise.

See Section 3 of UPMIFA for the complete list of standards of conduct in managing and investing institutional funds.

New Law Eliminates "Historic Dollar Value" Concept

UMIFA introduced the concept of total return expenditure of endowment assets for charitable program purposes. This concept expressly permits prudent expenditure of both appreciation and income, as long as a fund is not spent below “historic dollar value.”

Although the new law builds on UMIFA’s appreciation rule, it eliminates the concept of “historic dollar value.” This change increases an institution’s ability to apply a total-return spending rate to its funds.

The new law replaces the historic dollar value approach for endowment funds expenditure with a new standard of prudence for the governing board’s decision-making process. UPMIFA states that institutions “may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines to be prudent for the uses, benefits, purposes and duration for which the endowment fund is established.” 

UPMIFA Sets Appropriation Guidelines

Under the new law, institutions should consider the following factors when determining the appropriation for expenditure or accumulation: 

• The duration and preservation of the endowment fund
• The purpose(s) of the institution and the endowment fund
• General economic conditions
• Possible effects of inflation and deflation
• The expected total return from income and appreciation
• Other resources of the institution
• The investment policy of the institution 

Setting Investment Guidelines for Today’s Markets

The new law incorporates over 35 years of experience from UMIFA, recognizing and protecting donor intent more broadly than did the original law. UPMIFA brings institutional investment and expenditure practices up to date and unifies them across a broad range of charitable funds. The better charitable institutions manage investments and prudently control expenditures, the more money they should have for program purposes.

Questions about UPMIFA? Contact Cliff Shapiro at 312-980-2908 or your Blackman Kallick representative. 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.