understanding endowments – everything you need to know
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Understanding Endowments – Everything You Need to Know. Susan Manwaring Miller Thomson LLP 416.595.8583 [email protected] Brad Offman Mackenzie Investments 416.967.2189 [email protected]. CAGP GTA ROUNDTABLE September 20, 2012. - PowerPoint PPT PresentationTRANSCRIPT
Understanding Endowments – Everything You Need to Know
Susan ManwaringMiller Thomson LLP
Brad OffmanMackenzie Investments
CAGP GTA ROUNDTABLE
September 20, 2012
CAGP GTA ROUNDTABLE
September 20, 2012
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Endowments – From Theory to Practice
1. Defining Endowments
2. Do we have one? Should we have one?
3. The Strategic Decision to Build or Grow Endowments
4. The Regulatory Framework of Endowments
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Endowments – From Theory to Practice
5. Operational Issues
6. Fundraising for Endowments
7. Investments – The Regulatory Framework
8. Case Studies – Real Examples from the Field
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Endowments
“Endowment funds for charities are, in my opinion, on the brink of change from a traditional investment fund of perpetual duration for the long-term support of a charity to a charitable fund of action.”
“The recent reforms of the disbursement quota rules, coupled with the ever-increasing sophistication of donors, will inevitably push traditional endowment funds from being plodding dinosaurs to fleet-footed gazelles.”
Calvin Fong, Vancity Community Foundation
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What is An Endowment?
The Legal Definition Not much guidance here Is it in the Income Tax Act?
The Right Definition? Capital Intact and Income used annually for
Charitable Purposes The Understandable Definition?
The Organization’s Savings Account
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The Regulatory Framework – A Brief History Donor’s Choice: Short or Long-Term
The “80-20” RuleThe “Ten-Year” Rule/Enduring Property
The Capital Accumulation Rule – 3.5%How did endowments accumulate?I. Strict Endowment AgreementsII. Board Directed Endowment AgreementsIII. No Endowment Agreement
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The Existing Regulatory Framework DQ is highly simplified – only the 3.5%
disbursement requirement still exists The 80/20 rule is gone The Ten-Year gift is gone
Massive implications for new charities and donors Opens up the donor conversation
Potential implications for existing endowments
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Regulatory Framework
Anti Avoidance provisions Gifts between related parties must be spent
within the following year unless a “designated” gift
Rules which prohibit a charity from engaging in transaction which delays the expenditure of funds on charitable activities
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Groups of Charities – Take Note!
Transfers between non-arm’s length charities Now 100% spending obligation unless
designated Remember to designate all intra-group
transfers
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The Case For Endowments
Long-term cash flow ensures continuity of programs
Smoothes out the peaks and valleys associated with traditional fundraising
Safety net Reflects strength and stability of the
organization Decreases fundraising costs
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The Case Against Endowments
Only a small portion of the donation actually goes to the “cause”
Donors getting full tax break for charitable funds not being put to full use
Will dissuade donors from supporting organization because it already has sufficient funding
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The Case Against Endowments
Repeal of 80% expenditure requirement 3.5% disbursement requirement for
charitable organizations – now applies only when investment assets exceed $100,000
Elimination of “enduring property”, “specified gift”, “capital gains pool”
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Implications For Existing Endowments
Questions to ask: Do the new rules mean we can spend
existing endowments differently? Do the new rules mean the charity can
encroach on capital? Do the new rules permit spending on
different activity?
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Implications for Existing Endowments The answer requires consideration of:
Terms of Gift – Donor perspective Terms of Restriction – Internal or External Ten year gift tax concerns – now irrelevant? Common law / trust law issues Public reputation/Donor relations
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Existing Endowments – Encroachment
If real trust exists, cannot encroach unless the terms of the “trust” permit encroachmentor Court Order – which, in effect, varies the trust – S.13
Charities Accounting Act (Ontario)• Public Guardian Trustee of Ontario has the authority
in Ontario over the regulation of charities• Must be served if conclude court application
required to vary terms of endowment• Parens patriae role filled by Attorney General in
other provinces
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Existing Endowments: Encroachment - Internally Restricted Funds
If the funds are internally restricted what can be done?
Donor contributions depend on the donor understanding of Fund
There should be flexibility in regards to the internally restricted funds unless the Board by its language created a trust
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Implications For New Gifts
Greater Flexibility!
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Flexibility - New Gifts
What is meant by capital? What is meant by income? Can the charity fund its commitments? Can the charity encroach? How should the charity invest?
total return model – no differentiation between interest, dividends and capital gains
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Perpetuity
Is it necessary? Income tax requirements - gone Donor Charity Donor-imposed or board designated
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Endowment Strategy
Most charities sit somewhere in the middle of the two extremes
For endowment building to be successful, there must be a strategic decision to focus on it. There must also be a strategic imperative.I. Board of Directors must support itII. Senior staff must support itIII. Patience
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Operational Readiness
Proper governance is critical Policies
Gift acceptance Endowment Planned giving Fundraising Distribution/Disbursement
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Raising Funds for Endowments Endowment fundraising is often
synonymous with planned giving/legacy fundraising
It doesn’t have to be that way…or does it?
Organization that successfully integrate legacy gifts into the existing fund development culture will benefit most
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Bringing home the bacon
Board support is critical – is it the best deployment of organizational capital?
Is there a case for support? Does the organization truly want to build its endowment?
Who is responsible for endowment fundraising? Major gift fundraisers Planned giving officers
How is the endowment funded?
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Investments – Regulatory Framework Constating documents may establish
considerations and limitations Generally found in Provincial Trustee
Acts Other relevant acts (Ontario)
Charities Accounting Act Religious lands
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Investments – Regulatory Framework – cont’d Rules have become less restrictive
over time Basic tenets:
Prudent investor rule Basic criteria established Allows for advice and delegation
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Shaping Up Your Investment Policy If you have investments, you should
have a formal, written policy with respect to the oversight and management of these investments
This document should serve as a guide for the charity and its investment manager for the ongoing management of its investments
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Shaping Up Your Investment Policy It is important to recognize that a
charity may have investments for different purposes – endowed funds, operating funds, other restricted funds
This is NOT a “one size fits all” policy
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Case Study – The ChairThe Donor, Mackenzie Investments, wishes to make a gift to a large Canadian University to establish a new Chair at the Business School. Mackenzie has never made a gift to this organization.
It is Mackenzie’s wish that the new Chair in Financial Planning Research be established and filled as soon as possible.The University has limited funding outside the gift to support the new position.
The size of the potential gift is $1,000,000.The University estimates that the cost to recruit the Chair will be $50,000 and the “upfront” required costs of securing the position(salary, moving expenses, bonus) will be $250,000
The University also expects to receive support from other donors and some matching funding to support the long-term sustainability of the new Chair
How should we structure the gift?
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Case Study – The ChairHere is what we did:
Mackenzie Investments made an upfront $1 million gift to the University.
The following spending arrangement was formally incorporated into the GiftAgreement:
• $50,000 would be spent in the first year on recruiting expenses• $250,000 would be spent in the second year on upfront costs• $700,000 would be permanently endowed to support the long-term
sustainability of the position with some flexibility built-in to the arrangement.
Is this the correct structure?
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Case Study: The Endowment Agreement Major Foundation wants a precedent
agreement Fundraisers want agreement to reflect
traditional notions of endowment Internal operations and finance want
flexibility as provided under the new ITA rules
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Case Study: The Endowment AgreementSolutions: Delete all references to income and capital Reference the fund as an Endowment but clearly define
spending Add flexibility for Foundation to alter spending if and
when needed Annual payouts can be determined by reference to
charity policies in some way investment and expenses are set by reference to charities policy
Ultimately Donor decides and negotiates but if start with position of flexibility ultimate agreement will be better
