All About Estates

Endowment Variations

COVID-19 has hit the charitable sector hard, and arts organizations face particular challenges. A recent article in The Globe and Mail about the Banff Centre described closed facilities, lost fundraising, cancelled programs, layoffs, deficits, resignations, and protests. The article also mentioned a request to endowment donors for “permission” to use annual payout of “their” funds for operations, not the designated purpose. One donor, Myra Davis, refused. The money was for artists, not operations.

Presumably a number of other Banff Centre endowment donors, or perhaps their descendants, agreed to the request to lift endowment restrictions in this tough year. It’s the responsible thing to do.  Make sure the money can be devoted to core mission. In Covid, unrestricted funds can mean the difference between a charity’s survival and extinction.

Cy-près?

To the trust lawyers reading this blog, you might be scratching your heads about the legal basis for this request. What legal power does the donor have to vary to the purpose of an endowment that she  established and funded? She made an irrevocable gift subject to certain conditions. The donor doesn’t  own the money. The donor has no ongoing legal say over how the money should be used, yet the charity asks a question as if she does. Only the courts, or in Ontario the Public Guardian and Trustee, can vary charitable trusts insofar as the variations are “as near as possible” to the donor’s original purpose.

Right to Vary Purpose Clause

In the case of the Banff Centre, the legal power is probably provided by a “right to vary” purpose clause in the endowment agreement. This clause allows the charity to change the purposes to a related object if the donor is consulted. It’s a pragmatic form of internal cy-près. The change can be made without judicial reference. When I worked at a hospital foundation we called it the “cure for cancer” clause, but Covid demonstrates that it may also be used to free up restricted funds in times of crisis that would otherwise go unused.

Public Relations

For many charities the primary considerations related to gift restrictions are donor relations, reputation management and risk management. The donor may have no legal authority to lift restrictions, but they have significant influence. They can give again, and, they can complain publicly and/or sue the charity.

Following this logic, with the donor’s consent, trust terms can be altered on a temporary or permanent basis. Does it matter that the charity is violating the terms of the trust? Yes, in trust law. No, if the  only potential complainant agrees with the change.

Using a restricted endowment payout for general operational purposes is an example of the organization being practical and protecting its mission. In this context, being in breach of trust is a victimless crime – if the donor is onboard. That said, charities should call their legal counsel before gift or endowment restrictions are relaxed.

About Malcolm Burrows
Malcolm is a philanthropic advisor with 30 years of experience. He is head, philanthropic advisory services at Scotia Wealth Management and founder of Aqueduct Foundation. Views are his own. malcolm.burrows@scotiawealth.com

3 Comments

  1. Marie-Anne Desjardins

    January 14, 2021 - 2:25 pm
    Reply

    Hence the importance of not endowning/capitalising all money generated by the trust on good years above the agreed upon/of legal dq, but rather to create a reserve fund equivalent to 1,2, 3 years of what would be the annual distribution of the endowment.

    • Malcolm Burrows

      January 14, 2021 - 2:55 pm
      Reply

      Agreed Marie-Anne! Charities need flexible funding to be effective. A reserve fund is helpful; flexible endowment terms are helpful; unrestricted donations are helpful. Thanks for the comment, Malcolm

  2. Doug Puffer

    January 14, 2021 - 5:53 pm
    Reply

    Malcolm, thank you for writing this important piece. I couldn’t agree more. You have highlighted the significance of cy pres language in original gift agreements and memoranda which govern the limitations of how charities may use the endowment income and to some extent the invested capital.

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