Charity donation as endowment

Can a large unrestricted donation be treated as or converted to permanent endowment?

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I am a trustee of a small charity. We understand that we are due to receive a substantial donation (a bequest).

The donation is large relative our charity's size, and it is likely that trustees will take the view that spending it is unlikely to be in the best interests of the charity or its members or beneficiaries. The charitable purpose is educational, and we had recently had discussions about whether a permanent endowment would useful to us in underpinning this long-term purpose; the general view was that it would be, although we didn't have any potential sources of endowment funding at that point. We would therefore like to consider whether this donation can be treated as, or can become, permanent endowment.

My questions are as follows:

  • There appears to be no restriction in the terms under which the donation was made. Might it nevertheless be possible, due to the size of the donation relative to our turnover, to treat it as a donation which was obviously intended to be used as permanent endowment?
     
  • If we cannot treat the donation as permanent endowment, would it be possible for the charity to self-endow, i.e. for the trustees to create an endowment from what would otherwise be 'surplus' funds? And if the power to do this is not yet in our constitution, is there any reason why we cannot (subject to trustees' and members' agreement) adopt such a power?
     
  • If the charity adopts a power to create endowment from surplus funds, does this power cease to have effect 21 years after it is created (the perpetuity period), or does the 21-year accumulation period commence in respect of each capital donation or event by which endowment is created?

Replies (9)

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By WhichTyler
03rd May 2018 18:38

Seek legal advice. I looked at this a while ago, and it is not straight forward. From memory it involves setting up a subsidiary trust, while persuading the charity commission that not spending money that could be used on charitable objects is the right thing to do

From my charity experience, there is no such thing as too much unrestricted income....

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By WhichTyler
03rd May 2018 19:07

StarfruitAntelope wrote:

The donation is large ... spending it is unlikely to be in the best interests of the charity or its members or beneficiaries.

Really? You could help many more beneficiaries, or help existing ones more extensively. You don't have to do it all in one go. And remember your reserves policy; is it fully funded?

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RLI
By lionofludesch
03rd May 2018 19:36

You can ring-fence the money by putting it in a separate, unrestricted fund. Technically, you'll still be able to use it for anything but it might be a better option if the legal fees are going to be disproportionate.

"Large relative to the charity's size" could mean anything from £100 compared to £1 upwards. Without numbers, we can only offer ideas.

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Replying to lionofludesch:
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By StarfruitAntelope
03rd May 2018 20:16

Thank you both for the replies.

We're talking a 6-figure sum, roughly 10x our annual turnover. We'd certainly like to spend on bringing our work to a larger and wider group of beneficiaries, as well as looking after existing beneficiaries, but under all the circumstances it looks to us like an ongoing stream of investment income would allow us to do this in the best way.

Our reserves are fully funded (and currently growing, although we are addressing this surplus through additional and/or better benefits for our beneficiaries).

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Replying to StarfruitAntelope:
RLI
By lionofludesch
03rd May 2018 21:14

StarfruitAntelope wrote:

Thank you both for the replies.

We're talking a 6-figure sum, roughly 10x our annual turnover. We'd certainly like to spend on bringing our work to a larger and wider group of beneficiaries, as well as looking after existing beneficiaries, but under all the circumstances it looks to us like an ongoing stream of investment income would allow us to do this in the best way.

Our reserves are fully funded (and currently growing, although we are addressing this surplus through additional and/or better benefits for our beneficiaries).

Then you must take professional advice if you feel that the trustees cannot keep their hands off the donation.

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Replying to lionofludesch:
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By WhichTyler
03rd May 2018 21:39

Is there anything you can invest in that would reduce running costs and support the programme(such as buying rather than renting a building etc)?

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Replying to WhichTyler:
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By StarfruitAntelope
03rd May 2018 21:58

Probably not -- we do rent premises but only for a few hours each week. The donation isn't big enough for us to buy premises which would meet our needs, and in any case they'd then lie idle the rest of the week unless we could rent them out. Financial investments would appear to be the best way of, in effect, reducing our running costs and allowing us to do more.

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Replying to lionofludesch:
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By WhichTyler
03rd May 2018 21:43

lionofludesch wrote:

StarfruitAntelope wrote:

We'd certainly like to spend on bringing our work to a larger and wider group of beneficiaries, as well as looking after existing beneficiaries, but under all the circumstances it looks to us like an ongoing stream of investment income would allow us to do this in the best way.

>

these are not incompatible. Spend say 10% of the bequest on additional services, invest the rest. Repeat until funds are used up, but until then they still available for a rainy day or if need increases. Once its in endowment, its hard to get out when you need it...

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Replying to lionofludesch:
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By StarfruitAntelope
03rd May 2018 21:55

Thanks again. I don't think that there's any immediate concern about mis-spending. Rather it's concern that we should avoid spending for the sake of it, or simply to satisfy the requirement to spend within a reasonable time. Actually, spending within a reasonable time, given our objects, size, capacity to grow etc., would probably mean spending at a rate which is roughly similar to the expected investment returns.

However, there is also a consideration as to whether the funds should be 'locked down' in some way against the risk of future trustees/wider membership doing something silly. I also realise that we need to be careful not to make a rod for our own back, though.

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