Differences Between Endowments and Quasi Endowments

Endowments and Quasi Endowments are types of funds available to non-profits and non-profit boards. They are usually money donated to the non-profit or charity to support the organization’s work.

The law of the state of New York makes a distinction between restrictions a donor places on a donation to an organization, and the restrictions a board of an organization places on its own funds.

The former (donor-restricted funds) may be called endowments, and are governed in part by New York’s Not-for-Profit Corporation Law (N-PCL)[1].

The latter (board-created funds), however, are not considered endowments at all under New York law – they are sometimes referred to as “quasi-endowments,” “board-created funds,” or otherwise. These are not governed in the same was as endowments, because they are not considered true endowments.

These are akin to standard board decisions made in the course of running the organization, that may be undertaken or changed via appropriate board procedures and appropriate management of the money. The appropriate board procedures are likely outlined in the founding documents or articles of incorporation of the organization.

Regarding board-created funds, the board can use these funds, or otherwise decide to amend, modify, or change these funds upon appropriate board procedure, it would be up to the board, upon appropriate due diligence and proper management, to decide what they would like to do with these funds and any money contained within – insofar as the money can be confirmed to be given without donor-restrictions.

Further, for donor-created funds, there are certain rules the board must follow, including that the board must spend the money according to the donor’s wishes. However, New York law also allows for the board to decide to spend the money elsewhere if they take certain steps, including considering other alternatives first, allowing the donors to opt-out of the spending, and then, if appropriate, spending the funds prudently while keeping detailed records. There are specific standards with regards to what counts as “prudent” spending. The board may then spend not only the income, but also the historic principal amount of the funds.

For example: if the donors of the money originally wanted to give money to the board so that the board could spend the income only (while saving the principal) on a certain memorial fund, and now the purpose of that memorial fund is no longer relevant, current New York law allows the board to spend the principal as well (known as: spending down below the historic dollar value) via the above listed prudent decision making. This is an “opt-out” style regulation, meaning that this is now the default rule in New York and any donors who donated money before the cut-off date of September 17, 2010, need to be contacted to ask if they want to “opt-out” of this new rule. If they do not choose to opt-out, they are automatically subject to the law (automatically “opted-in” by default) and thus the board can now spend below the historic dollar value of the principal.

If you have any questions on the differences between endowments and quasi-endowments, or board-created funds, do not hesitate to get in contact with us!

---

[1] Available at the New York State Senate webpage, here https://www.nysenate.gov/legislation/laws/NPC; there is also an overview available as a PDF here, https://ag.ny.gov/sites/default/files/publications/mifa-funds_0.pdf.