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Jack Owen’s Tax-Exempt Alert AUGUST 2020

Surprising Pennsylvania Response to Pandemic and Economic Downturn

On July 23, 2020, Governor Wolf signed into law H. B. 2484, Act 71 of 2020, which permits increased payouts from endowment funds to charities and expands the standing of donors.   This legislation was passed in response to pressure from charities to spend more from their endowments after recent economic challenges.

Before this change in the law, Pennsylvania had permitted two types of spending from endowments. The first is under the Principal and Income Act, which permits charities to spend only the actual income earned from an endowment. The other alternative is the Total Return Policy (Act 141), which before the change in law permitted charities an election to spend between 2% to 7% of the three year average value of their endowment as long as consistent with the long term preservation of the endowment. With this recent change in law, charities are now allowed to spend up to 10% of their endowment for a temporary period of three years. Accordingly, for fiscal years ending in 2020, 2021 and 2022, Pennsylvania raised its fixed maximum from 7% to 10% for endowment spending.  The spending, however, must consider the long term preservation of the fund and the charity’s need for capital to fulfill its mission.  The percentage selected must be done in a prudent manner by the board acting as fiduciaries and applies to the three year average of the balance in the endowment. These rules apply to both nonprofit corporation funds and funds held in separate trusts.

The other major change in Act 71 of 2020 was to expand standing. Under prior law, a donor generally did not have standing to sue a charity for failure to follow endowment restrictions. Following Act 71, a donor now has standing related to his or her donation.  Act 71 provides that, in addition to the Attorney General, the charity itself, the donor and any other person named in the gift instrument has standing. For planning purposes, donors may now want to name persons in a gift instrument to enforce the donor’s restrictions after the death of the donor.

Electing a Total Return Policy on endowment spending is something that should be studied carefully by a board of directors (or trustees).   Drafting an endowment agreement is also a significant undertaking for a donor, and it is critical for a charity to understand any endowment restrictions.

This is a complicated area and please do not hesitate to contact us if you have any questions.

We sincerely hope you appreciate receiving the information in this newsletter.  But in case you do not want to receive it, please contact Diane Trichtinger at 412.745-1040, or [email protected] to be removed from this list.  Likewise, please contact Diane with any colleagues or other persons who you would like to add to this list. 

Note:  This provides general information regarding matters of interest to tax-exempt organizations.  Such information is neither legal advice nor legal opinion concerning particular situations.  If legal advice or opinion is required, legal counsel should be consulted. 

We would be pleased to address any questions you may have regarding the foregoing or any other tax-exempt issues.  For further information, please contact Mike Dutkovich (412-765-0535), [email protected]; Susan Ott (412-745-9900), [email protected]; or Jack Owen (412-765-1020), [email protected].

©Owen Law Group, LLC, 310 Grant Street, Suite 1005, Pittsburgh, PA 15219  412.745.1040

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    Pittsburgh, Pennsylvania 15219
    Phone: 412-745-1040
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