Magneto and the Use of the Variance Authority, Part II

As was discussed in the previous blog post, power vested in your Board of Directors under the variance authority language is not unlimited.  (Of course, even Magneto is not invincible – Wolverine stabbed him, right?)  But the variance authority is a great superpower – so, how can you make sure you are able to use it to advance the forces of good, truth, justice and the American Way?

As with any question involving legal issues, make sure your legal counsel is part of your decision-making with any variance authority matter.  The concept of variance authority originates from the trust law doctrines of cy pres (modifying a purpose restriction) and deviation (modifying a management restriction).  There is an abundance of legal doctrine in this area.

The use of the variance authority is addressed in the Uniform Prudent Management of Institutional Funds Act (UPMIFA).  While states were free to adopt their own versions of UPMIFA, the uniform law added a provision that allows a charity to modify a restriction on a small (less than $25,000) and old (over 20 years old) fund without going to court.  If a restriction has become impracticable or wasteful, the charity may notify the state charitable regulator (usually the attorney general), wait 60 days, and then, unless the regulator objects, modify the restriction in a manner consistent with the charitable purposes expressed in any documents that were part of the original gift.

But your use of the variance authority may not fall under the provisions of UPMIFA.  If that’s the case, here are six ideas to consider when contemplating the use of the variance authority.

#1 – Make sure all your funds have fund agreements, and all fund agreements contain the variance authority language.  This is a simple first step, but a crucial one. 

#2 – Store the original copies of agreements in a safe place.  This may sound obvious, but in the case of fire, flood or theft these are the source documents you can turn to when a question arises.  Digital scans of all your agreements can help a lot. 

#3 – Review your state laws.  Many states may address the use of the variance authority in state law.  Find out what your state requires.

#4 – Find out what your attorney general expects.  In most states the attorney general oversees the regulation of charities.  Many attorneys general ask that they be notified when you use the variance authority.  Most don’t require you to ask permission; rather, they ask for notification which gives them the chance to review the matter.  Get clarity from your attorney general on what they expect.

#5 – Communicate with the donors, or their family.  Keep all interested parties apprised on how you are managing a fund.  In most cases, it would make sense for you to communicate a potential change with a donor, or their family, or their original professional advisors.  If they object you need to consider your options, but good communication can avert a variety of potential future problems.

#6 – Make sure your board fully understands the variance authority.  Take time during board orientation sessions, or regularly at a board meeting, to review what the variance authority means and when you can use it.  If an issue arises where use of the variance authority is contemplated, make sure all the board members are fully briefed on the matter, and are in agreement with the recommended course of action.

Variance authority power is central to the entire concept of community foundations.  Your foundation will still be working to improve the quality of life in your community one hundred years from now.  Thoughtful use of the variance authority will ensure that your funding will be used in the future to address the most compelling community needs – whatever they are at that time. 

Set up an effective process for using the variance authority, and stick with it.  These Magneto-like powers will help give you the tools to effectively achieve your mission.  Your great-great-great grandchildren will thank you for it.