Endowments are money or property given to a church with the understanding that the principal stays invested rather than being spent, while the investment earnings support the church’s programs or operations over time. That basic idea is simple. What trips churches up is that endowments aren’t just a financial arrangement — they’re a legal one, governed by a specific California statute that limits how and when the church can actually spend the money.
The Law Behind Endowments: California’s UPMIFA
California governs institutional endowments through the Uniform Prudent Management of Institutional Funds Act (UPMIFA), adopted effective January 1, 2009 and codified at California Probate Code §§ 18501 through 18510. UPMIFA applies to endowments created after that date and, retroactively, to decisions made after that date about older endowments too — a church can’t assume a decades-old endowment is grandfathered out of the statute’s requirements. The law sets a prudence standard for investing endowment assets and requires the church to adopt a spending policy consistent with the donor’s intent as expressed in the gift instrument — the document or agreement that created the endowment in the first place.
Restricted vs. Unrestricted: The Distinction That Actually Controls Spending
Not every endowment is legally the same, and this is the distinction most churches gloss over. A true endowment fund is one that isn’t wholly expendable on a current basis under the terms of the gift instrument — the donor specifically restricted it, and the church is legally bound by that restriction, not just by good manners.
A board-designated or “quasi-endowment” fund looks similar day to day, but the board itself chose to treat unrestricted money as an endowment; because the board created the restriction, the board can also undo it. Confusing the two is a real problem: spending from a true endowment fund outside what the gift instrument allows isn’t just a bad financial decision, it can be a breach of the church’s legal obligation to the donor’s restriction.
Releasing an Outdated Restriction on Endowments
Donor restrictions written decades ago don’t always make sense today, and UPMIFA has a practical release valve for exactly that problem. For an endowment fund that’s more than 20 years old and worth less than $25,000, a church can release or modify an outdated restriction without going to court, as long as the funds released continue to be used consistently with the purposes in the gift instrument. Larger or newer endowments generally need either the donor’s consent or a court proceeding to modify a restriction — a church can’t simply decide a restriction is inconvenient and stop honoring it.
Taxation and Reporting for Church Endowments
A properly structured endowment held by a tax-exempt 501(c)(3) organization is itself tax-exempt — dividends, capital gains, and interest earned within the endowment generally aren’t taxed, provided the organization controlling it maintains its exempt status. Churches occupy an unusual position here: while the IRS encourages charitable organizations generally to report financial information, churches specifically are not required to file the annual information returns that most other 501(c)(3) organizations must file. That reporting exemption doesn’t touch the UPMIFA spending and prudent-management requirements above, though — those apply to a church’s endowment regardless of whether the church files anything with the IRS.
What Happens to Endowments If a Church Dissolves
A restricted endowment doesn’t simply become free money if the church that held it closes. Because a true endowment fund carries the donor’s specific restriction, and a dissolving nonprofit’s remaining assets must still be applied to a charitable purpose, a restricted endowment whose original purpose can no longer be fulfilled — the church itself no longer exists to carry it out — is typically redirected under the cy pres doctrine: a court (or, for smaller UPMIFA-eligible funds, the release process described above) directs the funds to a purpose as close as possible to the donor’s original intent, often another church or charitable organization with a similar mission, rather than allowing the funds to simply be absorbed into general dissolution proceeds.
This is one more reason the restricted-vs-unrestricted distinction matters well before a closure is ever on the table — it determines who actually has a say in where the money goes next.
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