Prudent Investing

A longtime congregant passes away and leaves your synagogue $500,000.

Death is always sad. But the bequest is a good thing, right?

But what if there were stipulations in the legal documents that specified how the funds were to be invested? That the $500,000 was to be kept in accounts at the local bank and invested in CDs? The synagogue has an endowment fund of approximately $1 million invested conservatively and generated a return of 11% last year. Current 1-year CD rates are 1 ½ %. What should you do?

I read a story recently where a church member passed away in 1999 and left his church $460,000. The funds were to be held in trust and invested only in insured bank accounts and government securities, and the net income was to be used for maintenance of the physical property of the church.

A few years ago, Mike, a synagogue president had called me and shared a similar story. The synagogue was in a vacation area. During the 1990s, the Goldbergs would come each year and spend several months in the community, attending services frequently. They set up a trust of $600,000 to benefit the synagogue. The legal stipulations were similar as the church above. The funds were to be housed at the local community bank, and could only be invested in Bank CDs.  And the local bank officer was to be the administrator of the fund. The Goldbergs had both passed away during 2000.

In 1995, the return on a 1 year CD was 5.40%, and just over 6% for a 5-year CD. Today, such rates are 1.50% and 2.25% respectively.

Mike said as CD rates plummeted, they had asked the bank officer if the funds could be invested in a similar way as endowment funds for universities and other not-for-profits, with a mix of equities and fixed assets such as bonds or government securities. The return to the synagogue from the CDs was minimal. And after paying bank fees, very little was left for use by the synagogue. The would make this request every year. And the bank officer always insisted that the donor’s intent regarding investment be followed.

UPMIFA, The Uniform Prudent Management of Institutional Funds Act, is the official governmental guide for how not-for-profit boards are to invest endowment funds. Being prudent is key. The synagogue board is the ultimate authority regarding the management of all synagogue funds, and this includes investing. In 2017, having such a substantive amount of money invested in CDs, or even just in government securities is not prudent.

The church leadership filed a lawsuit in order to invest these funds prudently, in the spirit of UPMIFA, with the desire for a bigger return.  When the New York Trial Court denied their request, the church leadership appealed. The Appeals Court agreed with the church leadership noting that such restrictions “have become impracticable and frustrate the trust’s purpose of generating funds to assist in church maintenance” (In re Estate of Chamberlin, 135 A.D.3d 1052-NY App. 2016).

No one wants to go to court, especially members of a synagogue board. But there are times when such legal action is warranted.

Posted in News
4 comments on “Prudent Investing
  1. Alice Miller says:

    Excellent article. Very worthwhile advice. Articles should be written in bulletins telling people to update their wills with the advice of a financial advisor. No one today would recommend putting money into a CD if they were looking for long term gains.

    • admin says:

      Thanks for writing, Alice. You are correct that no one today would make a gift with restrictions to invest in CDs. But it certainly is within the realm of possibility that there would be other restrictions – housed at a certain financial institution, hedge fund. If a synagogue has gift acceptance policies, that can be the guide on when a gift with restrictions can be accepted.

  2. Mauri Willis says:

    The other side of this issue is when the use specified for the proceeds of the investment is too restrictive. I’ve seen instances where the donor specified a program that many years later no longer existed but it was too expensive and time consuming to try and change the terms of the bequest.

    • admin says:

      Mauri,

      How nice to hear from you.

      You raise an important point. In hindsight, I could have gone into a little bit more detail. You can always reach out to the family members of the donors to share with them the challenges with the current gift’s restrictions and what the synagogue would like do with the available funds. And seek their approval. If there are no family members to reach out to, you would need a board resolution, and then you probably have to go to court to be sure that how you intend to use the gift holds up legally. In such situations, it is always advisable to seek legal advise from a tax attorney or someone familiar with not-for-profit and religious organizations.

Leave a Reply

Your email address will not be published.