Court Listens to Petition to Modify Restrictions on an Endowment Fund

This is a petition to modify restrictions on an endowment fund, pursuant to section 8-1.1 of the Estates, Powers and Trusts Law or, in the alternative, section 522 of the Not-for-Profit Corporation Law. Petitioners, trustees of a university, seek an order authorizing the subdivision of an endowment fund created by a testamentary bequest to the College of Medicine. The Attorney General of the State of New York (on behalf of ultimate charitable beneficiaries) has reviewed the current audit of the fund and raises no objection to the relief requested in the petition.

The decedent died on March 9, 1985. Her last will and testament was admitted to probate by a decree of this court dated April 5, 1985. Decedent was a graduate of the University, a member of the Board of Trustees and a benefactor of the University. In September 1986, the University received $1,500,000 from the estate of the deceased.

The University states that the income from the fund exceeds the amount required to fund a chair in clinical medicine. Specifically, the income exceeds the amount that can be utilized under the University’s guidelines. The guidelines for endowment funds provide payment of a salary to the professor appointed to the professorship and expenses including laboratory space and research services. Beginning in 2007, the University has required $2.5 million to fund an endowment for a full professorship and $1.5 million to fund an endowed associate or an assistant professorship. The currently expendable income from the Uris professorship generates annual expendable income of $242,284. A current endowment of $2.5 million generates expendable income of $107,500.

The University states that the spending guidelines for endowments limit the amount of funds paid to professors in order to encourage the faculty to obtain research grants and maintain a medical practice. The University contends that the application of the entire fund in the endowment to one professorship would discourage a faculty member from seeking government and industry grants and engaging in patient care.

The petition seeks to modify the terms of the bequest pursuant to section 8-1.1 of the Estates, Powers and Trusts Law or, in the alternative, pursuant to section 522 of the Not-for-Profit Corporation Law. A charitable corporation may apply for the release of a restriction imposed by a gift instrument as to the use or investment of the fund (N-PCL 522). There is a co-existing right to seek modification pursuant to EPTL 8-1.1. The focus of the Not-for-Profit Corporation Law is the construction and administration of the charitable corporation.

EPTL 8-1.1 applies to all charitable dispositions including absolute gifts. This statute embraces both the doctrine of equitable deviation and the doctrine of cy pres. Equitable deviation under EPTL 8-1.1 is the equivalent of modification pursuant to N-PCL 522. Equitable deviation is utilized to alter or amend an administrative provision. The doctrine of cy pres is utilized to effect a substantive change.

The court is mindful of the concern that equitable deviation may be employed to modify a charitable disposition where a substantive change is requested but the higher standard for cy pres cannot be met.

The requirements for cy pres are: “1) the trust must be charitable in nature; 2) the language when read in light of all the attendant circumstances must indicate general rather than specific charitable intent; and 3) the particular purpose for which the trust was created has failed or become impossible or impracticable to achieve”

Generally, in the application of cy pres there is a further requirement that the donor have a general charitable intent with respect to trusts. The current Restatement of Trusts provides that in the application of cy pres a general charitable intent is presumed unless the donor expresses a contrary intent. The courts in this state still require evidence of general charitable intent in addition to specific charitable intent.

The question of general charitable intent is not so much an issue here, as petitioners do not seek to substitute the charitable institution selected by the testator, modify the charitable purpose, or extend the category of recipients of the award. The court notes, nevertheless, that the bequests in the last will and testament to the Hospital and the Museum in addition to Columbia University evidence a general charitable intent. Thus, the court is convinced that the petitioners have satisfied the requirements for application of cy pres.

Cy pres can be applied to modify a charitable disposition where the change in circumstances is the creation of a surplus fund. A surplus exists where the fund exceeds the amount necessary or appropriate to accomplish the charitable purpose. The Restatement [Third] of Trusts adds a new provision permitting modification where an expenditure of funds would be wasteful.

This case involves the uncommon situation where utilization of a surplus fund would not only be wasteful but would be counterproductive.

In this case, the University contends that application of the full endowment to fund a professorship in clinical medicine would eliminate the incentive to (1) obtain grants and (2) provide patient care. The first point relates to the financial impact to the University and the second concerns impairment of the University’s commitment to patient care.

Under cy pres, the test to determine whether the proposed change is consistent with the intention of the testator is ascertained from the language of the last will and testament and facts not in dispute. Here, to the extent that the proposed modification benefits the University’s program in medical research, it will also advance the charitable intention of the testator. In addition, the testator’s legitimate desire to perpetuate her name and her husband’s name will be effectuated. Further, the presence of a distinguished faculty at this institution ensures that the prestige of the original professorship in clinical medicine will not be diminished by the creation of additional professorships.

The court, therefore, grants the petition. The University is authorized to create an endowment fund of $2.5 million and additional endowment funds to support professorships, as the value of the remaining funds permit. The trustees are authorized, in their discretion, to reduce the number of additional professorships if the income from the funds decrease.

If you are an heir of a decedent where you think that you are deprived of your inheritance, consult Stephen Bilkis and Associates for guidance.