Simplifying the administration of trust funds

Veale Wasbrough Vizards look at some of the common issues HEIs encounter when administering trust funds

Universities hold assets on trust for a variety of different purposes, reflecting conditions imposed by donors often dating back to times when universities were radically different organisations, facing different pressures and opportunities. Trust assets might include libraries and collections, scholarship and bursary funds or funds resulting from donations for research, professorial chairs or to fund a capital project. 

Universities are obviously fortunate to have the support of donors and to be entrusted with important historical collections. However, the recent High Court case involving the University of London and the Warburg Institute has brought into sharp focus the administrative complexities that universities operating in the current HE landscape can face when holding assets on trust.

In this article, we look at some of the common issues HEIs encounter when administering trust funds and what measures can be taken to make their management more straightforward. We focus on funds, although libraries and collections have their own specific operational challenges as the Warburg case well illustrates. 

What are trust funds?
First it is important to understand what we mean by trust funds. Essentially, these are funds held by a university which are subject to legal restrictions created by the donor which affect the purposes they can be spent for (known as ‘special trusts’) and/or the university’s ability to spend the capital donation itself (known as ‘permanent endowment’ if the capital cannot be spent). They need to be distinguished from funds designated by a university itself for certain projects or grant funding held subject to contractual terms governing how the funding can be applied.

While these concepts may seem esoteric, the distinction, as we shall see, has real and practical implications for a university’s obligations in relation to its various funds.

Problem areas
Common challenges a university may face when administering trust funds include:

●Ambiguous trust terms
It took a long legal battle and a High Court judgment to clarify the basis on which the University of London holds the Warburg Library and, in that case, there was at least a comprehensive trust deed establishing the original gift. Often the documentation governing trust assets will be patchy (perhaps because the funds were donated to a predecessor institution of the now trustee university).

In some cases, it can be difficult to work out whether the funds are held on trust in the first place. A gift to a university for specific educational purposes (eg to fund a scholarship or chair) will often create a trust, but many cases will not be clear cut. In particular, the line is often blurred as to whether grant funding is subject to a trust or contractual obligations.

Even where there is an obvious trust, the university may not be sure of its obligations. Can it spend the capital as well as the income or must this be held in perpetuity? Funds may historically have been assumed to be permanent endowment but, if this assumption is incorrect, access to the capital may have been prevented unnecessarily.

●Outdated purposes and restrictions
Often trust funds will reflect donations made many years ago where social and economic circumstances were vastly different. Purposes which may have been important a century ago may now be obsolete or outdated, or simply not the best way of using the funds in the current climate to support the university’s students or research.

Equality Act issues can also arise, in particular with scholarship and prize funds which set criteria based on ‘protected characteristics’ (including gender, ethnicity and nationality).

Finally, permanent endowment restrictions can be a problem where the income, which once may have been sufficient to fund a scholarship or chair, is now too low to usefully spend. 

● Administration costs
Administering a large number of trust funds can take significant internal resource, both when it comes to investing and accounting for them, as well as deciding how to apply the income.

What can be done?

There are a number of steps that universities can consider taking to address these issues and simplify the administration of their trust funds.

The first step will be to ensure you have a comprehensive understanding of what you already have. Are you clear what funds are held on trust? Are their purposes clear? Is it clear whether the funds are permanent endowment? If in doubt, take specialist legal advice.

The next stage will be working out whether any changes could be made to existing funds to make their administration more straightforward and/or maximise their potential impact.

  • Could a number of small funds held for similar purposes be consolidated into larger funds (eg for research or scholarships in certain areas)?
  • Could (and should) any permanent endowment restrictions be removed so that the capital of the fund can be spent as well as income?
  • Could (and should) the purposes of any older funds be amended to similar purposes which would maximise the benefit which can be obtained from them in the 21st century?

Where Equality Act issues have been identified, it is likely that the purposes will need to be amended unless a charity-specific exemption can be relied upon. This may be possible where the governing document of the fund only allows students who share a protected characteristic to benefit and the aim is to tackle a particular disadvantage faced by them or is to achieve some other legitimate aim in a proportionate way.

Depending on the size of each fund, there are statutory powers that the university, as trustee, might be able to use to achieve its proposed changes, which in most cases involve the approval of the Charity Commission. For larger funds, the Commission might be willing to make a ‘scheme’ consolidating and amending a number of different funds. It is worth noting that the Law Commission in its project on selected issues in charity law has made provisional proposals which, if implemented, should make it easier for HEIs to rationalise and modernise their trust funds and free them from endowment restrictions.

But whatever kind of restructuring is proposed, care needs to be taken to keep donors on side and minimise any wider reputational implications for the university. Consultation with donors (where possible) will be important not least because, when considering a resolution by the university or an application for a scheme, the Charity Commission may look to see what attempts the university has made to seek the view of donors or their families. 

Carry out a review of your procedures and documentation for new donations to make sure any historical issues are addressed:

  • Is the status of the funds sufficiently clear from the documentation or could improvements be made (take external legal advice if in doubt)? Would your Development team benefit from training on the kinds of restrictions that can apply and how to engage with donors about these?
  • Could additional flexibilities be built into the documentation so that funds can be applied for other purposes if the original purposes cease to be suitable or effective?
  • Finally, consider whether changes could be made to the basis on which the funds are invested. In particular, the adoption of a total return approach to investment could simplify investment decisions, maximise returns and enable you to apply more of the overall return in furthering the purposes of each fund.

Summary

Trust assets can be of vital importance to a university, helping it carry out research, fund its academic chairs and support students. As we have seen, while the administration of trust assets can carry operational challenges, particularly where donations were made in very different times, steps can be taken to simplify them and maximise their impact. Important lessons can also be learned for new donations, enabling universities to take measures now to safeguard the effectiveness of their funds for years to come.

Contact us

Con Alexander, Partner, and Rachel Tonkin, Senior Associate, are from leading education law firm, Veale Wasbrough Vizards. Con can be contacted on 0117 314 5214 or at  calexander@vwv.co.uk. Rachel can be contacted on 0117 314 5397 or at  rtonkin@vwv.co.uk.

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