the terms “PRINCIPAL” AND “CORPUS” EXPLAINED

We often get the question, “What is the principal?” when it comes to funds endowed with UMF.

The principal, also known as the corpus, is simply the portion of an endowment fund balance that a donor contributes or otherwise allocates to be maintained in perpetuity. It is made up of the initial contribution to the fund, any subsequent deposits made, and any income allocated to that balance as instructed within the endowment agreement.

This question often has to do with the balance of accumulation of earnings. When the market is on a strong decline, accumulated earnings available to spend can go into the negative if the fund’s market value is less than the corpus balance of the fund at a snapshot in time.

For example, Jania donates $50,000 to the UMF to establish an endowment to benefit her home church on December 20, 2022. UMF then invests that into the Balanced Fund on December 31, 2022. The market value of the fund rises to $55,000 by June 30, 2023. Jania makes no additional contributions before June 30, 2023, and her agreement does not instruct UMF to allocate any income to the principal. Jania’s endowment has $5,000 in accumulated earnings that are available to spend as of June 30, 2023; calculated as:

Market value on 6/30/2023 = $55,000

CORPUS/PRINCIPAL on 6/30/2023 = $50,000

$55,000 – $50,000 = $5,000

Now, let’s assume Jania donates $10,000 to the endowment on March 31, 2023, and there’s still no instruction in the agreement to allocate income to the principal. The total corpus/principal is now $60,000:

Beginning Corpus/Principal on 12/31/2022 = $50,000

Additional donation on 3/31/2023 = $10,000

Ending Corpus/Principal on 3/31/2023 = $60,000

The $60,000 remains the corpus balance until any additional contributions are made.

Lastly, let’s assume Jania added instruction to allocate* 10% of net (of fees and expenses) dividend and interest income to principal annually as of March 31, 2023, which calculates** out to $500, and donates $10,000 on March 31, 2023:

BeGINNing Corpus/Principal ON 12/31/2022 = $50,000

ADDITIONAL DONATION ON 3/31/2023 = $10,000

INCOME ALLOCATED TO PRINCIPAL ON 3/31/2023 = $500

ENDING CORPUS/PRINCIPAL ON 3/31/2023 = $60,500

The $60,500 remains the corpus balance until the next annual income allocation to the principal and until any additional contributions are made, whichever comes first.

The balance of accumulated earnings changes with every month-end valuation so to remain consistent, for annual accounts, UMF uses the beginning of the year or 1/1 valuation. The beginning quarters’ accumulation is used for quarterly accounts (accounts with automatic quarterly distribution) and the latest unitized (determined market value) month for by-request distributions.

*For illustrative purposes only; not an actual option for current endowment agreements. **Income allocated to principal refers to earnings that are reinvested in the fund and added to its corpus balance. For example, an agreement may state that a percentage of dividend & interest (say, 5% of net earnings) or a percentage of the distribution (i.e., 5% of the 1/1 MV shall be distributed annually and 10% of said distribution shall be reinvested in the fund) should be reinvested to grow the principal of the fund.

This article was written by Ivanna Cole, CFO of UMF of North Carolina. If you would like more information regarding UMF or this article, please contact Ivanna at [email protected].