Nonprofit Endowment Essentials

Are you looking for a way to provide your organization with a sustainable, long-term fundraising solution? Nonprofit endowments are a great option to support the continued success of your mission rather than only relying on fundraising to maintain your immediate needs. While endowments may be more commonly used in larger organizations, smaller organizations can benefit from endowments as well. With proper planning and research, nonprofit endowments help equip your organization with continuous financial support.  

Discover how a nonprofit endowment fund can help your nonprofit! 

• Nonprofit endowments 101
• How endowments work
• Nonprofit endowment fund rules and policies
• Benefits of nonprofit endowments
• How to start an endowment fund 

Nonprofit endowments 101 

Exactly what is an endowment fund? Nonprofit endowments are a type of long-term fund raised through donations given to support your nonprofit’s mission. Your organization invests the principal value of the endowment, and the investment earnings are distributed for your nonprofit to use for operational expenses. You can also add more donations to your endowment fund later to increase the principal value. Endowment funds typically have restrictions and policies established by your nonprofit on what the money earned from the fund can be used for.  

Types of endowments 

There are a few different types of endowments your organization can set up that have predetermined rules on how the fund is used and how long the fund is set up for. The three main types of endowments are true endowments, term endowments, and quasi-endowments. Here’s a breakdown of those three types:  

• True endowments. A true endowment is one of the most basic types of endowments. True endowments are meant to last permanently as a source of income for your organization, with the purpose of the use of funds determined by your donors. Donations made to your endowment fund often include a written agreement with your donors that their principal contribution will remain invested in the fund.  
• Term endowments. Unlike a true endowment, a term endowment often has a specific period set for how long a donation stays invested per your donors’ request. That time period could be a set number of years or until a special event occurs. Once the time ends, your organization can take the principal donations out of the fund to use for other purposes. 
• Quasi-endowments. A quasi-endowment’s purpose and duration are purely determined by your nonprofit board members, rather than being restricted by your donors. Your board members can designate reserve funds or unrestricted donations to an endowment; they can also decide to liquidate the principal investment at any time.     

Other endowment types include unrestricted endowments, restricted endowments, and micro-endowments. Restricted endowments are endowment donations made by your donors where income from their investments is reinvested in a specific program or scholarship fund. Conversely, unrestricted endowments are donations that your donors leave the use of up to your nonprofit’s discretion for any urgent needs. Micro-endowments are smaller endowments funds that are more accessible for smaller organizations that are meant to grow over the years.   

How endowments work 

Nonprofit endowments work by investing either reserve funds or specified donations, usually into the stock market, to produce future income for your organization. Endowments can be used by any size of nonprofit, but they’re most commonly used by larger nonprofits, such as museums, universities, and hospitals, for ongoing operations, scholarships, and other long-term projects. 

Before you start an endowment fund, consider if you have the ability to put funds aside. Having money invested that you can’t use won’t be helpful if you’re struggling to get enough funds. How your donors will feel about an endowment fund is also something to consider, as some donors may feel unmotivated to give to your organization if it seems like you have a large amount of money in the bank, even if you’re unable to use it yet. You should also consider what your nonprofit’s current knowledge about investing is, as an endowment may require you to hire a financial planner or investment advisor if you’re less experienced in the investment world. 

Nonprofit endowment fund rules and policies  

Nonprofit endowments generally require different rules or policies to be set before you start your fund, as you’ll need to inform potential endowment donors of these policies as part of their gift. The four most important policies to consider before you start your endowment fund are an investment policy, a usage policy, a disbursement policy, and a donation policy. 

Investment policy 

For your investment policy, you need to decide what your organization can invest the endowment into. Consider the type of stocks or other investments your endowment can invest in as well as how high-risk of an investment you’re willing to make. You also need to consider what your rate of return goal is for your endowment. This information will be vital if you’re hiring an expert to help with your investing. 

Usage policy  

Choose what you’ll be able to use your investment funds for to determine your usage policy. Is there a specific project you want to fund? Is there a scholarship you want to start? Is it for operational expenses? You can keep your usage policy unrestricted, but some donors may want to restrict their specific endowment donation. 

Disbursement policy 

Your disbursement policy can be one of the easier policies to determine! This policy is simply the maximum amount or percentage your organization can withdraw annually from your investment returns. Limiting your withdrawals prevents your nonprofit from taking out too much money, which would defeat the purpose of the endowment fund. 

Donation policy 

Making your donation policy prevents your endowment fund from being overly restricted by your donors and making sure their gifts align with your endowment’s purpose. Your donation policy can include essential information in the donation receipts, as well as how the donation will be transferred to the endowment. You can also set a minimum donation amount and what type of non-monetary gifts can be accepted within your gift policy.   

Endowment management  

To manage your endowment, you should consider creating a committee and hiring a financial expert to handle the investing and tracking of funds. A committee can ensure all your organization’s policies are being followed and the fund is actually growing, rather than staying stagnant or losing money. A poorly managed endowment fund could end up costing your nonprofit money instead of creating long-term income. 

Benefits of nonprofit endowments  

Endowment funds can be a lot of work, so is it worth the effort? There are quite a few major benefits! 

• Overhead reduction: If you can use your investment income on operational costs, it can reduce the amount from your annual fund used to keep the lights on. It also allows your organization to start planning for long-term projects, rather than constantly relying on short-term fundraising campaigns.  
• Sustainability: While organizations with insufficient funding may struggle to put some money aside to invest, endowments are a great long-term solution for nonprofits. Depending on your endowment’s restrictions, your fund can alleviate the stress of planning for future and ongoing campaigns, allowing your team to focus on your other fundraising efforts. An endowment also keeps donors connected to your nonprofit in perpetuity, as you continuously steward your relationship with them and keep them updated on the endowment.  
• Stability: Because there’s an annual stream of income from your investment returns, your organization knows there’s a specified amount of funds you have set aside. This allows you to better prepare for emergencies and inconsistent funding throughout the year.   
• Trustworthiness. Endowment funds help you build trust with the public. Donors love knowing what their gifts are going to, and nonprofit endowments show your organization is thinking about the future instead of finding a quick fix to a larger problem. This is also a great benefit when applying for grants. 
• Major donor appeal. Nonprofit endowments are often appealing to major donors because they often have a minimum donation amount and provide major donors with a legacy they can watch grow over the years. This provides these donors with the immediate tax benefits of a donation while providing them with a vision of the impact of their donation past their own lifetime. 

How to start an endowment fund  

Planning your nonprofit endowment fund can feel daunting. Where do you start? Who do you need to talk to? Here are five steps to help you get started with your endowment fund: 

1. Create your goals  

Before you start your endowment fund, you need to create your goals for the fund. These should be long-term goals since you won’t be able to use the investment returns you gain from the endowment immediately. Decide which projects or organizational needs your fund will be used for in the future. You should also assess what your nonprofit’s urgent needs are to know how much you can realistically put aside for your endowment. Once you’ve figured out what needs your endowment fund will solve, you can start figuring out which type of endowment and restrictions will work best. 

2. Decide your endowment policies  

Your goals will help you determine what type of endowment you decide to start, and the type of endowment fund you choose will affect the policies and restrictions you put on the fund. If your nonprofit has some reserve funds to put aside or donors who want to provide endowments, true or term endowments will probably be your best option. However, if you don’t have a lot of spare funds or are concerned about having possible emergencies, a quasi-endowment will be a better option as your board will be able to liquidate the endowment funds to cover your nonprofit’s needs.  

After you’ve chosen the type of fund, you can decide your different policies regarding the endowment. Decide what investments you can make with the fund, how much your organization can withdraw, and what the income from the fund can be spent on. You can also choose the type of restrictions your donors can put on endowment gifts that you’ll accept. 

3. Recruit your endowment committee   

Once you’ve decided your endowment fund goals and restrictions, you can start recruiting your endowment committee. This committee will pave the way for building your endowment, make decisions based on your goals and policies, and help you find, recruit, and steward endowment donors. This committee can also decide what investment provider will host your nonprofit endowment fund, as well as collect the necessary documents (application, Articles of Incorporation, and 501(c)(3) IRS Determination Letter) to open an account with the chosen provider. 

Your committee should consist of board members, an investment advisor, fundraising directors, a few endowment donors, and other expert advisors, based on your organization’s needs. A diverse committee will help ensure the needs of your organization, the wants of your donors, and the legal requirements involved are met when making endowment decisions. 

4. Appeal to your donors  

After your committee is set and your endowment is ready to start, you can start appealing to your donors. The best place to start appealing for endowment donations is with your board members and partnerships. If you’re able to get the ball rolling internally, your donors will be more motivated to donate as well. A good way to market your endowment fund to your donors is by showing them how their gift can help create a legacy within your mission. Your donors’ contributions will provide support in perpetuity rather than being spent immediately. Your donor appeal should also include information on your organization’s restrictions and gift acceptance policies regarding your nonprofit endowment.  

5. Continue to grow your fund  

Once you have a principal amount, you can start growing your endowment fund through investments. Growing your fund will be a slow process that occurs over years and requires a bit of patience. Your committee should meet regularly to oversee how well the invested funds are performing to keep your fund on the right path.

Your nonprofit can accept more donations to the endowment over time to add to the principal value that is invested. By adding to the additional principal, your endowment fund can provide more investment income in the future. Continue to appeal to potential endowment donors throughout the years to help your fund grow a bit bigger a bit faster. 
 

Final thoughts  

Creating an endowment fund doesn’t have to be out of reach for smaller organizations! Nonprofit endowments can provide your nonprofit with a sustainable source of income for the future of your mission. Once you’ve determined which policies and type of endowment fund would benefit your organization, you can start creating your fund, recruiting your donors, and growing your financial investment into the future.