Consider this: Harvard University’s endowment fund is currently valued at over 53 billion dollars. Stanford’s is valued at $38B. These higher education institutions (and many, many others) prove that wealthy donors LOVE giving to endowments that support long-term organizational sustainability. It's a one time gift that can give for generations to come.
But if you're a small to midsize nonprofit—and most of us are—creating an endowment and accessing these donors can seem daunting and out of reach. But it doesn't have to be! The endowment landscape has changed, and smaller organizations can now tap into legacy giving in ways that can still give you flexibility for the future.
An endowment can be organizationally created, small, and unrestricted and still have great impact.
In this ultimate guide to nonprofit endowments, we’ll examine the theoretical and practical elements of developing and managing an endowment fund for smaller organizations. We’ll look at the following topics:
- What Is a Nonprofit Endowment
- Why Your Nonprofit Should Consider an Endowment
- How to Build a Nonprofit Endowment
Endowments shouldn’t be for only the wealthiest organizations. Our goal is to democratize nonprofit investing and make endowments an accessible option for all nonprofits because they are a key cornerstone for financial sustainability. Let’s begin by defining the nonprofit endowment and exactly why it matters.
What Is a Nonprofit Endowment?
A nonprofit endowment is a dedicated source of long-term funding made up of donated gifts that support the mission and work of a philanthropic organization. In addition to educational institutions, endowments are used by cultural institutions, charities, libraries, religious organizations, and social-service organizations.
Each year, a portion of the endowment is typically paid out as an annual distribution to fund the organization’s work. Any appreciation above this annual distribution is retained in the endowment so that it can continue to grow and support future generations. This disbursement is predictable money coming in that you don't have to fundraise for every year.
Generally, endowments are designed to keep their initial investment amount intact and growing, spending only the investment income for organizational expenses.
In this sense, a nonprofit endowment is different from a nonprofit’s reserve fund. While reserve funds are planned to be eventually spent, endowments are planned, first and foremost, to be grown.
Even among endowments, however, there’s variation in how and when they’re used. Nonprofit endowments can fall into three main categories:
- True Endowment. In a true endowment, the initial investment (principal) is held in perpetuity, and the earnings from the invested assets are allocated and spent per the donor’s specifications and the endowment’s policies.
- Term Endowment. A term endowment is designed to exist for a limited period of time. After the term of the endowment expires, the principal and interest may be used by the nonprofit without restrictions.
- Quasi Endowment. Unlike true and term endowments, quasi endowments are started at the board of directors' discretion via internal transfers of reserve funds. Generally, just as they can be created, these endowments can be dissolved at any time. These are ideal for smaller to mid-size organizations who may not know what their needs are in 20-50 years.
What Are Micro-Endowments?
Nonprofits don’t need a billion-dollar fund for an endowment to be impactful. Micro-endowments are smaller endowment funds that make endowment giving more accessible and attracting to more donors. When invested properly, even endowments in the low thousands will grow significantly over time and pay for salaries, programs, and scholarships year after year.
Why Your Nonprofit Should Consider an Endowment
Endowment funds can be attractive to nonprofits and donors alike for a range of reasons. Understanding the benefits of an endowment can help you decide not only whether your nonprofit is ready to create an endowment, but also how to share the opportunity with high capacity donors.
Why Nonprofits Like Endowments
For nonprofits, an endowment can create a stable annual income stream, alleviating some of the pressure of inconsistent funding. When appropriately advertised, a healthy nonprofit endowment can help attract potential donors by signaling the organization’s trustworthiness and its focus on long-term financial stability.
Why Donors Like Endowments
On the other side of the equation, many high-wealth donors WANT to give endowment donations. For them, gifting endowments not only offers immediate tax benefits, but it also creates a legacy of sustainable giving that has an impact long beyond their lifetime. It's a gift they give once, that can provide for their favorite organization for generations to come.
Questions to Ask if an Endowment is Right for You.
Not every nonprofit is in a good position to establish an endowment. If you are deep into a scarcity mindset, and surviving donation to donation, you should table this idea. But once you have established deep relationships, have fairly predictable giving, and a healthy reserve fund, the timing could be right. When deciding if you’re ready for a nonprofit endowment, ask yourself the following questions:
- Does your nonprofit have sufficient cash reserves to weather sudden economic downturns? Best practices would be 6-12 months of operational reserves put aside as savings to weather those ups and downs. If you don't have this, we recommend pausing the idea of an endowment until it is established.
- Is your board of directors comfortable setting and working towards long term goals? Endowments should be thought of in decades and requires long term thinking. It also requires setting aside some extra cash reserves that will become more restricted to seed your quasi endowment.
- Do you have the right partner in place? Endowments require Investment Policies, Endowment Agreements as well as financial strategies and disbursements. A Nonprofit Investment Advisor will partner with you as a fiduciary and should be able to create these documents at no extra cost to you. Know much will it cost to manage an endowment each year.
If you’ve answered “yes” to each of these questions, it may be time to take the next steps to build a nonprofit endowment! What are those steps? In the next section, we break them down into easy, bite-size pieces.
How to Build a Nonprofit Endowment
Step 1: Draft Endowment Policies
While not necessarily required to open an endowment, developing and approving clear policies for how to fund and manage an endowment is an essential step for long-term endowment health.
A Nonprofit Investment Advisor will partner with you as a fiduciary and should be able to create these documents at no extra cost to you.
Before creating an endowment, consider setting the following three policies in conversation with your nonprofit’s board and endowment partner:
- Investment Policy. An investment policy describes the types of investments you can make with your nonprofit endowment, the investment strategy, and the target returns.
- Disbursement Policy. A disbursement policy describes the amount your nonprofit can withdraw from the fund each year. Generally, this will be a percentage of the fund’s total amount typically in the 4-5% range.
- Usage Policy. A usage policy describes how the fund and its investment income can be used. Board members or donors might want to restrict an endowment’s funds to a specific purpose, such as funding a program, scholarship, or position but we encourage unrestricted gifts to give your organization the most flexibility.
Once you’ve developed your endowment policies and received board approval, you can move to the next step. Remember, you spent time and energy creating these policies for a reason. At each stage, rely on your endowment policies and Nonprofit Investment Advisor to help guide your decisions.
A Brief Note on Restricted and Unrestricted Endowments
When determining your nonprofit endowment policies, you’ll want to define your stance on endowment restrictions. Donors can struggle to let go of their donation and may want to restrict how their endowment is used, dictating exactly where their money goes into your nonprofit—whether that be a specific program, position, or department.
However, this isn’t always in the best interest of your organization. Disbursements from an unrestricted endowment or one with relatively few restrictions can be used where the need is highest. Because of this, we encourage organizations to prioritize unrestricted endowments for the greatest impact. You can still do your best to honor their requests when possible without formally restricting the gift in the policy.
Ultimately, If you have this policy written down, it will likely be easier to negotiate with and find a solution with donors who have strong beliefs. Often education on the detriments of restricted endowments and talking them through long term strategies can help weave the gift into one that only has positive long term impact for the organization.
Step 2: Choose an Investment Provider
You’re now faced with a decision: Where will your endowment live? From big banks to wealth advisors to Nonprofit Investment Advisors, you have a myriad of options for managing your endowment. To find the best fit for your nonprofit’s endowment, look for the following features when choosing a provider:
- Competitive investment and management fees for your endowment.
- Transparency and access. Look for technology that provides an easy-to-use portal that allows you to view your endowment in real time without waiting for an annual report.
- Security features, such as backup and encryption, that keep your endowment funds safe.
- Insurance by the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC).
- Nonprofit expertise. Large, billion dollar funds are managed very differently than a $10M fund, and that is different than a $1M fund. You need someone who understands those nuances and can work within your risk tolerance.
- Extensive investment options that align with your endowment policies and goals.
- Accessible, trustworthy advising services from a Registered Investment Advisor (RIA).
Not sure how to get started? Infinite Giving's team of endowment experts can help your nonprofit create your policies, receive your donations, and provide strategic investment strategies to help you create and manage your endowment.
Step 3: Create an Endowment Fund
Next, you’ll create an account with your chosen provider. In order to open an account, you’ll need to provide your:
- Application (with basic nonprofit information)
- Articles of Incorporation
- 501(c)(3) IRS Determination Letter
Depending on the provider you choose, it can take between a few days and a few months from application to account approval. For example, a big bank can take months to process an application. With Infinite Giving, it generally takes two to three business days to process an application.
Once your account is active, you’ll then select a portfolio and your annual disbursement. To weather the market, outmatch inflation, and grow giving, portfolios for nonprofit endowments should consist of low-cost index funds, ETFs, and bonds and follow an annual disbursement up to 5%.
Step 4: Fund Your Fund With Endowment Donations
Finally, the step you’ve been waiting for! It’s time to fund your endowment. Nonprofits can fund endowments in a variety of ways, including allocating portions of unrestricted reserves as well as soliciting endowment giving directly.
With Infinite Giving, this step is radically easy to put on your website and begin the conversations. Donors who have given to your organization for years in a row are prime for legacy giving. Often these gifts come through asset giving like stocks or cryptocurrency because of the tax savings, so be sure you are set up to receive them before you make the big ask.
When giving an endowment, donors should:
- Designate the organization, gift amount (ideally a minimum of $25,000), and any special notes or requests.
- Identify if they want to donate anonymously, receive a thank you, or build a relationship with your organization.
Your Nonprofit Investment Advisor will then help transfer and invest the funds according to your chosen portfolio, as well as manage the annual disbursement and reporting. Moreover, with Infinite Giving, donors will receive a link to a Donor View dashboard where they can track the impact and growth of the endowment, add to it, and invite others to give.
Wrapping Up: Further Reading
Endowments can bring much-needed financial sustainability to established small and big nonprofits in our local communities. Want to learn more about financial stewardship and growing your nonprofit endowments? In an effort to democratize access to nonprofit endowments and investing, we’re developing comprehensive, accessible resources to answer your most pressing questions. Take a look at our most recent guides:
- Nonprofit Reserve Funds: Using Capital & Operating Reserves. In addition to an endowment, you’ll also want to build a reserve fund for your organization. Learn when to create one, why it’s important, and how to fund it.
- Nonprofit Investing | The Ultimate Guide to Grow Your Giving. Follow this guide for additional strategies and tools for investing your endowment and other financial assets.