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.

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.

In this ultimate guide to nonprofit endowments, we’ll examine the theoretical and practical elements of developing and managing an endowment fund. We’ll look at the following topics:

  • What Is a Nonprofit Endowment
  • Why Your Nonprofit Should Have 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. Let’s begin by defining the nonprofit endowment and exactly why it matters.

Infinite Giving is making endowment funds available to nonprofits big and small.  Learn more.

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, libraries, religious organizations, and social-service organizations.

Each year, a portion of the endowment is 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. 

Generally, endowments are designed to keep their initial investment amount intact and growing, spending only the investment income for predetermined 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.
In this image, you can see the  three major types of endowments: true, term, and quasi.

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 Have 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 advertise it to potential donors.

Why Nonprofits Like Endowments

For nonprofits, an endowment can create a stable annual income stream, alleviating 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. 

Questions to Ask Before Creating an Endowment

That being said, not every nonprofit is in a good position to establish an endowment. When deciding if you’re ready for a nonprofit endowment, ask yourself the following questions:

  • How much will it cost to manage an endowment each year? Is this financially viable?
  • Does your nonprofit have sufficient reserves to weather sudden economic downturns? Can you afford to put assets into a less liquid form to grow them for future use?  
  • Is your board of directors comfortable putting restrictions on the use of the endowment’s assets? 

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 

There are four critical steps to building a nonprofit endowment: making a policy, choosing a strategy, creating a fund, and funding a fund.

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. Before creating an endowment, consider setting the following three policies in conversation with your nonprofit’s board:  

  • Investment Policy. An investment policy describes the types of investments you can make with your nonprofit endowment, the aggressivity of the investments, and the target returns. 
  • Withdrawal Policy. A withdrawal 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. 
  • Usage Policy. A usage policy describes how the fund and its investment income can be used. Board members or donors might restrict an endowment’s funds to a specific purpose, such as funding a program, scholarship, or position.

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 to 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. 

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 automated investing, 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:

  • Low, transparent service, investment, and management fees for your endowment.
  • Easy-to-use portal that allows you quickly to view, add, invest, and withdraw funds from the endowment.
  • 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).
  • 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 automated investment platform can help your nonprofit accept endowment donations at no cost and reinvest them at a maximum annual fee of 0.65% of assets. 

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 a 5% annual disbursement.

View all your nonprofit endowment gifts in a single dashboard.

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. All you need to do is share your nonprofit’s unique giving URL with potential endowment donors, inviting them to create a lasting, intergenerational impact on their community. Donors will then follow the link to gift unrestricted endowments and micro-endowments (and stock shares) to your organization. On your endowment giving page, they’ll:

  1. Designate the organization, gift amount (minimum $25,000), and any special notes or requests.
  2. Identify if they want to donate anonymously, receive a thank you, or build a relationship with your organization.

We’ll then transfer and automatically reinvest the funds according to your chosen portfolio, as well as manage the annual disbursement and reporting. Moreover, 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.

With Donor View, donors can view the growth of their nonprofit endowment gift.

Wrapping Up: Further Reading

Endowments can bring much-needed sustainability to established small and big nonprofits in our local communities. Want to learn more about automated investing and growing your nonprofit endowments? In an effort to democratize nonprofit investing, we’re developing comprehensive, accessible resources to answer your most pressing questions. Take a look at our most recent guides:

Ready to open a nonprofit endowment fund? Infinite Giving can help. Get started.