For small-staff nonprofits, creating an endowment can seem daunting and out of reach. Fortunately, it doesn't have to be!

Wealthy donors love giving to endowments that support long-term organizational sustainability, and modern investing advisors make setting one up more accessible than ever.

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 cover the following topics:

• What Is a Nonprofit Endowment?
• Types of Endowment Funds for Nonprofits
• Benefits and Drawbacks of Nonprofit Endowments
• Things to Consider Before Starting an Endowment
• How to Start an Endowment for Your Nonprofit

Let’s be clear—creating an endowment isn’t always the right move for smaller nonprofits. We’ll help you determine if it’s a good fit for your organization, explain your options, and jumpstart the endowment creation process if you decide to move forward. Let’s start with the basics.

What is a Nonprofit Endowment?

A nonprofit endowment is a dedicated source of long-term funding made up of donations that support a philanthropic organization’s mission and work. In addition to educational institutions, endowments are used by cultural institutions, charities, libraries, religious organizations, and social-service organizations.

Generally, endowments are designed to keep their initial investment amount (the principal) intact and growing, spending only the investment income for organizational expenses. 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.

In this sense, a nonprofit endowment is different from your reserve fund. While reserve funds are planned to be eventually spent, endowments are planned, first and foremost, to be grown.

Types of Endowment Funds for Nonprofits

Among endowments, there’s plenty of variation in how and when they can be used. Nonprofit endowments typically fall into a few main categories:
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True

In a true endowment (also called a permanent endowment), the principal is held in perpetuity, while earnings from the invested assets are allocated and spent per the donor’s specifications and the endowment’s policies.‍ The principal investment cannot be spent, as it’s meant to keep growing long-term. These traditional endowments are common among large universities.

Restricted

Donors can struggle to let go of their donations and may want to restrict how their endowment can be used. For these endowments, donors dictate exactly where the money can go—whether a specific program, position, or department. This gives the original donor more control, but it isn’t always in the best interest of your organization.

Unrestricted

On the other hand, disbursements from an unrestricted endowment (or one with relatively few restrictions) can be used wherever 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 donors’ requests when possible without formally restricting the gift in the policy.

Term

A term endowment is designed to exist for a limited period of time. After the term of the endowment expires, the nonprofit may use both the principal and interest without any restrictions.‍

Quasi

Unlike true and term endowments (in which a donor provides the principal investment), 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 that may not know what their needs will be in 20-50 years.

Micro

You 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 attractive 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.
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Benefits and Drawbacks of Nonprofit Endowments

Endowment funds can be attractive to nonprofits and donors alike for a range of reasons. Understanding the benefits and drawbacks 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 that are well-prepared to manage new assets, starting an endowment can:
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• Establish a reliable funding source. Endowments create a stable annual income stream, alleviating some of the pressure of inconsistent funding. The disbursement serves as predictable money that you can count on and don't have to fundraise for every year.
  
  
• Attract large gifts. When appropriately advertised, a healthy nonprofit endowment can help attract potential donors by signaling the organization’s trustworthiness and focus on long-term financial stability.
  
  
• Create donor legacies. For high-wealth donors, gifting endowments offers immediate tax benefits and 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.

Why an Endowment May Not Be the Best Fit

On the other side of the equation, not every nonprofit is in a good position to establish an endowment. Some organizations lack the resources needed, while others have concerns about potential drawbacks. These include:

• Public perception of endowments. In recent years, endowments have come under increased scrutiny from the public, especially university students and political activists. Many higher education institutions have faced calls for divestment from certain companies.
  
  
• Potential pushback from donors. While many high-capacity donors love endowments, others may think you’re hoarding donations instead of using them for charitable purposes. Small disbursements may also rub donors the wrong way, as only a small part of the funding is being used to actively further your mission at a given time.
  
  
• Associated risk. All investing comes with some level of risk, even if you manage your endowment strategically and prioritize low-risk, highly liquid assets (which we recommend!). Some nonprofit boards may not be comfortable with the risks involved.
  
  
• The long-term nature of endowments. Endowments don’t get results quickly, which can be a barrier for nonprofits that need more short-term solutions. If you can’t afford to wait for your endowment to grow, you shouldn’t establish one.

Things to Consider Before Starting an Endowment

In addition to the potential drawbacks, your nonprofit will need to look inward and consider your organization’s current financial standing before committing to an endowment.

When deciding if your organization is ready to create a nonprofit endowment, ask yourself the following questions:

• What is your budget for managing the endowment? Beyond the initial funds needed to seed the endowment (if you choose a quasi-endowment), there are several costs associated with managing an endowment. Determine your budget for policy creation, outsourcing the management of investments, and any other potential fees.
  
  
• Does your nonprofit have sufficient cash reserves to weather sudden economic downturns? Best practice is to have at least 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 you’ve established a healthy reserve fund.
  
  
• Is your board of directors comfortable setting and working towards long-term goals? Endowments require long-term thinking and should be thought of in decades rather than years. Your board must be comfortable with this fact and willing to abide by the level of restrictions they choose.
  
  
• Do you have the right partner in place? Endowments require Investment Policies, Endowment Agreements, financial strategies, and disbursements. A qualified Nonprofit Investment Advisor will partner with you as a fiduciary and should be able to create these documents at no extra cost.

If you answered “yes” to these questions, it may be time to take the next steps to build a nonprofit endowment!

However, if you are deep into a scarcity mindset, you should table this idea. Consider other options to boost financial sustainability that are more accessible and less restrictive, like building up your reserve fund or improving cash management. With the right strategies, these avenues can be just as impactful as an endowment.
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How to Start an Endowment for Your Nonprofit

If you’ve decided to move forward, follow these steps to establish a quasi-endowment for your organization.
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Step 1: Assess Your Organization’s Readiness

Refer to the questions we discussed in the last section and make sure you can answer “yes” to all of them. Then, verify that your organization is truly ready to start an endowment. Before moving forward, you should have:

• A healthy reserve fund
• Effective cash management strategies
• A strategic plan that considers long-term finances
• A principal investment of at least $25,000 (or a donor willing to provide a principal investment)
• The budget for advisory and endowment management services
• Donors willing to give to the endowment

If you’re missing any of these crucial pieces, take a pause to reevaluate. Consider if you could meet your goals with other financial sustainability strategies, or talk to an advisor to learn more about your options. These experts can help you figure out the best way forward.

Step 2: Discuss Endowments with Your Board

You must secure board buy-in to start an endowment for your organization. Board support is critical, as they’ll be the ones establishing the endowment (if it’s a quasi-endowment) and managing its long-term usage.

Discuss the long-term nature of endowments with your board, and make sure they understand that only a small portion of the funding can be used to support short-term needs. Talk about the pros and cons of starting an endowment, options for management strategies, and potential reactions from donors. It’s difficult to make major structural changes once the endowment is in place, so get everyone on the same page now.

Step 3: Draft Endowment Policies

While it’s not necessarily required, developing clear policies for how to fund and manage your endowment is essential for long-term endowment health. Before creating an endowment, consider drafting the following policies 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, often 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. However, we encourage unrestricted gifts to give your organization the most flexibility.

If you work with a Nonprofit Investment Advisor, they should be able to create these documents as part of your partnership. At each stage, rely on your endowment policies and advisor to help guide your decisions.

As you draft these policies, don’t forget to define your stance on endowment restrictions. If you have this policy written down, it will be easier to negotiate with donors who have strong beliefs and find a solution. Often, education on the detriments of restricted endowments and talking them through long-term strategies can help donors make the best decision.

Want to jumpstart the policy creation process? Download our free Investment Policy Statement template.

Step 4: Choose an Investment Provider

You’re now faced with a decision: Where will your endowment live? From big banks and wealth advisors to registered Nonprofit Investment Advisors, you have a myriad of options for managing your endowment.

To find the best fit, look for the following features when choosing a provider:

• Competitive investment and management fees for your endowment.
• Transparency and access through a user-friendly portal that allows you to view your endowment in real time without waiting for an annual report.
• Security features that keep your endowment funds safe, such as backup and encryption.
• Insurance by the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC).
• Nonprofit expertise. Large, billion-dollar funds are managed very differently from smaller $1M funds. 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. We are a Registered Investment Advisor solely focused on nonprofits to help create your investment policies, receive donations, and provide strategic investment strategies to help you start and manage your endowment.

Step 5: Create Your 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.

Once your account is active, you’ll select a portfolio and your annual disbursement. To weather the market, outmatch inflation, and grow giving, nonprofit endowment portfolios should consist of low-cost index funds, ETFs, and bonds, and follow an annual disbursement up to 5%.

Step 6: Fund Your Endowment with 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 gifts directly.

With Infinite Giving, this step is radically easy. You get a branded asset donation page to put on your website and begin conversations. Donors who have given to your organization for years are prime for legacy giving. Often, these gifts come through non-cash 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:

1. Designate the organization, gift amount (ideally a minimum of $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.

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. With Infinite Giving, you get access to an intuitive dashboard where you can monitor endowment growth at any time.
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If a donor started the endowment, they’ll even receive a link to a Donor View dashboard! Here, they can track the impact and growth of their endowment, add to it, and invite others to give.

Wrapping Up

Endowments can bring much-needed financial sustainability to established small and big nonprofits in our local communities. To make nonprofit endowments and cash management more accessible, we provide expert investing advisory services and comprehensive resources to answer your most pressing questions.

Want to learn more about financial stewardship and growing your nonprofit’s endowment? Take a look at our most recent guides:

• Nonprofit Reserve Funds: How to Manage 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.

• Nonprofit Asset Management: Basics, Benefits, & Options. An endowment is just one of the many financial assets your nonprofit has to manage. Discover tips for managing your cash and investments wisely in this guide.
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