Crucial Tips for Handling Endowments

An endowment, which is usually in the form of a donation made to a non-profit, consists of investment funds or other property that may or may not have a specific stated purpose at the bequest of the donor. Endowments can be a financial security blanket for your non-profit but it is important to understand how to handle them.

One of the first points that people need to know is that while you can’t spend the principal from the endowment unless the donor or court says so, income from the principal is normally accessible. While an endowment can be great investment income since you don’t have to solicit it, some endowment agreements outline how interest income can be spent. Most financial experts do suggest that a non-profit avoid donor-imposed conditions that could cause the organization to move away from its mission. There are of course cases where donors don’t apply any restrictions. Either way, the organization can set up the endowment internally; operating it as a separately accounted investment fund or set up a separate charitable organization, such as a foundation, to manage the funds.

One of the larger endowment funds in the United States is made up of millions of dollars in Berkshire Hathaway stock, donated by Warren Buffet. We are referring to the Bill and Melinda Gates Foundation. Another example is The Mayo Clinic, which is a non-profit medical research group, based in Minnesota. It has an endowment that is estimated in the billions. Not all endowments have to be huge like these examples. Non-profits of various sizes have been able to set up endowment programs.

Endowments are a lot of responsibility but can also be beneficial; especially when it comes to a non-profit’s longevity. Here are some tips to consider when thinking about endowments:

• Look at organizations similar to yours that have endowments. Ask yourself how an endowment can further your mission while you study other organizations.
• Consider whether an endowment would help a major gifts campaign or help open doors that you haven’t approached before.
• Think carefully about whether or not your organization can develop strong governance practices to ensure solid investment decisions.
• Develop a document that looks at both the pros and cons of an internal versus an external endowment.

There are many other factors to keep in mind when considering endowments. The points outlined below may help you as you ponder funding for your organization.

• You can start an endowment with any amount of money.
• Endowments tell people that the non-profit will be around for the long-term.
• Very large endowments can leave the public wondering why you need their money.
• Growth of the endowment requires careful investment management.
• A professional investment manager can help better manage endowments.
• Reviewing tax laws in your jurisdiction can tell you whether people will be in an endowment-giving mood.
• External endowment funds require forming a new board of directors and applying for tax-exempt status.
• Making it clear to donors how your organization uses endowment funds is important.
• Be aware that campaigns to fund endowments can divert attention away from a non-profits current needs.
• While your board of directors do not have to be financial experts with endowments, they must be comfortable reviewing financial reports.
• If you have an endowment, a Fund Policy Statement is crucia.l

An endowment Fund Policy Statement is a document that outlines the purpose and guidelines of the endowment fund and how the funds are to be invested. It will also include how funds can be accessed and used.

Donors often offer endowments because they want to leave a legacy behind and give a non-profit the opportunity at a long-term future. Keep in mind that even small non-profits can set up simple bequest programs so donors are able to name their favourite cause as a beneficiary in their wills.

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