Should I create an endowment? It’s a question I’m asked frequently by donors making their first major charitable gift – you know, one that requires the donor to stop and think about the details. Those first details are usually financial: how much, paid over what period of time, whether to use cash or other assets. Those are important details! There are others, too, though, so let’s discuss a few of them here.
What is endowment?
Like the old TV ad for diamond jewelry, an endowment is forever. It’s a permanent fund held by a charity that makes regular monetary distributions for the purpose the donor requested. The original gifts to the fund remain intact and invested to provide funding for the long-term.
The benefit of an endowment to the charity is that it provides a lasting base of support, a reliable source of funding that can be reasonably projected and budgeted from year to year. Endowments do require some administration, though. The organization must prudently invest the funds, usually by hiring an outside investment manager and monitoring their results. They must account for each endowment fund (yours separately from mine, for instance) and make sure that distributions are made accurately and for the appropriate purpose. And they should provide an annual report to living donors showing the fund’s financial position and amount of distributions.
Should I create an endowment or just give the money?
That’s a question only the donor can answer. The advantage of a non-endowment gift, sometimes called current-use or spendable gift, is that the entire contribution will be spent for the purpose the donor wants to support. The disadvantage is the same – the money will all be spent. That means that if the related need is ongoing, the charity needs to find new money after the donation is gone.
The advantage of an endowment fund is its perpetuity. Its lastingness, that ongoing base of support we discussed earlier. An endowment also creates a lasting legacy for the donor or someone else they wish to honor by naming the fund. Yet some donors do prefer to see their entire contribution spent. So, the decision is personal.
A true endowment can only be established by the donor and should be formally documented. Stay tuned to this blog for a future post on gift agreements for more on that topic!
Making an endowment gift? Some due diligence is in order.
Endowment funds are a good thing. When establishing an endowment fund, though, donors are well-served to ask a few questions. This helps ensure confidence that their expectations will be met. Here are a few suggestions.
- What is the minimum amount for an endowment fund at your organization? If you want to donate $25,000 to create a fund honoring your parents, but the minimum amount for a named endowment fund is $50,000, you will likely choose to make your gift fully spendable.
- What is the endowment distribution rate? Here, you are looking for a distribution rate that is wise for the long-term viability of the endowment. These days, 4% is fairly typical, and a range of 3% to 5% is reasonable. Also, is that rate applied to a year-end market value, or is it applied to a moving average market value? Using a three-to-five year moving-average market value helps smooth out fluctuations in available funds over periods of big ups and downs in the markets.
- How often are disbursements made? Is it monthly, quarterly, semi-annually, or annually? There is no right answer here, but you probably want to know what to expect.
- What reports will I receive and how frequently? You can reasonably expect to receive communications at least annually with financial information on your endowment fund. These reports should include additional contributions, change in market value, and distribution amounts since the last report. You should also receive information on the use of the distributions related to the purpose of your gift.
- If I make my gift over time (i.e., payments over a few-year period), at what point does the endowment start making distributions for spending? Again, there is no right answer, but many organizations have a minimum balance or time-period before disbursements begin.
- If I restrict my gift to be used for a particular program or purpose, what happens if that program goes away in the future? Organizations that are good at managing endowments have a plan in the unlikely event that occurs. A good practice is having the organization’s Board of Directors or a designated committee review staff recommendations, then approve a decision. If the donors are still living, the organization should consult with them first.
A gift to endowment is a great way to create a lasting legacy and have a significant, long-term impact on a cause that’s important to you. If you have questions or would like to discuss a charitable gift you’re considering, please contact us or schedule a free, introductory phone call. Nothing makes us happier than helping others effect meaningful change in the world.