How to Start an Endowment for Your Nonprofit

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Maybe you think endowments are just for large nonprofits such as universities and hospitals. But nonprofits of any size can start an endowment fund. And they should act as an insurance policy for the future. With an endowment, facing the ups and downs of the economy and fundraising becomes easier. And there's no time like right now to get started. Why? Because donors care more than ever about helping their favorite organizations to become sustainable well into the future.

An even greater incentive lies in the coming wealth transfer from older generations, such as Baby Boomers, to their children. The Center on Wealth and Philanthropy at Boston College has estimated a considerable wealth transfer that could result in $18.1 to $72.7 trillion given to charity between 2007 and 2061.

Smart charities plan to capture that wealth transfer through bequests and planned giving (both of which can be part of an endowment campaign).

What Is an Endowment

An endowment is a fund that is restricted. Only the interest from the fund can be spent, not the principal that anchors the endowment. Usually, only a portion of the interest or earnings from the endowment (typically five percent) can be spent annually to make sure that the original funds grow over time. Professional money managers often oversee endowment funds, investing the money in stocks, bonds, and other investments.

Pros and Cons of Endowment Funds

Advantages

Small and new nonprofits often only think about the current fiscal year or the next payroll. It is essential to get out of that financial trap as soon as possible. An endowment helps diversify your organization's income and reduces your vulnerability to every economic crisis.

Endowment funds impress donors, especially generous donors. They know that your nonprofit manages its resources well, plans efficiently, and will likely survive any crisis. Donors also love the option of giving a gift that keeps on giving well into the future, and the opportunity to support the needs of the moment, such as operating and program funding.

Disadvantages

You might be criticized for having an endowment or for having an endowment that seems too large. Some renowned universities have come under attack for growing huge endowments while claiming not to have funds for other uses. 

Small nonprofits may be criticized for not spending every dime on current needs. The organization's board of directors could be the biggest critics of an endowment. Why put money away for an uncertain future when it could be used for very obvious current needs? You'll need a strong case in favor of long-term stability to persuade them.

Even funders such as foundations might slight an organization that already has plenty of money. However, donors usually think well of organizations that show the ability to stash away money for the future.

Growth of the endowment and the amount of income each year depend to an often uncomfortable degree on the current health of stocks and bonds. A period of great economic upheaval could have unanticipated consequences.

The nonprofit’s board of directors probably won't feel qualified to manage all of that investment. Most nonprofits will wish to hire an investment manager or use a foundation to handle all of those details. There may be costs to be considered. Plus, managing large donations to the endowment entails writing agreements and dealing with legal issues. Make sure that your nonprofit knows what will be necessary, the costs involved, and how to find reliable partners to help.

How to Get Started

First, reflect on how much you want to have in your endowment ultimately. You might look at the amount of money needed to fund your organization annually. Consider all the sources of your income from fees for services, to donations, to product sales.

How much do you want to come from your endowment? One expert, Andrea Kihlstedt, writing for Guidestar, suggests nonprofits have at least twice their annual operating budget as a minimum endowment.

You can start an endowment with any amount of money, however small. But to build an endowment of any size is a long-term project. You will need to cultivate donors over time since many endowment gifts come as a result of a bequest when a donor dies.

Your board should set up the rules of the endowment. For instance, you will want to name the endowment, restrict its use, and provide guidelines for how much of the interest can be employed yearly and when the endowment principal can be tapped if needed under extraordinary circumstances. The endowment can be set up within your existing nonprofit corporation, or it can be spun off into a separate 501(c)(3) organization or foundation

Although it is not impossible to start an endowment on your own, you will want to get some help. Your community foundation may be able to help you, including holding the endowment for you. Also, work closely with your accountant and attorney so that your endowment complies with your state's requirements.

Raising Money

Explain to potential donors why you are setting up an endowment. How do you plan to use the fund and its earnings? Answer any questions in all of you fundraising materials for the endowment, provide them on your website and include them in the content you supply to your volunteers (such as board members) who will "sell" the endowment to prospective donors.

Find out if other organizations similar to yours in your community have endowments and how they use them. These facts will be helpful to show that what you are doing is not unusual, much less illegal. Explain your endowment building as good stewardship, ensuring that your organization continues doing good in your community for many years to come.

Make sure that your fundraising for the endowment takes second place to your fundraising for immediate needs. Always make sure that you have enough money coming in to support your annual expenses before you fundraise for an endowment. 

Likewise, ensure that you have a "rainy day" fund that you can tap quickly should unexpected problems arise. An endowment is not a rainy day fund. You should not approach every donor for endowment fundraising. Since wills and bequests usually make up the main components of endowment fundraising, choose your donors carefully and cultivate them over time.

Endowment donors want to leave a legacy and provide for the long-term future of your organization. Set up a planned-giving program to keep up your endowment fundraising. Market it through different materials, seminars, events, and a legacy society.

Build a persuasive case for your endowment. Why should your donors make a long-term investment in your organization? How will their gifts change lives, even save lives well into the future? Explain how your organization will be a good steward of your donors' contributions. Provide lots of ways for people to make their donations and explain how you plan to recognize them or what benefits they will receive. 

Why You Should Get Started Now

Just like any savings program, starting early works. Even in less than ideal economic situations, you start working on building an endowment. It is not a task or goal that you can achieve overnight. Begin now so that you can create a much more stable financial position years down the road.

Article Sources

  1. Havens, J. and Schervish, P. (2019). A Golden Age of Philanthropy Still Beckons: National Wealth Transfer and Potential for Philanthropy Technical Report. [online] Bc.edu. Available at: https://www.bc.edu/content/dam/files/research_sites/cwp/pdf/A%20Golden%20Age%20of%20Philanthropy%20Still%20Bekons.pdf [Accessed 16 Sep. 2019].