A Complete FAQ Guide to Understanding Nonprofit Endowments - Heller Consulting

A Complete FAQ Guide to Understanding Nonprofit Endowments

For many nonprofits, endowments can be confusing and might seem difficult to navigate. However, it doesn’t have to be that way. With the right tools alongside an experienced nonprofit investment advisor, endowments can be easy to implement and have a powerful impact on your fundraising potential.

By answering your most frequently asked questions, this guide will help you better understand the role of endowments and how you can use them to support your nonprofit organization. We’ll answer:

  • What is a nonprofit endowment?
  • What are the benefits of nonprofit endowments?
  • What are the challenges of nonprofit endowments?
  • What are the different types of nonprofit endowments?
  • How do you create a nonprofit endowment?

Without further ado, let’s begin by defining endowments and how they’re used in the context of the nonprofit space.

What is a nonprofit endowment?

Infinite Giving defines a nonprofit endowment as “a dedicated source of long-term funding made up of donated gifts that support the mission and work of a philanthropic organization.” Educational institutions, cultural institutions, libraries, religious organizations, and social-service organizations all leverage endowments as part of their fundraising efforts.

In endowments, the initial seed money (the principal) is typically invested, and the nonprofit uses a portion of the earnings from that investment to support its work. Depending on their restrictions, endowments can be used for a variety of purposes, such as supporting your nonprofit’s general operating budget, providing scholarships, marketing an event, or funding capital expenses.

What are the benefits of nonprofit endowments?

Endowments can have a number of benefits for both nonprofits and their donors. To make the most of your endowment and best market it as a donation option, you should have a solid understanding of how it can help both you and your supporters.

How do endowments benefit nonprofits?

Endowments provide nonprofits with a stable source of long-term funding that can support the organization’s work, respond to uncertain economic conditions, and take pressure off development teams. Instead of struggling each year to meet the nonprofit’s minimum budgetary needs, development departments can attend to growing their organization’s fundraising. 

Additionally, endowments can be used as part of your fundraising strategy to attract and build relationships with donors looking to make a lasting impact.

How do endowments benefit donors?

Endowments benefit donors by providing a way for them to support their favorite causes in perpetuity. Because the endowment’s principal is never spent, the donor’s gift will continue to benefit the causes they care about in the long term. Additionally, donors can often claim their endowment gift on their tax deductions—saving money while helping their community.

What are the challenges of nonprofit endowments?

While the specific challenges of nonprofit endowments will vary depending on your organization, common challenges include:

  • Ensuring the endowment is properly managed and invested
  • Growing the endowment to adequately support your organization’s goals
  • Navigating complex state and federal regulations and tax laws

However, in recent years, modern nonprofit investing tools have revolutionized the endowment space, making it easy for nonprofits of all sizes to accept, build, and manage endowment donations.

What are the different types of nonprofit endowments?

We can divide nonprofit endowments into five main types according to how they can be created and used: unrestricted, temporarily restricted, true, quasi, and micro. Let’s take a quick look at each one:

  • Unrestricted endowments are the most common type of endowment and are not subject to any restrictions on how or when they can be used. Funds in these endowments can be used to support the nonprofit’s general operations or specific programs and initiatives.
  • Temporarily restricted endowments (sometimes called term endowments) are subject to restrictions placed on the principal and interest by the donor for a specific time. During that period, these temporarily restricted funds can only be used for the purposes defined by the donor.
  • True endowments (sometimes called permanently restricted endowments) are subject to restrictions that can never be removed. In these endowments, earnings from the initial investment can only be used for the specific purpose specified by the donor in perpetuity. 
  • Quasi endowments are created via a transfer of reserve funds by your nonprofit’s board of directors. Often, these are established when a nonprofit receives a donation not intended for immediate use. As a result, the donation is held in an endowment fund and invested with the goal of generating income to support the nonprofit.
  • Micro-endowments are small endowments that can be grown and distributed in the same way as larger endowments. Just like their larger siblings, micro-endowments may be subject to various restrictions. However, because of their smaller barrier to entry, these are available and attractive to a broader range of potential donors.

As you look at your endowment options, consider your nonprofit’s short- and long-term financial needs. Endowments can often tie up significant amounts of money that you require for more immediate purposes. 

If that’s the case, you might focus your efforts on micro-endowments that can attract a range of donors and provide long-term support without tying up your entire budget.

How do you create a nonprofit endowment?

Are you ready to create an endowment for your nonprofit? Begin by taking the following four steps. Answering these questions will help guide the endowment’s creation and ensure that it meets your nonprofit’s needs and goals.

  1. Define the purpose of the endowment. What will the endowment be used for? How will it benefit your nonprofit? Will these purposes change over time?
  2. Develop a plan for the endowment. What type of endowment will you create? How will the endowment be funded? How will the endowment be managed? How will the funds be invested?
  3. Secure funding for the endowment. How will you ensure your endowment is adequately funded? Will it be funded through donations, grants, or investment income? 
  4. Establish the endowment. What provider will you use to open the endowment? What restrictions do the endowment’s donors or trustees have for the use of funds?

In many cases, a registered investment advisor (RIA) can help you answer these questions, oversee the investment of your endowment account, and act as its fiduciary. 

In this way, you can focus your attention less on the minutiae of investing and more on providing critical services to your community.

Once the endowment is established, with the help of your RIA, monitor it to ensure that it is being invested and used in accordance with any restrictions and policies. Moreover, to continue building deep relationships with your endowment donors, consider regularly updating them on the fund’s growth and impact.

No matter your nonprofit’s size, you can easily accept and create endowments with donors as an integral part of your giving strategy with the answers above alongside user-friendly tools.

About the Author

Karen Houghton is the CEO of Infinite Giving, a relationship and technology driven Nonprofit Investment Advisor. Karen leverages her deep nonprofit expertise to bring a modern and curated investment experience to nonprofit organizations all over the US. She advocates for organizational sustainability through better financial management, strategic access to curated investment practices for reduced management fees, and increased asset giving.