Understanding Endowments and Their Consistent Source of Funding

This article was originally published on the GrantStation blog. You can read the full blog post here.

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Did you know that over 43% of nonprofits have endowments they can use as a consistent source of funding? If you’ve never created or received an endowment for your organization, setting one up might seem like a daunting undertaking. In actuality, it doesn’t have to be a difficult process—even for smaller nonprofits!

Before you can get started with endowments, however, you need to understand what they are and what goes into maintaining them. We’ll cover these essential topics:

• What is an endowment?
• How endowments work for nonprofits
• Benefits of endowment donations

Adding endowments to your fundraising strategy can help you improve both your financial sustainability and your relationships with donors. Let’s explore the basics to give you the foundation you need to get started.

What is an endowment?

Endowments are long-term, donated funding sources that support your nonprofit’s work and grow over time. By setting aside these funds and investing them, your organization creates a sustainable source of revenue that lasts for years to come.

Infinite Giving’s nonprofit endowment guide breaks down the key components of endowments to give you a better idea of how they operate:

• Annual disbursements from the fund support your work. Each year, you’ll use a specified percentage of the fund (usually around 5%) to pay for your programs, initiatives, or operations. 
• Additional appreciation gets retained and reinvested. Money in the endowment beyond the annual disbursement, including any appreciation, stays in the fund to keep growing. 
• The initial investment is meant to grow. Ideally, none of the initial investment (known as the principal) will be spent as part of your disbursements. The fund is meant to grow over time, while only investment income should be spent. 

Your nonprofit can start your own endowment, or donors can gift endowments to your organization themselves. Even if a donor gifts their own endowment, it functions differently from a donor-advised fund since your nonprofit is more in control of the fund. Donors may have requests for how they want income from the endowment to be spent, but they do not control the fund directly. 

How endowments work for nonprofits

Let’s dive deeper into what starting and maintaining an endowment looks like. The process is made up of three main parts:

Creating a fund

Before creating an endowment fund, you’ll need to create endowment policies to guide your usage and get board approval. With the help of a nonprofitn investment advisor, develop policies for: 

• Investment: Work with your board to determine rules for what you can invest in and what your overall investment strategy will be. Include target investment returns in this policy, as well.
• Disbursement: What will the endowment’s annual disbursement be? Choose a percentage such as 5% to take out of the fund each year to support your nonprofit’s work.
• Usage: This policy outlines how the money taken out of your endowment can be used. For instance, a donor might want funds restricted to a specific program or scholarship fund. 

Once these policies are in place, you can create your fund with a bank, wealth advisor, or RIA (Registered Investment Advisor). There are pros and cons to each option, but RIAs are often preferred because they have a fiduciary responsibility to work in your best interest. Plus, certain RIAs specialize in working with nonprofits, meaning they know how to cater to your unique needs.

After choosing your provider and opening the endowment, you’ll decide on your investment portfolio. Most nonprofits choose low-risk options for their portfolios like treasury bonds and low-cost index funds. If you’re not sure what to invest in, your advisor can use their expertise to help you decide.

Accepting endowment gifts

Once your endowment is set up, you’re ready to accept donations to fund it. As mentioned earlier, donors can either donate towards an existing endowment or donate their own. 

You can make both of these processes easier by using intuitive endowment software that lets donors quickly gift endowments online (some platforms will even open your investment account for you!). Simply by going to your donation page and filling out a form about their intent, donors can start the process of gifting an endowment. Once it’s set up, the donor can monitor their gift’s growth and make additional donations to the endowment at any time. 

Since donating endowments isn’t always the first thing on donors’ minds, it’s important to promote the option to them on your nonprofit’s website and across marketing channels. Conduct individual outreach as needed for high-capacity donors you think might be especially interested. 

Monitoring your endowment’s growth

The last step after establishing and funding your endowment is to manage disbursements and monitor its growth.

By investing the funds, your organization can fight against inflation and potentially increase the donations’ value over time. But since investing can be complex, it’s crucial to consistently and strategically manage your endowment. Monitor your total returns and earnings, and consider updating your portfolio if needed. If you’re working with a nonprofit investment advisor, they can handle this for you!

Benefits of endowment donations

There are plenty of benefits your organization can receive from endowments, but the main benefits fall into two categories:

1. Creating more sustainable funding: Because endowments are meant to grow and due to the consistency of annual disbursements, they can offer your nonprofit a reliable source of income that you can count on year to year. Even when other fundraising results fluctuate, endowments often remain predictable. 
2. Building stronger relationships with high-value donors: Endowments are exciting to donors with significant wealth because they offer tax benefits and the ability to create a major impact over time. By promoting and soliciting endowment gifts, you can build strong, long-term relationships with these donors. 

Additionally, although endowments are different from planned gifts, they’re still considered a form of legacy giving because they allow donors to make a personal, lasting impact on your organization. And according to NXUnite, any type of legacy giving acts as long-term income that can help you improve financial planning and support your organization for years to come.

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Once you get up and running with your first endowment gifts, plan to dedicate plenty of time to appreciating and recognizing your donors. Those who donate endowments believe in your mission and can be strong advocates for your cause, so start building those relationships right away!