Give - Types Of Funds - Nonprofit Endowment Fund - FAQs
Frequently Asked Questions
What is an Endowment Fund? Many of the funds managed by the Foundation are endowment funds, meaning that the initial gift and future contributions are invested for perpetual growth. The principal is never spent. A portion of the earned income and appreciation is distributed to meet the donor's chosen charitable purposes and the rest is reinvested. As the fund increases, the amount of the distribution can be increased proportionally.
What is an Nonprofit Endowment Fund? Like other endowment funds, a Nonprofit Endowment Fund, (sometimes known as an Organizational Endowment Fund), is established for perpetual growth. It is established by a nonprofit agency for the benefit of the nonprofit and has the following characteristics:
- The nonprofit agency is both the donor and the beneficiary of the fund
- The fund has been established by the nonprofit agency with its own funds.
This includes funds that the nonprofit has raised and elected to place at a community foundation. According to the IRS, agency funds are different from all other endowment funds in that a community foundation can transfer the assets, the return on the assets, or both back to the agency upon request. Nevertheless, while the fund is with a community foundation, that community foundation is the legal owner of the fund.
Should all organizations have an endowment fund? No. Organizations that are formed in support of short-term causes or particular events do not need endowments. Similarly, organizations that may be experiencing financial difficulty, lack a strong donor base, or do not have a significant track record should probably not consider creating an endowment.
Is a Nonprofit Endowment Fund an operating reserve? No. Every agency should have a reserve fund to cover operational costs for the short-term in case of an emergency. Such a fund is generally managed and invested by the agency's own board of directors. The income earned and the principal itself may be spent in an emergency. An endowment fund, however, should be considered a permanent fund in which the principal is never spent. The very word "endowment" encourages donors to believe that the fund is intended to exist forever.
Is an endowment fund the same as a planned giving program? Planned giving generally refers to gifts given through legal structures, such as wills and trusts. An endowment fund is built over time and many gifts, including planned gifts, can be used to build it.
Will having an endowment fund conflict with current donors' giving? Developing an endowment is very different from fundraising for current operational support. The addition of an endowment fund effort presented to your current donors can encourage them to provide additional long-term support since it shows your foresight as an organization with a plan to stabilize its financial resources long-term.
What happens if we have an emergency and need the endowment money? The Foundation can transfer the assets, the return on assets or both back to the agency upon request. However, if the fund was originally established purely as an endowment fund, the nonprofit has a moral obligation to maintain it as such because that was the expectation for all previous donors to the fund. To avoid this problem, the Foundation recommends thoughtful planning and careful wording in the original fund agreement to allow for potential difficulties in the future.
What happens to our endowment fund if our organization goes out of business? Technically, the Foundation has, by law, what is known as "variance power" - the authority to redirect the use of assets transferred to them by donors. However, if your nonprofit goes out of business or ceases to be a qualified charitable organization, rather than use this "variance power", the Foundation would consider the advice of your board of directors to assure continued use of your fund for the purposes for which it was originally intended.
Couldn't we just manage the endowment ourselves? That is certainly an option. In fact, if and when an organization has grown sufficiently in size, sophistication, and technical expertise so that it can manage its own investments, the Foundation may recommend the return of its assets. However, because we are in the investment business, we can be an asset to most local nonprofits, making sound investments, saving them time, protecting them from conflict of interest issues, and providing their donors with a sense of security.
How do we get started? Starting your organization’s endowment or placing your current endowment at the Foundation can be a simple, flexible and efficient way to achieve your endowment goals. The Foundation provides a Fund Agreement for the nonprofit organization to sign. The minimum balance required to establish an endowment fund is $5,000. The management fee is 1%. Contributions can be added to the fund at any time and in any amount.