Understanding Endowments and Why They Matter to Nonprofits

Endowments offer nonprofits increased financial sustainability and improved donor relationships. Learn what endowments are and how they can work for you.

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 an endowment is;
• how endowments work for nonprofits; and,
• 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 Do 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 nonprofit 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!

What are the 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 provide consistent annual disbursements and are meant to grow, 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.

Examples of Successful Endowment Campaigns

For your inspiration, here are examples of successful endowment campaigns by nonprofits:

• Harvard University Endowment: One of the largest and most successful in the world, Harvard's endowment "distributed $2.4 billion in the fiscal year ending June 30, 2024." It supports everything from financial aid to faculty positions and research programs. Harvard has built this fund through large donor gifts, planned giving, and by consistently reinvesting a portion of its returns into the fund.
• The Nature Conservancy: Supporting its mission of environmental conservation, The Nature Conservancy has built a strong endowment focusing on fundraising practices and engaging high-net-worth donors who align with their environmental goals. There have been $818 million in investment gains added to the endowment in the last three years.
• The Cleveland Clinic: This renowned healthcare institution ran a successful endowment campaign that focused on advancing medical research and patient care. According to recent reports, the endowment's growth has enabled $494 million in philanthropic spending in support of its mission.

While those are a few examples, others like The Metropolitan Museum of Art, Smithsonian Institution, St. Jude Children's Research Hospital, and more have also had successful endowment campaigns.

Frequently Asked Questions (FAQ)

Q: How can nonprofit organizations effectively manage endowment assets to ensure long-term growth?

Nonprofit organizations can manage their endowment assets through professional investment management services, which help align the organization's financial goals with long-term investment strategies. This often involves partnering with advisors experienced in nonprofit investments. Additionally, having clear spending policies and a defined withdrawal policy—typically dictating a fixed percentage for annual distributions—ensures the endowment grows over time while providing steady support. Nonprofits should also consider diversification to mitigate risk and enhance returns.

Q: What is the difference between a quasi-endowment and a term endowment?

A quasi-endowment refers to funds that a nonprofit’s board of directors designates to function as an endowment, but these funds can be withdrawn or reallocated at the discretion of the board. It offers flexibility, allowing the nonprofit to use the funds for specific purposes or in response to financial needs. In contrast, a term endowment is created by donor contributions with restrictions that the funds be used for a specific purpose over a designated period or until a certain condition is met, after which the funds may be fully spent.

Q: How do community foundations support nonprofits with their endowments?

A community foundation can serve as a valuable partner to nonprofit organizations by managing their endowment assets. These foundations often offer professional investment services and help nonprofits establish unrestricted endowments, term endowments, or specific purpose endowments. Community foundations can provide guidance on spending policies, withdrawal policies, and long-term sustainability. By doing so, they help nonprofits achieve financial stability while cultivating relationships with major donors who are passionate about the nonprofit’s mission.

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!