on Endowment Gifts:
As the director of the regional community foundation, I am frequently asked why donors should consider establishing an endowment or making a donation earmarked for endowment for a favorite nonprofit organization. After all, these gifts are not available for use right away, and the earnings that are available to the nonprofit seem to be relatively small, at least in the early years. There are so many worthwhile nonprofits out there doing important work; shouldn't all charitable giving be directed to helping these organizations with their programmatic and general operating costs? Isn't that where the money is really needed? Well, yes. And no.
Most nonprofit organizations I know scramble constantly to meet their annual budgets. Annual gifts are needed and appreciated. But endowment gifts are also needed and appreciated. And endowment gifts may appeal to a certain type of person, or to a long-time donor who is capable of making a relatively large or deferred planned gift. Endowment gifts are for donors who want to make a contribution that will permanently support a nonprofit of their choosing, or, more generally, the community they grew up in and call home.
An endowment is set up to benefit a particular organization or the general community. These funds are then managed to grow steadily over time. Each year, some of the earnings from the funds are distributed to nonprofit organizations. Over time, endowed nonprofits can count on this steady funding stream to help meet their budget expenses. Nonprofits are constantly encouraged to diversify their revenue sources, and endowment income is a terrific way to meet this diversification challenge! Endowment income helps keep overhead costs lower for the nonprofit, too.
I like to describe endowment gifts as “gifts that keep on giving, gifts that keep on growing.” Let's think about a donor who has the means to make a $10,000 gift. The donor can make the gift outright to a favorite charity; that gift is likely to be spent that year to support a special program or general operations. Nothing wrong with that. But let's look at another possibility for that $10,000 gift. If that $10,000 is set up as an endowment, through a community foundation or another vehicle, it will double and triple its value to the nonprofit in a short time. Assume a 10% annual return on investment, and an annual pay-out rate of 5.5% to the charitable beneficiary. In 50 years, the value of the gift will have grown to $59,350, adjusted for inflation; the fund will be almost six times larger than when it was established. And, perhaps more importantly, the endowment will have generated $76,000 in operating income for the nonprofit organization! Now that's impressive charitable gifting power for the long haul! Larger initial gifts can provide even more resources for charities and communities.
There are a variety of ways people with charitable intentions can set up endowments to fund their interests in perpetuity. (Perpetuity is a fancy word that means “forever.”) First of all, a donor can establish or add to an endowment fund for a favorite nonprofit - an organization they have been involved with over the years, or one that has helped them personally (colleges and hospitals are good examples). Donors can also establish funds that are more general. A “field of interest” fund provides grant dollars for a particular issue or area of interest to a donor - say, at-risk children or arts and culture or open space preservation. The donor can have confidence that a charitable interest will be funded for years to come, responding to new needs in the community and supporting projects and organizations that perhaps were not around when the donor was alive. A donor might also want to set up an unrestricted endowment earmarked for a particular community or geographic area they care about. Usually this is the community the donor grew up in or calls home.
Finally, donors may wish to consider what we call a donor-advised fund. These endowments are like charitable spending accounts. Each year, the donor can recommend grants from the interest earnings be distributed to charities of their choosing. The charities can be the same ones, year after year. Or the donor may choose new organizations because of a perceived need or new interest on their part. Donor-advised funds allow great flexibility for donors who set them up now to benefit charities forever.
Endowment giving is not for everyone. But certainly for donors who want to leave a lasting charitable legacy, endowments are the gifts that keep on giving and keep on growing. Year in and year out, now and forever.
This article was written by Anne Wenzel and reprinted from WCCF’s monthly Giving Matters column in The Daily Sentinel, June 9, 2002.
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