We have endowments on the brain right now because one of our clients is about to launch an endowment campaign. It’s so exciting to see them getting ready to assure their future!
Most of us tend to think of endowments in the classic university model.
A large corpus or principal of funds is permanently set aside and only the interest earned can be spent. Donors give to this type of endowment, mostly through bequests and other types of planned gifts, as a way to ensure the future of the organization and leave a lasting legacy for themselves.
But, there are other models to consider!
You might have an endowment principal that you can actually dip into in times of need or for special opportunities. You might have a restricted endowment that supports a specific program or facility.
The distinction here is between a true endowment and a quasi endowment.
A true endowment is the first model I described above. Typically, the principal funds are completely off limits and annual payments of between one and five percent are distributed into your general operating funds or a special line item in your budget.
A quasi endowment allows for more flexibility. The principal is invested, you may choose to forego annual distributions, and you may also choose to withdraw a portion of the principal up to a certain limit.
In order to pin down which type of endowment is right for you, explore the following questions with your board:
1 What do we really need our endowment to do for our organization?
Do we need a steady stream of income into our operating funds? Do we need protection for a rainy day? Do we need maintenance dollars for a capital asset such as real estate or a collection of some kind? Do we need to ensure the future of a particular program or position?
2 What is our vision for growing our endowment?
Do we intend to actively grow the endowment through fundraising? Will we put in place other financial policies that help us grow the endowment, such as designating unexpected bequests to it or putting budget surpluses into it? Or, will we just let it sit and grow through investments alone?
The right endowment for you will become clear as you answer these questions.
For example, if you don’t intend to grow your endowment, then a true endowment is probably best because you won’t want to spend down a principal if you don’t intend to replace it. If you want to be able to step up for your clients in times of great need (such as a natural disaster or financial crisis), a quasi endowment will allow you to access larger sums of money.
Regardless of the type of endowment you choose, clear policies are the key to protecting it and your organization.
The good news is that Community Foundations all across the United States are standing by to help you think this through and make sure you have an endowment that meets your future needs. And, don’t hesitate to reach out to other nonprofits to find out how they’re structuring their endowments for maximum impact.