Nonprofit Endowment FAQ's
Will having an endowment conflict with our current donor's giving?
Annual appeals generally target current year needs; endowments provide annual support every year. Our experience has demonstrated that dedicated donors support their favorite charities in many ways and quite frequently participate depending upon your relationship and the messages they receive from you. In addition, establishing an endowment will attract donors that are focused on long term giving that is perpetual in nature.
What's the difference between an endowment and an operating reserve?
An operating reserve is a board-designated category of money which may act like an endowment because an organization chooses not to touch the principal for general operating expenses. However, the principal is available to meet emergency needs should the need arise. Usually operating reserves are managed and invested by the organization's financial staff and board. An endowment, on the other hand, is a fund which has a principal that the organization has decided to permanently set aside for the long term vision and support of the organization.
What happens if we have an emergency and need the endowment money?
Nonprofit Agency funds are not intended to be used even for emergencies and cannot be accessed after the endowment has been established. They are intended to provide a stable source of operating revenue to the organization. Nonprofits are encouraged to build their own operating reserves to address emergencies. Annual endowment distributions could help to establish such operating capital and emergency reserves funds within your organization.
How does an endowment fit into an overall organizational financial plan?
To be healthy and stable, an organization needs to meet its current operating budget without exerting 100% of its resources. In addition, an organization should have an operating reserve account, which covers somewhere between 20 to 30 percent of all of its annual expenses. Then, based on some fundamental criteria for definition of endowment donors, it is ready to consider endowment fund-raising.
Should all organizations have an endowment?
Organizations, which are formed in support of short-term causes or particular events, do not need endowments. Similarly, organizations which are in financial crisis, do not have a donor base, or have not demonstrated a long-term vision and record of accomplishments are unlikely candidates for an endowment.
Is an endowment the same as a planned giving program?
Many use the terms interchangeably, but they really are two separate things. Endowment funds are grown over the long-term to provide a long-term source of annual income. Donors make long-term plans through such planned giving instruments as bequests, paid-up life insurance, charitable gift annuities and charitable remainder trusts to benefit nonprofits and their endowment funds.
Should we set up our own foundation to hold the endowment?
The creation of a new nonprofit to hold an endowment appears to solve the problem, but in fact does not provide any greater insurance for the protection of principal. A separate private foundation will add cost for legal, accounting, staff to manage and the need to stay in compliance with the ever changing federal and state laws and requirements. In addition, the Directors of separate foundations may invade principal when emergency needs arise which conflict with the reason for creating a permanent endowment. In addition, the costs involved in maintaining two separate charitable organizations will erode a good portion of the earnings that would otherwise be directed toward the charitable activity. This is why working with the GLCF can have so many benefits to an organization.
What happens if our organization goes out of existence?
For endowments that are held and managed by nonprofit boards, it is unlikely that an endowment will survive if an organization fails. Community Foundations make nonprofit agency endowed funds inaccessible to creditors so the fund can continue to support other closely related nonprofit activities in the community. The endowment can be transferred to a merged or surviving organization or transferred into a Field of Interest Fund that is focused on the mission of the organization.