"When we think of giving to charitable causes, most of us think about writing a check to help the organization today. However, you can utilize sound financial planning and make sure that a charity close to your heart will still be caring for people for generations to come. Helping nonprofits establish an endowment, or giving to one already established, allows you to achieve your own financial goals, take advantage of tax savings and make a lasting gift that will enrich the lives of many generations to come.
I would like to give a special thanks to Anne Nash, executive director for Blue Grass Community Foundation (www.bgcf.org), for helping us better understand endowments through the following frequently asked questions. Armed with the following information, you can help nonprofits for which you volunteer or donate look toward the future.
What is the legal definition of endowment?
There is no legal definition. The commonly accepted meaning for endowment is a fund that is kept in perpetuity to provide interest and dividend earnings for the benefit of a charitable cause.
Should all organizations have an endowment?
No. Organizations that are formed in support of short-term causes or particular events do not need endowments. Similarly, organizations that are in financial crisis, those that do not have a donor base, or those that lack any credible record of accomplishments are unlikely candidates for an endowment.
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 percent of its energy. In addition, an organization should have an operating reserve account that covers somewhere from half to all of its expenses in an emergency. Then, based on some fundamental criteria for definition of endowment donors, it is ready to consider endowment fundraising.
What's the difference between an endowment and an operating reserve?
An operating reserve is a board-designated fund that may act like an endowment because an organization chooses not to touch the principal. Principal is, in fact, available to meet emergency needs should the board choose to extend it. Usually operating reserves are managed and invested by the organization's staff and board. An endowment, on the other hand, is a fund that has a principal the organization is not able to invade. Sometimes this can be accomplished only by placing the endowment outside the reach of the organization.
Will having an endowment conflict with current donor giving?
Absolutely not. In fact, the addition of an endowment effort presented to your current donors will encourage them with the foresight of an organization that is planning to stabilize its financial future. Experience demonstrates that dedicated donors do not choose among ways to support their favorite charities, but frequently participate in all of them.
Who gives to endowments?
Obviously the best candidates are current board members, committee members and donors. Approaching them for consideration of endowment giving, either current cash gifts or planned gifts, does not annoy them and, in fact, successfully raises endowment support.
What happens if we have an emergency and need the endowment money?
In a true endowment the emergency must be solved with other financial resources. Quasi endowments can be set up. Also, community foundations that hold endowments for nonprofits may provide for emergency withdraw under certain circumstances.
What happens to our endowment if our organization goes out of existence?
For endowments that are held and managed by boards, it is unlikely that if the organization is failing the endowment will have survived. For endowments that are inaccessible because they are held in other organizations, such as the Blue Grass Community Foundation, the charitable earnings will be redirected to the most similar cause that can be found.
Should we set up our own foundation to hold the endowment?
The creation of a new nonprofit organization to hold an endowment does not provide any greater insurance for the protection of principal than board designation. Directors of separate foundations may invade the principal when emergencies arise. In addition, the costs involved in maintaining two separate charitable organizations, including extra staff, expertise, and large amounts of capital to invest, may erode a good portion of the earnings which would otherwise be directed toward the charitable activity.
Is an endowment program the same as a planned giving program?
Many use the terms interchangeably, but they really are two separate things. Endowment is the pot of money you build as a nest egg for your organization. Many gifts that go into the pot will be planned gifts.
Again, thanks to Anne Nash and Blue Grass Community Foundation, a wonderful resource for nonprofits looking for giving options as well as donors who desire to make a lasting difference in the community.
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