Planned giving, will/ bequests and other forms of deferred giving are established to perpetuate the organization’s vision and mission as well as the donors’ values. In planned giving, the non-profit organization (NPO) receives a bequest on the death of the donor and will frequently use it to establish a perpetual fund, called an endowment. Generally, the nonprofit organization uses the earnings from the endowment’s principle for general operations. The principle is protected and is invested for perpetuity.
Why are endowment funds important to an organization?
- Provide long-term viability;
- Promote financial health ;
- Allow the donor to develop a legacy for their family and loved ones.
In the movie Field of Dreams , Kevin Costner says, “ If you build it, they will come.” This rings true not only in building a baseball field in the middle of nowhere in hopes that dead people will come to play ball, but in planned giving as well. Generally, if the organization is ready for an endowment and markets it successfully, people will contribute to this fund. The problems arise when organizations establish an endowment before they are ready (read: financially solvent) to do so. We have actually worked with some nonprofits that have ‘gone under’ with six figures in the bank account that they could not access because of the way the endowment was established. Recently, an organization we are intimately involved with was encouraged by a foundation to set up an endowment (matched by the foundation) before the organization had a solid enough donor base. This organization has now spent over a year raising funds for the endowment at the expense of their annual fund.
Now, for organizations that are in the active growth or mature stage of their development, have financial reserves in the bank, as well as a consistent donor base that is growing, then an endowment may make sense.
How to establish an endowment fund:
- Establish who will manage the endowment: Will it be housed at a community foundation, a trust at a local bank, at a Federation, or at your house? Make sure you have an experienced money manager to manage the investments. DO NOT hire a board member to manage the funds, as this is considered a conflict of interest ; however, the board can establish a committee to oversee, evaluate, and monitor the investments.
- Establish a clear and concise investment policy that assures security while encouraging the growth of the fund.
- Establish a clear and concise Gift Acceptance Policy that will determine under what circumstances you will or will not accept gifts.
- PUBLICIZE, PUBLICIZE AND PUBLICIZE the opportunity to establish your legacy and to carry out your values and vision in perpetuity. Let people know that planned giving and endowment funds are needed! Market your planned giving and endowment funds in your newsletters, web sites, brochures, and YES even in thank-you letters to donors.
- Don’t ignore the annual fund campaign while trying to raise endowment funds. Let people know that you are greatly appreciative of their endowment gifts, but you still need their support for the annual fund. For the endowment you can only count on 5 percent of the total investments – and in the past couple of years the interest rates were much lower than 5 percent.
- Target your consistent donors – not the major donors – for endowment. We know someone who raises almost $100 million a year for a hospital and he always says: “Our best givers for endowment come from those that give consistently. The major donors donate to our annual and capital campaigns while they are ALIVE, NOT to our planned giving program when they are dead.”
- If you are raising capital campaign funds consider adding 20 percent to the campaign for endowment. This will help assure the financial longevity of your organization. The Kresge Foundation, the largest capital campaign funder in the United States is beginning to do this with their challenge grants.
- Find a lawyer who can help you set up the legal wording and documents, but take a class yourself on planned giving to learn how trusts work. Try to get a working knowledge of the following: charitable remainder unitrusts; annuity trusts; lead trusts; pool income funds, etc.
- The key is to have strong leadership from your CEO and board president. Consider forming an endowment committee (made up of board and nonboard members).
- Begin to target people CLOSEST to the organization who have already made previous donations as endowment prospects: volunteers, strong current contributors, people who have received services from you; alumni, etc.