The Power of Endowment

By Dave McGowan

An endowment is a pool of invested assets intended to generate income to support a not-for-profit organization in perpetuity.  It’s an important strategy in diversifying the overall mix of not-for-profit revenue.  That said, only nearly 11% of not-for-profits have endowments.

Endowments allow not-for-profit organizations to plan for the long term, weather economic downturns, build capacity, and demonstrate sustainability to donors and other constituents.

That said, small to mid-size not-for-profits often don’t have the staff, time or expertise to enact planned giving programs and manage endowments.  However, they can turn to their local community foundation, which has the infrastructure to act as their investment arm. 

A typical spending policy is between 4–5% of a rolling balance (12–20 quarters).  That policy assumes an average annual return on investments of 7–8% and an inflation factor of 3%.  When I was at DuPage Foundation, we started a fund in 2002 with a $1.3 million bequest, which, after 16 years, had granted $1 million to area not-for-profits and still had a balance of $1.5 million!

Some of the largest endowments in our communities include Midwestern University at $1.1 billion, Wheaton College at $710 million, The Morton Arboretum at $326 million, Elmhurst University at $194 million and DuPage Foundation at $150 million.  Harvard University manages the largest endowment in the U.S. at more than $50 billion.

Named endowments allow individuals to build something that will identify their legacy to an organization or cause that will last in perpetuity and that will grow over time.  Endowments can also be restricted in purpose, as colleges and universities do for scholarships.

Not all endowments are true endowments.  You see, only a donor can restrict a gift to an endowment.  If that same donor gives the not-for-profit an unrestricted gift and the board decides to invest it, operating off of the annual distributions, that is technically called a “board-designated fund” or “quasi-endowment” but is often correctly referenced as part of the organization’s overall endowment.

Many not-for-profits automatically deposit all or the majority of estate gifts into their endowments per their gift acceptance policies.  This is an important strategy for the not-for-profit, but it’s also important to the donor who built the bequeathed asset over a lifetime and appreciates knowing that the not-for-profit will use it to generate income the same way it did for the donor.  For a donor who gives $1,000 a year to an organization, a bequest of $25,000 would enable that gift to continue in perpetuity.

If you are interested in learning more about making an endowment gift, contact the development office of the organization you wish to support, as well as your financial advisor and estate planning attorney, who can assist you in making an endowment gift during your lifetime or through your estate plan.