Not-for-profit organizations have long turned to endowments for
help, providing the necessary financial resources to carry out
their mission, now and into the future. The largest and wealthiest
generation in U.S. history, the baby boomers, are expected to
transfer trillions of dollars of assets in the next few decades;
this could be the time to launch an endowment fund.
All endowments are not created
equal. With a permanent endowment, the original gift is usually
intended to be held into perpetuity, with only certain income
available for use in operations. With a term endowment,
organizations are generally allowed to also use the principal after
the designated term has ended. Either way, though, not-for-profit
organizations need to consider several key issues before making the
Balancing the Pros and Cons Endowments appeal to not-for-profit organizations for
several reasons. For example, the funds provide financial stability
and can help ensure that programs stay focused on areas the board
and donors rank as most important. An endowment also can reduce the
headaches and uncertainty often experienced when you are forced to
rely solely on work-intensive annual campaigns, special events and
fundraising. Think less event planning and more time to devote to
the actual mission of the organization
Endowments can help attract
additional donors, as well. Having endowments demonstrates that the
not-for-profit has earned the trust of other donors and will be
around for the long haul, and let you approach donors from a
position of strength and confidence, rather than neediness.
Be forewarned, however: An
endowment can turn off potential donors, who might think the
organization does not really need their contributions.
Administrative tasks to manage endowments also could suck up staff
time, diverting it from the organization's current needs.
Managing Assets and
Spending Not surprisingly, endowments come with some handcuffs. The
Uniform Prudent Management of Institutional Funds Act (UPMIFA) lays
out the standards for managing and investing endowments.
Not-for-profit organizations need to establish written investment
policy for any endowment that satisfies those standards by
addressing, among other things, asset allocation and spending.
An organization board's
investment committee, with input from an investment advisor, when
necessary, should determine the best allocation across asset
classes, for example, stocks, bonds and real estate, to earn the
desired return on investment. If board members do not have
expertise in this area, consider hiring an investment manager to
advise the committee. Each investment decision must be made in the
context of the endowment's total portfolio, taking into account
the risk and return objectives of the endowment and the
When it comes to spending, UPMIFA
allows spending or accumulates at a rate the board determines is
prudent for the endowment's uses, benefits, purposes and
duration, subject to seven specific criteria. These include the
purposes of the organization and the endowment, general economic
conditions and the organization's other resources. UPMIFA also
allows spending on the expected total returns of the
endowment, including earnings on original principal and
Taking a Different
Route If a traditional endowment does not seem like a good fit,
do not worry, an organization can establish a "quasi
endowment," also known as a board-designated endowment or
funds functioning as endowments. A quasi endowment could work well
if your organization is not quite ready for a full-blown endowment
campaign, but wants the financial stability and other benefits
associated with endowments and has the funds to set aside for this
Unlike traditional endowments,
quasi endowments are established by the board, not the donor. They
are usually funded by unrestricted donor gifts or excess operating
funds. Organization will find a quasi-endowment to be more flexible
than permanent or term endowments because the board can change its
designation(s) at any time and for any reason. Even better, they
are not subject to UPMIFA.
Planning for the
Complexities If an organization decides to pursue an endowment of any
kind, keep in mind that the arrangements are more complicated than
for funds raised through ordinary fundraising or capital campaigns.
An organization will need to make sure it has, or can acquire, the
requisite expertise in areas, such as drafting investment policies,
managing the investments and related financial reporting.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Lawyers are often asked to serve on Boards of nonprofit corporations and if they do so, they will often be asked by other directors about the potential individual liability of a director for actions of the nonprofit, for actions of the director and for actions of other directors. - See more at: http://www.wcsr.com/Insights/Articles/2017/March/Liability-for-Directors-of-Nonprofit-Corporations#sthash.fomRRxiJ.dpuf
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