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How To Set Up An Endowment Fund For A Nonprofit

By Arnab Dey

July 28, 2022

Endowment Fund

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One of the ways charity organizations use to fund their long-term projects is using endowments. Endowments are donations made to create income through investment. These donations can be money, financial assets (bonds and equities), or properties. 

You might be wondering why some charity organizations prefer having endowments.

Endowments are preferred because they attract more donors, responsibly diversify the organization’s donations, and form a source of funds that’ll be used for the organization’s activities. Moreover, endowment funds allow you to have stronger relationships with your donors.

There are various types of endowment funds. They include:

  • Quasi-endowments
  • Term endowments
  • Unrestricted endowments
  • Restricted endowments

Setting Up An Endowment Fund

When using endowment fund planning, you’re only allowed to use part of the interest received from the principal balance. You can only use the principal balance if the court and donors approve. This may be a lot to take in, especially if you’re new to the world of charity organizations.

However, there’s nothing to worry about since this article details everything about the endowment fund.

It provides a guide on how to set up an endowment fund for a non-profit.

Step One: Find Out How Much Your Organization Needs

The amount needed for endowments by an organization depends on what you’re planning to achieve. Based on your activities, you’ll find that some organizations use more money than others.

As you know, you can only spend the interest earned from your endowments. Therefore, you need to know how much the organization requires to meet its needs and to have as your endowment funds.

For instance, if you can only use 20% of the interest earned and you need to spend USD$100,000, you can calculate how much you need to have in your accounts. By calculating, you’ll realize that you need to have an interest of USD$500,000.

Assuming your interest rate is 5%, you should have USD$10,000,000. This is the amount you should strive to get from your forms of income.

Step Two: Find Forms Of Income That’ll Support Your Organization

After determining how much money you need, the next thing to do is find donors willing and capable of supporting you.

There are some options of forms of income you can use to get your endowment funds. You can also accept non-monetary contributions, which lower expenses.

One of the common forms of income is having a consistent annual donor who has promised to support your organization for a long time.

Since the support of such donors is usually impactful for many years to come, even after they’re in a position that can’t allow them to support anymore, it’s always good to show them appreciation by giving them endowed gifts.

Another form of income you can use is having events where you campaign intending to get many donors. In this case, you’ll have to come up with a clear cause for your endowment fund, spread the message as wide as possible, and have a set goal of what you want to achieve from the event.

While sourcing funds in all forms of income, it’s good to inform people how you intend to use the money because this is what will motivate them to donate.

Step Three: Choose People Who You’ll Be Working With

After you figure out the means you’ll use to get donations, you should find people (not members of the board) that’ll guide you through what’s needed. It’d help if you considered working with a money manager and an attorney.

A money manager will guide you through setting up a sizeable endowment, which often takes time and the type of endowments to set up.

Setting up an endowment requires you to:

  • Come up with the name of the endowment
  • Set restrictions that’ll be used for the endowment
  • Set what percentage of interest will be accessible for the non-profit organization annually
  • Determine how you can access the funds in case of an emergency

On the other side, an attorney will guide you through state and federal requirements. It’d be best if you considered working with attorneys that are well conversant with charitable laws.

For example, some laws govern how much you can use from the funds, how you spend them, and the amending process of your assets. This is because some states categorize endowments as non-taxable entities. Therefore, you need an attorney to direct you on proper filing to avoid possible penalties.

Step Four: Come Up With Policies That’ll Govern Your Non-Profit Organization

It’s essential to have policies that you’ll use to govern your organization. Having policies will reduce issues such as arguments and misunderstandings among members.

The following are some policies you can use when setting up an endowment fund:

  • Gift acceptance policy. It’s good to be clear about the kind of donations you’ll receive and the minimum amount you should have. Moreover, it’s best to include strategies you can use to raise funds.
  • Gift agreement. Donors have various reasons for donating; some do it out of goodwill, expecting nothing in return, while others have expectations. This policy requires donors to state their intentions for granting funds so the involved parties can be on the same page.
  • Endowment spending policy or withdrawal policy. This policy is used to clarify when and how the endowment funds can be used.
  • Review of bylaws. Unlike any other accounts with specific people overseeing various activities, endowment funds also need people in charge. These people will have the responsibility and authority to govern the fund’s documents and activities such as withdrawing money.
  • Investment policy. This policy outlines the kind of investments your money manager is allowed to make on behalf of the organization.

However, you don’t have to use these specific policies necessarily. Instead, you can come up with others that’ll seem best for governing your endowment funds.

Cons Of Endowments

Cons of Endowment Fund

Before setting up your endowment funds, you should know that they’re associated with disadvantages.

Some cons of endowment funds include:

  • They don’t guarantee forms of income
  • They require a lot of time 
  • They may limit you from expanding your charity services if they specify how the income should be used.

Wrapping It Up

Non-profit organizations can use endowment funds, especially for their long-term projects. If you’ve been thinking of seeking endowment funds for your NGO, consider following the steps detailed above.

The first step is knowing how much your organization will need, then sourcing the forms of income that’ll fund the needs. You’ll also need to select a team to work with and develop policies that’ll govern your NGO. All the best in your quest for funding.

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Arnab Dey

Arnab is a passionate blogger. He shares sentient blogs on topics like current affairs, business, lifestyle, health, etc. To get more of his contributions, follow Smart Business Daily.

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