Part 2: Setting Up Your Nonprofit Endowment Program

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In the first blog of this two-part series on How to Launch Your Endowment Giving Program, we discussed the fact endowment is not just for large organizations. Any nonprofit can benefit from having a pool—or pools—of money that could help to ensure the organization’s future. An endowment can fund a program, pay for staff, help to enhance operations. And having an endowment program signals to funders and donors that your organization plans to be around for the long haul.

 

01 Introduction

All that sounds so good you may be wondering why every nonprofit doesn’t have an endowment program. The answer to that is simple: Not every organization is well-enough positioned. Some don’t have their financial houses in order. These organizations need to focus first on building a strong individual giving program. Others don’t have boards that are supportive of an endowment. Without board commitment, endowment building will be a hard slog. And still, others don’t have strong financial oversight—a real problem when you are dealing with funds that are invested for the long term.

Another thing that keeps organizations from launching an endowment giving is the many policies and procedures that must be in place. We’ll tackle those in this blog, along with taking a look at who your endowment donors are and where you can find them. In this Part II of How to Launch an Endowment Giving Program, we’ll also dig a little more deeply into how endowment funds are given and then explore how you can actually launch your endowment giving program and keep it going.

If you are ready, let’s start with a look at all the policies you will need to have.

 

02 What Policies And Procedures Are Needed For Your Endowment Giving Program?

In almost every state in the US, the Uniform Prudent Management of Institutional Funds Act, or UPMIFA, is the law that regulates how charitable institutions are to administer endowment funds that have been created with donor restrictions. The law does not apply to quasi-endowments created by board designation, but it wouldn’t hurt for your nonprofit to follow its guidelines in all cases.

UPMIFA mainly has to do with the way endowment funds are invested and, as such, it has a great impact on investment policy. According to UPMIFA, endowments should be invested in such a way that total returns are maximized. The way that you would comply with that would be to diversify your investments appropriately. And to have an investment policy.

INVESTMENT POLICY

In most nonprofits, the finance committee is the front line in charge of the nonprofit’s funds. They typically help to develop the budget, oversee the financials, decide where your investments will be held (unless you are very large, you will want to hire a firm or several firms to manage the day-to-day workings of your investments), and create an investment policy.


Your investment policy outlines the dos and don’ts of how your endowment funds (and any other investments you may have) will be handled. Think of it as insurance for a stable financial future. The policy should clearly set out the overall goals of the organization for investment results and what kind of mix (called the asset allocation) between cash, fixed income, and equity investments. The board or the finance committee—whoever is creating this policy—may also want to restrict certain types of investments. And the policy should contain benchmarks that will assist in evaluating the performance of investments and the investment managers you have hired.

SPENDING POLICY

Either as part of the investment policy or as a separate document, you want to make sure you have written clarity about how much of the income that your endowment funds kick-off can be used each year. UPMIFA sets standards for endowment fund spending, but you will want to create a policy that works for you. And one that will fulfill the donor’s needs.

ENDOWMENT POLICY AND ENDOWMENT AGREEMENTS

Even before you create investment and spending policies, of course, you need to have an overall endowment policy. This policy will provide in writing clearly and succinctly, a definition of terms that relate to endowment giving. You’ll want to specify the types of gifts you will accept for an endowment and how you will recognize endowment gifts. Included in this is the all-important issue of Donor-Named Restricted Endowment Funds. As you’ll remember, all endowments are actually restricted gifts, however, in this case, restrict[1]ed refers to the specific purpose of the fund. Those endowment funds that simply support the operations of the organization are typically called general endowments.

Those that will support a specific project or program are called restricted. Speaking of named and/or restricted endowment funds, your policy should lay out minimums to set up the account, and what percentage must be paid in before anything goes out. This is arguably the most important aspect of, and the main reason for an endowment policy. Beyond the financials, of course, there should also be guidelines as to either what restrictions can apply or what steps need to happen before a restricted endowment may be accepted. For example, I had a donor once, not too many years ago who wanted to give a very large cash gift to endow a cadaver room for my college’s nursing program. The gift was tempting but we did not have a cadaver room, nor did the nursing program want one. Our endowment policy (and our gift acceptance policy— see below) had clear guidelines for restricted gifts, and so I was able to thank the donor for his extreme generosity, explain why this gift was unacceptable, and work with him to develop another purpose for his support. Another purpose for an endowment policy is to state very clearly what would happen should the purpose for which the endowment was originally set up is no longer viable.

You want to ensure that you have in writing and signed by the donor an understanding that if the purpose for which the donor set up the endowment, say to fund a specific program and that program ceases to be run at your organization, the funds can be used for something else. Ideally, that something would be similar. Let’s imagine that the program originally funded was to train people with disabilities to perform a specific job but, over time, the job for which they were being trained was now completely automated. That training program would come to an end. The new purpose might also be to train people with disabilities, but for a different job or set of jobs.

GIFT AGREEMENTS

These are the documents the donor signs once they have said yes to endowment giving. It spells out when the agreement was made, who the participants are, what the commitment is, the purpose, how the endowment will be managed, and the aforementioned statement that should the purpose ceases to be relevant, what will happen.

If the gift is a planned gift, it may not be a binding agreement. Conditional gifts, such as bequests that are not realized until the donor passes on, are typically revocable. This, of course, means that the donor can change their mind at any time. Conditional gifts are those that in effect say, before this gift can happen, something else must occur. Planned gifts, by their nature, are always conditional. Furthermore, those who give through a bequest are often loath to state an amount for the gift. Nevertheless, if you can get a signed pledge agreement that the donor is committed to a planned gift, so much the better. At the very least, this will remind your successors of the gift and the need to continue stewarding the donors.

GIFT ACCEPTANCE POLICY

The most important financial policy for your nonprofit is your gift acceptance policy, which should clearly state what you will and will not accept as a charitable gift. Your endowment policy can be incorporated into your overall gift acceptance policy, or it can be kept separate.

Gift acceptance policies can also be used as a tool for your non-endowment major gifts program.

Once you have these policies in place—and the procedures for how your organization will handle the various types of endowment giving, you are ready to launch your endowment giving program.

 

03 Who Are Your Endowment Donors And How Do You Find Them?

Endowment donors tend to be very special people. They are visionaries who are committed to your organization and have an understanding of the importance of ensuring the future. They are also primarily your existing donors. It is rare for someone to contribute to your future if they are not already supporting you in the present. But beyond their commitment to and love for your organization, endowment donors do not fit into a specific box. They are as varied as the many ways they can give to the endowment. They can be donors with great capacity and ones who cannot currently make a large gift. In order to identify appropriate endowment donors, you must first be clear on what you are going to be asking them to support, and how you will be asking them to give that support.

Most of your potential endowment donors are in your donor database. Look for:

  • Loyal donors—those who have given to your organization regularly for at least 3 years. If they are annual donors, they may be prospects for planned gifts as this is the group most likely to leave a legacy. While they cannot make a current large gift, they might be able to leave something significant through their estate
  • Older donors—they understand the value of future support. They are also more likely to be considering their estate plans. But here is a caveat! Older yes, but not necessarily elderly. Donors who are 45-60 are arguably your best-planned giving prospects. They are thinking of their mortality and may be ready to make an estate plan
  • Major donors—They have already shown their love for your organization by giving one or more large gifts. If endowment speaks to them, they may be willing to make another major gift, this one for endowment

One wonderful way to identify potential endowment donors is through house parties or salons. These are small gatherings that would be hosted by someone who has already made an endowment gift. They invite their friends and colleagues and you may also add people from your donor pool to learn about endowment for your organization and why they have already made a commitment.

As with most events, it’s what you do after the salon that really matters. Following up with every invitee, clearly telling them you want to either continue the endowment conversation or, if they didn’t attend, start one by sharing the information that was imparted at the salon.

It is important to understand that endowment is not something that every donor will embrace. I once had a donor who made several transformative gifts to my organization, but I could not get him interested in endowment. Through many conversations, I finally realized that the idea of a world without him in it was too daunting for him to contemplate, and endowment was a lot about what would happen after he was no longer around. Another donor didn’t feel that we could invest “his” money better than he could. Endowment, therefore, was not something he would consider.

 

04 How Are Endowment Funds Given

In How to Launch an Endowment Giving Program: Part I, we looked at the different ways that endowment gifts can be made. You learned that donors can make cash (also called current) gifts, or their gifts can be planned (also known as deferred). Let’s delve a little deeper into these types of gifts and see how you can get your donors to support endowment with either cash and/or a legacy gift.

CASH GIFTS TO THE GENERAL ENDOWMENT FUND

Donors can make a cash gift to your general endowment fund. Those gifts can be large—and let’s be honest, those are our favorite. Or they can be very small. However, your focus should be on cultivating and soliciting those of your donors who can make a major gift. Major gifts are gifts that are above a certain amount. The amount varies from organization to organization. I think it needs to be a stretch for most of your donors, but you do not want it to be so large that it is beyond the reach of those who support you. Typically, only 3-5% of your donor pool is able to make a major gift—but you want to ensure that 305% of your donor pool can make a gift that is major to you.

NAMED ENDOWMENT FUNDS AND OTHER RESTRICTIONS

Not all endowment gifts, of course, go to the general endowment fund. As you think about launching your endowment giving program, you also need to consider the rules and procedures for establishing named endowment funds. A big part of that is having the agreement of your leadership and board on what programs could be endowed and what size gift would be needed to fund that program.

You also must be very clear on how much of the gift must be in hand before the fund is ready to “go live.” I would also advise a policy stating what happens if a named endowment fund isn’t fully funded. For example, imagine that it would take a gift of $1.5 million to endow a program and name it for the donor and/or his family. The donor commits to pay this over 5 years at $300,000 a year. It is agreed that when the fund reaches $900,000 the program will be renamed the Name of the Donor Program. But what if the donor gives $900,000 and then for whatever reason, ceases to honor the remainder of his pledge. What happens now? While this is not common, believe me, it does happen. You must protect the integrity of your organization by having a clear policy that the donor is informed about, understands, and—critically—signs off on. One good way to do this is to ensure a provision in the endowment agreement spells all this out.

Creating these funds must be carefully and strategically thought out. Sometimes donors, with all the best intentions in the world, want to fund something that just doesn’t add value to your mission. Indeed, I have been involved with situations where what the donors want and what our organization needed were quite a far distance from each other. Getting to a point where both parties were comfortable took a lot of time and even more negotiation. As the development director, my role was to ensure that the gift worked for both.

LEGACY GIFTS

Most endowments, however, are not built with current funds. They are created through legacy or planned gifts. But here’s a scary statistic: in the United States, the number of people aged 55 who have made a charity a beneficiary in their estate is between 5% and 6%. Or, put another way—around 95% of Americans over the age of 55 have not remembered any charity in their estate plan. Clearly, this is a problem waiting to be remedied. Planned giving can be extremely complicated. This is why many organizations shy away from having a planned giving program. But in truth, over 90% of all planned gifts turn out to be simple bequests:

  • The donor puts a clause in his or her will that leaves your nonprofit a gift from her estate. This can be a specific amount; a percentage of the estate at the time of death; the amount that is left over after other specific gifts are made.
  • The donor makes you a beneficiary of his insurance plan, either for the full death benefit or a percentage
  • The donor makes you a beneficiary of her retirement plan. Again, this can be for the full amount or for some portion.

The donor can restrict this bequest to endowment and state that it is either to be put into the general endowment fund or in a specific or named fund. If the bequest is truly unrestricted meaning, the donor doesn’t specify any purpose including endowment, your board can designate these monies to the endowment. Like all monies designated by the board for endowment, those funds will actually be a quasi-endowment where the principal can be invaded should the need arise.

 

05 How To Launch An Endowment Giving Program – And Keep It Going

Endowment giving—and your endowment giving program has a long horizon. Unlike a campaign, which is time-limited, or an unconditional major gift, an endowment giving program, like the endowment itself, typically goes on forever. Yes, there may be some named endowment funds that have an infinite fundraising timeline, but by and large, you will want to continually be giving donors the opportunity to support your organization’s future.

That said unless you have a robust endowment giving program in place, and donors are regularly being asked to make a gift to the endowment, it is time to consider launching your endowment giving program and make this part of your integrated fund development plan.

One synonym for the word “launch” is “introduction” and that is exactly what your first step in launching your endowment giving program should be: Introducing your donors to the idea of an endowment giving program, and the joy of making a gift that will benefit your organization long after they can no longer make a current, annual gift. The best way to do this is with an ongoing marketing campaign that will regularly reach out to your donors and invite them to “make a tomorrow gift today”.

MESSAGING, AND THE MEDIUM

The first step of course is, to build the messaging that will help them understand why an endowment is important—and offer some (but not too much) information on the many ways they can support the endowment. It is also really important that you explain the difference between the larger pooled endowment fund, which will help to ensure that the organization’s mission, and named funds, which might be restricted to a specific project or program. And, because endowment funds are invested, all your marketing should assure your donors that you are good stewards. Donors want to know that the money (or bequest) they give today will flourish and grow for your future.

As you are thinking about what words (and perhaps pictures) you want to be using, also think about how you will disseminate those words. Will you create a brochure or, perhaps, several? Put it on your website? And if so, where? Video is increasing as an important way to communicate with your audience; will that be something you want to produce? If you send out a newsletter or eblasts, you might want to consider articles, initially about the endowment itself, but as time moves on, about donors who give to endowment and about the many ways your readers could make an endowment gift.

THE RIGHT PROSPECTS

Although you will want much of your message to reach all your potential donors, you will want to focus your fundraising efforts on those you have reason to believe would be interested in supporting the endowment. These prospects are a subset of those you are looking to commit to a major gift. That means that they are loyal donors, having supported your organization for a number of years; they are donors with capacity, and they are donors who have a vision for the future.

PLANNED GIFT DONORS

Because so much of endowment comes via planned gifts, you may be tempted to put a spotlight on your oldest donors. But don’t ignore those in their 40s and 50s. Where those over 70 may have already made their estate plans, younger but still mature donors are at that place where they are more likely considering what kind of a legacy they will want to leave for their family, their friends, and yes, the charities they care about.

One older group I would create a strong plan for are those over 70-1/2 who might have an IRA. The law requires this group to take a minimum disbursement each year from their IRA account, and this disbursement counts as income and so is taxed. However, if the donor chooses to transfer up to $100,000 annually from his or her IRA accounts directly to your organization, then the distribution is not considered income to the donor and, therefore, is not taxed. Clearly a win-win for everyone.

CURRENT DONORS

Another group definitely not to ignore are those who make current gifts. Often these are the same people who will also make a planned gift. For this reason, when asking for an endowment gift it is wise to make an integrated ask. This means, ask your prospects (for example) to give a $500,000 gift, $150,000 in cash payable over 3 years, and the remainder as a deferred or legacy gift. Integrated asking should also be done with major donors you are approaching for a current, non-endowment gift. With this ask, the cash is for the project or program you hope the prospect will support and the legacy gift is to go into the endowment. Depending on the project, the endowment gift could be specifically to ensure the future of that project, or it could be a general endowment gift. One thing I had a lot of success with when I was a front-line fundraiser was asking my larger annual donors to consider endowing that annual gift. If, for example, they regularly give $10,000 a year, a gift of about $250,000 (again, given perhaps over 3 – 5 years) will ensure that amount forever. In this way, they and our organization could be confident that the extremely important support for operations the donor provided would continue in perpetuity.

SMALLER DONORS

As you launch your endowment-giving program, your eye will be on larger donors. However, don’t completely ignore those who can’t make larger gifts— now or in the future. Giving these donors an opportunity to give to the general endowment fund will pay off handsomely. Your newsletter and your website are the perfect vehicles for informing these donors about the value of supporting the endowment. Direct mail, whether through the post or via email, is also a good way to get endowment on the radar of these smaller, but important donors. Because you don’t want to take anything away from your annual giving, I would have to think long and hard before I combined these two asks. I would be inclined to add one or two mailings a year, specifically about endowment and planned giving.

That said, I could also envision a P.S. on your annual appeal letter that suggests, “As you make your annual commitment today, also consider making a commitment for tomorrow. An additional gift of endowment will ensure the future of our organization.”

WHAT NEXT?

Although we have been talking about launching an endowment giving program, as I’ve noted again and again, the endowment is forever. And so is your endowment-giving program. Each time you identify a new prospect, you are launching that person’s individual endowment giving program.

Sometimes, however, you will reach back to an existing endowment donor to ask for an additional endowment gift. This may be asking your donor to add to an existing endowment fund or to create a new endowment program. You may, as a legacy donor also make a current gift—or vice versa.

In truth, you are always launching an endowment giving program, both to new prospective donors and those who have already made a commitment but might just be interested in doing more.

BEING STEWARDS

In order to be successful in any kind of fundraising, you must carefully thank and recognize your donors. This goes double for endowment givers, especially if their giving is via a legacy gift. Whether you choose to have a legacy wall, a legacy society, or a simple annual recognition event, honor roll listing, or a thank you note, it is critical that you keep your legacy donors close and continually show your appreciation for their gift.

For cash donors—and I would recommend for families of deceased legacy givers, an annual update on endowment investments and expenditures, will keep your donors excited about endowment giving, and may just encourage them to make another endowment gift. In fact, being transparent about your endowment funds and the uses to which the investment income is put, is a wise and wonderful way to market to your larger audience. Not just about the need but also to show the actual value of an endowment gift.

 

06 Summary

As you can see, launching an endowment-giving program is not something to be embarked on lightly. It takes planning and care. But, if your organization is financially strong, with strong staff and volunteer leadership, an endowment is not just a way to preserve your future, it can also be extremely beneficial to your programs today.

Before you launch such a program, there are many things to consider. And many policies and procedures to have in place. But if you are ready, and if your board is willing to do the hard work required of them, then an endowment program is the best way to ensure your organization’s future. And more good news! Donors who commit to making an endowment gift, whether via a current cash gift or one that will not be received for years, are more likely than not to continue being ardent annual donors. An endowment giving program, therefore not only secures you for the long term, but it can also be extremely profitable in the short term as well.

As you begin to plan your program, you might want to review (or read for the first time) Part I of How to Launch Your Endowment Giving Program. Much of the information in this blog can be adapted and used for alerting your prospects and donors about the importance of endowment for your organization. And you’ll want to ensure that you have everything in place to ensure that endowment giving is right for your organization.