Establishing an Endowment Fund

Establishing an Endowment Fund

Written by Chuck Krueger

November 18, 2022

Many nonprofit entities want to provide long-term stability for their organizations through the establishment of an endowment fund. Before proceeding with setting up an endowment fund, it is important to have some knowledge of exactly what is an endowment and what policies should be established for proper administration of these funds.

An endowment is a donation of money or property to a nonprofit organization, which uses the resulting investment income for a specific purpose, often for general operations of the nonprofit. Most endowments are designed to keep the principal amount intact while using the investment income for charitable activities. An endowment can also refer to the total of a nonprofit entity’s assets that are invested (typically referred to as “principal” or “corpus,”). In some cases, the donor may have a specific request as to what programs will benefit from the endowment earnings.

As part of establishing an endowment, the nonprofit needs to establish, at a minimum, policies regarding desired investments, permitted withdrawals, and use of endowment earnings. Below are some suggestions for these policies.

Investment Policy

Most nonprofits use professional investment advisors or community foundations to do the actual investing of endowment funds. If a nonprofit uses an investment advisor, the investment policy should spell out which types of investments a manager is permitted to make and dictates how aggressive the manager can be when maximizing investment returns. The investment policy usually has some language as to preservation of principal and desired return on investments. Many endowment funds have specific investment policies built into their legal structure so that the funds must be managed for the long term. The same instructions provided to a professional investment advisor are also applicable to investing with a community foundation.

Withdrawal Policy

The withdrawal policy establishes the amount the organization can take out of the endowment each period. The withdrawal policy can be based on the needs of the organization and the amount of money in the fund. However, most endowments have an annual withdrawal limit. For example, an endowment might limit the withdrawals to five percent of the total amount in the fund, subject to the accumulated earnings of the endowment. The reason the percentage of withdrawal is typically low is that most endowments are established to last forever and, therefore, have annual spending limits. These annual limits are intended to allow for the growth of the endowment over time.

Usage Policy

The usage policy explains the purpose(s) for which the fund can be used and also serves to ensure that all funding is following the intended purpose, as well as being used appropriately and effectively. As mentioned earlier, endowments can have multiple uses (specific programs or general operations of the organization). Like the other policies, the usage policy has the same overall goal of current use of available funds with long-term preservation of principal.

We Are Here to Help

This article covers some of the basics regarding endowment funds. Please contact your local Hawkins Ash representative if you have questions or want assistance in establishing and endowment fund and applicable policies.

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Chuck Krueger
I joined Hawkins Ash CPAs accounting and auditing staff in 1987. As a senior manager in the firm’s Manitowoc, WI office, I provide audit services to school districts, municipalities and nonprofit entities. I am a member of the firm’s Governmental Service Group and Nonprofit Service Group.

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