When an organization establishes the notion that they will be in existence for perpetuity, it may be wise to consider the creation of an endowment. While there are many ways in which an organization can bring in a consistent source of revenue, endowments provide a long-term, predictable income which can help to pave the way to lifelong sustainability.
An endowment is essentially a transfer of money or property to a not-for-profit organization, charity or trust. Endowments can be utilized for an array of reasons such as a specific, mission-driven program or general everyday operating costs. Oftentimes, this form of donation is the product of a final gift left from a donor. Many times, an endowment is presented to an organization by a longstanding supporter; donors commonly contribute to organizations that have made an impact on their own lives over a specific span of time.
Additionally, most endowments are set up to keep the principal amount intact while any further revenue generated from interest or investments is used to help drive an organization’s mission. Needless to say, this provides an endless way to keep a not-for-profit thriving, providing a reliable stream of income for years to come.
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) helps to provide guidance on significant endowment expenditures and strategic investment decisions. UPMIFA requires not-for-profit organizations, charities and trusts to control overall spending in order to preserve the original principal. Moreover, while maintaining an endowment’s principal is a nice feature of its own, there also must be careful focus placed on actively growing the account to ensure it multiplies throughout the existence of the organization. This can be done dynamically with the assistance of a financial advisor, a planned giving program, and through an unrestricted major gifts policy. Overall, endowments remain a valuable asset for all parties involved—for not only the organization itself, but for the donor as well.
The Benefit to an Organization
Endowments have the capability to create an infinite revenue stream and can help to ensure that an organization will endure throughout time and thrive for generations to come. Here are three key advantages to starting an endowment:
- Endowments offer financial independence and create a steady, ongoing source of income. When running a not-for-profit, those in charge have enough to worry about, so scheming how to pay the next set of bills or how the next paychecks will be cut shouldn’t be part of it. Possessing a trusted revenue stream from an endowment lets one take their mind off those matters and focus on what matters most: the organization’s mission and the people it serves.
- Endowments offer fiscal independence. Many factors are involved in the stability and the sustainability of any not-for-profit. Challenges such as economic climate, political matters or—in most recent times—pandemic all play a lead role in whether a not-for-profit can manage a sudden financial downturn. Endowments permit organizations to readily weather any storm through a protected means of continuous revenue.
- Endowments enhance prestige and provide a direct conduit for future giving. When donors see a true niche for a not-for-profit’s existence within the community, it attracts a strong desire to donate. Donors typically aspire to see their dollars in motion within an organization that consistently operates smoothly rather than one which constantly struggles with the challenges it faces
The Benefit to a Donor
A donor may have specific reasoning behind each donation they make and, the truth is, it is up to the individual as to when and where they make their gift. Here are three factors to keep in mind when contemplating a contribution to an endowment.
- Endowments help to make a positive impact on society. Benefactors contribute because it feels good to donate to an organization that brings good to the world. And when someone makes a donation—no matter how large or small—they feel like they are part of something big. Donating to an organization whose cause exhibits the same values, beliefs or interests as your own helps to make a connection that can potentially impact an infinite amount of lives. Not only that, but when you donate, you set a good example to those around you. Being generous is contagious and when others see your generosity, they can’t help but to replicate what they see. It is important for children especially to see acts of kindness so that they, too, may one day follow in those same footsteps.
- Endowment donations are tax-deductible. A gift to a qualified not-for-profit organization, charity or trust may entitle the donor to a charitable contribution against their own income tax. It is important to remember that such donations must be itemized in order to take a charitable deduction and help to reduce any potential tax burden. Before making any large endowment gift, it is necessary to check with a trusted financial advisor or legal affiliate first. This will help to ensure that the donation is maximized to its fullest potential all the while making a positive impact upon others.
- Endowments create a sense of legacy. Investing in the future of an organization is the ultimate gift and guarantees that, in a way, the donor’s gift will continue to provide meaningful influence even after their death. Oftentimes, an endowment is the donor’s final and largest donation, making it an impactful, everlasting sentiment to ensure their legacy lives on infinitely.
Giving is now more impactful than ever before and endowments help to play a pivotal role in the survival and perpetuity of an organization. It’s an act of kindness that is just as beneficial for the recipient as it is for the donor. Endowments help to empower those in need, help to make an organization’s mission flourish, and can even help to bring more meaning to life. In fact, it’s quite possible that those who donate will find themselves getting back a lot more than they give.
Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.
© Beacon Pointe Advisors. All Rights Reserved.