Are you confused about endowments? Do you wonder whether trying to build an endowment is worth the effort? Have you considered the benefits of an endowment, both to your organization and to your donors?

What is an Endowment? An “endowment” is composed of one or more “endowed funds” containing financial assets that are invested permanently to generate income and capital appreciation for the benefit of the organization. A reasonable portion of the endowment’s value is spent annually to support the organization and its purposes. The excess income and/or appreciation are accumulated in the endowment so that its value increases over time. (Of course, the value of the endowment will fluctuate with market conditions and, in some years, may decrease.) Endowment funds can be established to support the ongoing operating expenses of the organization or for designated purposes such as scholarships, projects, programs, professorships, or any aspect of its charitable work.

Benefits of an Endowment to Your Organization. An endowment can offer ongoing operating funds and welcome sources of revenue when money is tight. It is a wellspring of resources for new programs and innovations in prosperous years. It also enhances the stability and prestige of the organization, relieves pressure on the annual fund, and offers flexibility for management. Since many donors choose to make their endowment gifts through planned gifts—to take effect at a future time or at death—endowment building provides a pipeline of future gifts. In our experience, donors who have made planned gifts are likely to increase their annual, outright gifts. And, actively seeking endowment gifts also provides the opportunity for your donors and supporters to reap the benefits of making an endowment gift, such as the following.

Benefits of an Endowment Gift to Your Donor. For some donors, giving to endowment offers them benefits they could not receive by making a major gift for other purposes.

• Creates a sense of immortality. A fund named by or for the donor—a named fund–is invested in perpetuity and can serve as a permanent tribute to the donor.

• Makes a significant investment in the future. Many donors make larger endowment gifts, often through planned giving vehicles, than they dreamed were possible. Endowment gifts are sometimes the donors’ last (and largest) gift to the organizations they value most.

• Perpetuates the donor’s values and priorities. An endowment gift can provide assurance that programs that are important to the donor will survive. An endowment restricted to a broad “field of interest” fund can ensure organizational support for the donor’s priorities.

• Endows annual gifts. Endowment gifts give donors, especially consistent older donors, the option to perpetuate their annual gifts. For example, the $10,000 per year donor might make a $200,000 endowment gift in order to continue annual support of $10,000 to the organization in the future.

• Allows incremental funding. Some donors do not want to give away their assets during their lifetimes, yet they want to see the benefits of the gifts immediately. They establish endowment gifts through bequests or other giving vehicles that take effect after their lifetimes. Then they make gifts annually that represent the amount that would have been distributed from the endowment if their gifts had already been received. In this way, their annual gifts can provide the support currently that their planned gift will provide eventually.

• Provides lifetime income. Some kinds of endowment gifts—split interest gifts—pay income to the donor for life, with the remainder going to the charity’s endowment after the donor’s death. These kinds of gifts can provide stable income to the donor during retirement or can help the donor meet family obligations.

• Permits additions at a later time. A named endowment fund can be added to later. The donor, or the donor’s family and friends, can add to a named fund from time to time by simply identifying the fund as the object of the gift. It makes a handy vehicle for people who wish to make meaningful gifts to people who already have enough “stuff.”

Conclusion. Building an endowment provides benefits for organizations and for donors. Although an endowment is not the panacea that many boards of directors hope for, it can play an important role in your organization’s multiple funding sources and in the giving options you offer donors.

For more about endowments, see Diana Newman’s book Nonprofit Essentials: Building Endowment published by Wiley & Sons.