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Endowments 101: Three Most Common Endowments and How Nonprofits Use Them

Photo of author, Kathleen McDermott.
Kathleen McDermott
Business Development Manager and Director of Nonprofit Advisory Services

The term “endowment” is often used loosely and in reference to an organization's investable assets. However, there are distinct differences among endowments depending on their purpose and use. The three most common types of endowments are quasi, true, and term, as defined by the Financial Accounting Standards Board (FASB). The endowment concept, however, can get more confusing because of commonly used terms like designated, board-designated, and donor-restricted, to name a few.

Before we dive deeper into these definitions and how they are often used interchangeably, let’s clarify the general concept of an 'endowment.' An endowment is a pool of funds often invested in a mixture of cash, stocks, and bonds, so that investment returns may be generated. An organization’s spending policy is created to allow for a portion of those returns (or proceeds) to support the organization's operating, special programming, or capital needs.

One of the types of funds we most often see is the Quasi Endowment. This is also sometimes referred to as an unrestricted endowment or board-designated endowment. This type of endowment is generally funded by unrestricted gifts, reserve funds, and operating surpluses. The term “board-designated” comes into play when the board, by majority vote, agrees to allocate proceeds of the fund to a specific program or endeavor.

A True Endowment exists when a donor provides a sum of money to the organization, to be kept by the organization, in perpetuity, for a specific purpose. These are also referred to as donor-restricted endowments. In these situations, there is often a legal agreement with the donor and the assets are governed by the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in most states. In addition, the organization should work with the donor on a gift acceptance policy to ensure the organization's needs are also being met.

The third endowment type, the Term Endowment, is less frequently used because it is not perpetual. Most often, it is held for a period of time, such as a fixed number of years or until a specific event such as the death of a donor takes place, after which the assets are used for a specific purpose. For example, this could be an effective strategy for a donor who wants to fund an organization’s future capital campaign.

In summary, no matter which type of endowment(s) is held by your organization, prudent management practices are key to your organization’s financial success. We highly recommend nonprofits establish an Investment Policy Statement (IPS) for effective endowment management. The IPS should include a fund objective, spending policy, asset allocation, and more. We recognize that management of these funds and their policies is no easy task. However, establishing sound organizational financial planning involves knowing what you have and putting those resources to good use through effective stewardship.

Of course, if your organization doesn't yet have an endowment in place, now is a great time to start one! For any guidance regarding either your current endowment or best practices to start an endowment, don't hesitate to reach out to a member of our McKinley Carter Nonprofit Advisory Team. We are here to help!

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