How to start an endowment: Complete guide for nonprofits

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Endowment funds make up a critical piece of the nonprofit landscape. There’s a reason why many organizations think of them as a hallmark of financial sophistication, something to aspire to create as their mission grows (although this idea certainly has some caveats, as we’ll cover). 

Nonetheless, creating an endowment is a big step up for nonprofit organizations. When well-managed, endowments unlock financial stability and growth. They also clearly convey stability and growth to donors, inspiring confidence and attracting more support. 

‍How does an organization create an endowment? When is the right time to get started? Is an endowment always the right choice? 

More and more nonprofits are asking these questions today—after all, the nonprofit world is changing fast. More diverse forms of giving like planned gifts, stock, and crypto are on the rise. Ever-changing regulations, political pressures, and economic conditions make adaptability more important than ever. An endowment just might be the right choice to help your nonprofit weather the new challenges that come along with growth.

Let’s review the essential context your organization will need to approach an endowment with confidence.

Quick background: How endowments work

Technically speaking, a nonprofit endowment broadly refers to any restricted gift. More commonly, this term describes investment funds established by nonprofits to hold and invest gifts for various purposes and to effectively serve as a kind of cash reserve. 

Income from an endowment is used for its restricted purpose (or general unrestricted purposes), with the principal investment retained. 

Endowments are most commonly used by educational, cultural, and healthcare organizations, but any organization—large or small—can create one. The process of creating and then managing the endowment just needs to be prioritized properly.

So how do they work? In practice, endowments function like this:

• A donor gives a restricted (and usually large) gift with the express intent of establishing an endowment.
• The nonprofit uses the gift to establish an endowment fund, typically as a trust.some text
  • Note that foundations (both private and public) can hold the funds more directly.
• The nonprofit establishes management practices and various policies to dictate how the endowment will be used, how funds can be withdrawn from it, and more.
• The nonprofit pulls and uses income from the fund according to the policies’ timetable and restrictions.
• The principal investment is left untouched, and the fund is actively managed and grown over time.

Benefits of endowments

Nonprofit endowments bring some key (and often substantial) benefits.

A well-managed endowment serves as a sustained, reliable source of funding for programs, departments, scholarships, etc., or can cover unrestricted operating expenses. The predictability of this funding and the fact that endowments grow over time allow nonprofits to expand their capacity, focusing on big-picture strategy rather than just covering essential annual costs. A well-managed endowment can also attract more and larger gifts over time.

Types of endowment funds

There are several key types of endowments to understand. You’re likely to encounter these categories as you work to create your own:

• Restricted endowment. An endowment fund from which withdrawals can only be used for a specific purpose designated by the donor or board.
• Unrestricted endowment. An unrestricted fund from which withdrawals can be used for any purpose.
• Permanent endowment. A catch-all term for any large gift intended to serve as a long-term source of funding through the permanent retention of the principal investment.
• Term endowment. A shorter-term endowment that allows the withdrawal of the fund’s principal after a certain amount of time has passed.
• Quasi-endowment or board-designated endowment. Restricted or unrestricted long-term (but not permanent) funds established by a nonprofit board of directors with policies that can be changed over time as needed, sometimes referred to as “funds functioning as endowments.”

These terms can overlap. For instance, a permanent endowment may be designated as restricted or unrestricted. As you develop a plan to create an endowment, your team will need to carefully consider and potentially work with donors to determine exactly how you want to structure it to best support your goals.

Is creating an endowment the right choice?

Here’s the big question to answer before moving forward: Should your nonprofit create an endowment? Is it the best way to reach your organization’s financial goals?

Even when they fully understand what endowments are and how they work, many nonprofit professionals still think of them as a kind of endgame that eliminates the need for annual fundraising. This is not true. 

Endowments do not offer magic spells that make the challenges of fundraising simply disappear. 

However, it’s understandable why many organizations think this way—fundraising is tough! 

When you’re passionate about your mission and serving your community, the constant struggle to secure funding can be demoralizing. Have you ever thought, “If only I didn’t have to worry about fundraising constantly, I could focus on the actual work that I’m here to do”? If so, you’re not alone. 

That said, endowments can relieve some of your fundraising pressures. But they must be prioritized, used appropriately, and weighed against all your other ongoing needs, activities, and practices. So while endowments do help stabilize funding, they also add a new layer of complexity to your operations.

Put another way, an endowment should fit into your organization’s larger capital structure—it does not replace that capital structure.

• Working capital
  • Funds to cover planned expenses
• Operating Reserves
  • Emergency savings to be used sporadically as needed
• Strategic Reserves
  • Funds set aside specifically for strategic purposes to be used up or replenished over time
• Endowment
  • Long-term support and income generation for the organization, usually with restricted withdrawals

In terms of their immediate impact and value, the first three types of funds listed above are the most important. Remember that endowments are meant to generate long-term income. The majority of their funds must be left untouched. You shouldn’t lock away funds in an endowment before you have the structure in place to support stable operations in the short term.

With careful planning and savvy management, endowments will grow and help your programs become self-sustaining, but you cannot plan to over-rely on them to the detriment of your normal fundraising and stewardship work.

Creating an endowment might not currently be the right choice if:

• You want a large fund to replace the need for annual fundraising.
• Your organization doesn’t have other reserves in place that help serve the purposes described above.

Creating an endowment could be a very savvy move if:

• You have other types of reserves in place and are confident in your organization’s financial structure.
• You understand how endowments fit into that structure in the long term.
• You’re prepared to continue prioritizing fundraising and stewardship to keep growing your nonprofit and its impact.

If you’re unsure about starting an endowment, try consulting with a financial or accounting professional who can help you better understand your organization’s current state. If you do eventually choose to create an endowment, you’ll need to work with these professionals along the way, so it can’t hurt to go ahead and establish the relationship.

How to start an endowment: 11 steps

Let’s say you understand all these nuances and know that an endowment is the right choice—great! How do you get started?

The process of starting an endowment will look slightly different for every organization. Generally speaking, you should follow these key steps:

1. Review your organization’s financial management practices.

Start by taking stock of your nonprofit’s current financial practices to determine 1) if an endowment is the right choice, and 2) how it will fit into your capital structure. Take a look at the list of funds/reserves above and consider:

• Which types of funds your organization has in place.
• How they’re being used and whether they’re replenished over time.
• Your overall financial effectiveness—are your current practices serving your mission well or creating more stress than stability?
• Your general financial approach—managing from income or managing from expenses.

‍This last point is particularly important. Managing from income (setting budgets based on projected income, supplemented by cash reserves as needed) is the more responsible approach to nonprofit operations. 

Managing from expenses (fundraising to cover money already spent) is a recipe for stress and limited growth. Many growing organizations manage from expenses out of perceived necessity, which is why endowments are so often thought of as a magic solution to ending that stress.

However, growing into a more sophisticated and forward-thinking financial approach will be essential for sustainably building capacity. Without it, an endowment can become more of a costly distraction than a helpful asset.

‍The bottom line: Your financial house must be in order before taking on the challenge of creating an endowment.

‍Conduct an audit or further-reaching assessment of your financial practices and implement any changes as needed. If you know that your organization’s financial operations could be improved or are unsure, now is the time to consult with professionals to help you make those improvements. This will give your organization a much more solid foundation for long-term growth regardless of whether you ultimately create an endowment or not. 

2. Assess your organization’s readiness for an endowment.

As part of your endowment prep work, you should more tactically assess your nonprofit’s readiness for taking on an added layer of financial complexity.

Consider how an endowment would impact these key areas of your operations:

• How well your organization can pursue strategic and development priorities
• The overall performance of your business model
• Your organization’s staff and board
• Your liquidity and ability to address short-term needs

‍An endowment can both support and potentially distress these areas. For example, consistent revenue from an endowment might free up a considerable amount of staff time that would otherwise go to fundraising for a particular program. However, over-prioritizing an endowment without adequate cash reserves in place (see Step 3 below) might harm your nonprofit’s liquidity and make it difficult to cover emergency expenses. 

Of course, you can’t think through every possible impact and interaction, but you can try to be thorough or partner with a professional who can conduct this kind of assessment objectively.

‍Financial services provider PNC recommends that nonprofits try to answer these kinds of questions when assessing their endowment readiness:

• Does our nonprofit have a strategic plan?
• Do we actively measure and communicate progress toward our strategic goals?
• Do we delineate between our different types of income/expenses, i.e. operating and non-operating?
• Is our organization all on the same page about our financial state and goals?
• Do we have the development and financial structures in place to support creating and managing an endowment?
• Do we have donors who can serve as allies and contributors to an endowment?
• Are our staff and board knowledgeable about endowments and investing? Would training be necessary and welcomed?
• Would one or more board members be willing to chair an endowment oversight committee?

From here, you should be able to confirm if an endowment is the right choice and the next actions you should take to prepare to create one.

3. Establish a cash reserve if needed.

During the previous steps, you likely identified a need to either create or bolster your nonprofit’s cash reserve. As the National Council of Nonprofits puts it:

‍Reports such as the Nonprofit Finance Fund’s State of the Sector reveal year after year that a minority of nonprofits responding have more than 6 months of cash in reserve. In fact, many nonprofits report that they have less than three months of operating reserves on hand. This may be the reality for many nonprofits, but that does not mean that it is optimal.‍

‍If you need to focus on your cash reserves first, align with your board and donors about its urgency, and then take the necessary steps. For example, adjust your budget to proactively allocate incoming revenue to the reserve, like portions of new unrestricted planned gifts. Try soliciting a major gift from a close donor who understands the importance of cash for stable operations. Make building your reserve a key priority of your next annual campaign or capital campaign if one is coming up soon. 

If you experience pushback, remember that creating a robust cash reserve is the single best thing you can do to create short-term financial stability for your organization. An endowment helps create stability in the long term.

Plus, keep in mind that a nonprofit’s working capital ratio, a rough gauge of how long its programs can operate without new revenue, is often referenced by potential funders and donors before making grant and donation decisions. Solid short-term financial footing pays off, and it should be prioritized above creating an endowment. 

‍Note: With careful strategy, you can try to build both your cash reserves and an endowment at the same time. However, the viability of this approach varies from organization to organization. To go this route, your board can skip ahead to establish a quasi-endowment with a relatively small amount of money (there are no minimum requirements for endowments).

4. Define your purpose for starting an endowment.

With the foundational financial considerations and improvements out of the way, next define your “why” for starting an endowment fund. Answer these questions:

• What are your organization’s goals for starting an endowment?
• Has a donor already expressed the intent to give you a donation to start an endowment, or has the idea arisen internally?
• Do you already know whether the endowment will be restricted or unrestricted?
• If restricted, exactly what will the fund be used for?

Get as specific as possible and document your answers—you’ll need them for the next step.

5. Secure buy-in on the endowment from the board and/or donors.

Changing an endowment’s structure and function once it’s established is quite difficult. This means you need to fully align your organization on its purpose now before moving forward.

‍Make sure that your board understands the key points discussed above and how an endowment should and should not fit into your organization’s overarching financial structure. 

If a donor has already expressed interest in supporting an endowment, confirm with them that they understand what it is and how it will function, namely that the gift will not be used to drive immediate impact. 

If you plan to solicit other major donors to help seed your endowment, consider meeting with them to introduce your plan to create one. Explain its purpose, long-term function, and the significant benefits it will bring. Frame the move as a big step up in your organization’s operational sophistication and begin to lay the groundwork to solicit gifts later.

Once aligned, your board should pass an official resolution to solidify your organization’s plan to move forward with creating an endowment.

6. Align on endowment-related responsibilities.

Even once your board aligns on the organization’s desire for an endowment, you must still take pains to educate the organization about the new responsibilities that this added level of financial complexity will bring.

‍First, board members must understand that they’ll be held to a fiduciary responsibility, meaning they must put the organization’s and endowment’s financial well-being above their own. This responsibility can be broken down into a few clear-cut duties:

• Act only in the organization’s best interest.
• Manage the assets carefully and carry out financial responsibilities with care.
• Keep clear records of investments, assets, and transactions.
• Keep the endowment’s assets fully separate from all others.

Endowments also bring a range of specific rules and regulations that your organization must comply with. We’ll cover these rules below, but the most important to understand at the early stages of creating an endowment include:

• The Uniform Prudent Management of Institutional Funds Act (UPMIFA), applicable in some form in nearly all US states
• Foundation payout requirements depending on the classification of your organization
• Additional tax implications for large university endowments since the implementation of the 2017 Tax Cuts and Jobs Act
• General adherence to all policies enacted by your organization to guide the usage and management of the endowment—see more on policies below

As a nonprofit professional, you already know that navigating regulations like these can be quite complicated. This is one area where bringing in the expertise of a professional will be especially helpful.

7. Consult with professionals.

Legal, financial, and investing professionals with nonprofit experience will be invaluable throughout the process of creating and maintaining an endowment.

Consider contracting a legal consultant to help you understand your new regulatory responsibilities, create policies, and implement practices to support them. The services of a financial professional will likely be necessary for establishing the endowment and managing its investments over time. If you have any of these professionals on your board, ask them for help first or explore their lists of contacts to identify potential individuals or firms. 

‍There’s a chance that you may be able to receive pro bono or discounted rates for professional services, so it’s worth asking. 

‍However, be prepared to pay for these services now and down the line as part of the necessary overhead for responsibly creating and running your endowment. You’d ultimately rather pay these expenses than deal with potential legal and reputational damages (not to mention the headaches) that can result from trying to handle such impactful decisions alone.

8. Determine the overall structure of the endowment.

With an aligned team and solid financial footing, you can now begin making more tactical decisions to bring your endowment into focus.

‍The first major decision to make: Will your endowment exist as an account held by your organization, or will you set it up to be managed by a separate legal entity?

• An account held by your organization is the more straightforward approach for most nonprofits. It requires enacting an addendum to your bylaws and following the general steps outlined in this guide. The drawback to this approach is that it can open your organization to direct legal and compliance risks if the endowment isn’t managed properly or fails to comply with reporting regulations.

• A separate legal entity is the more complex approach but can bring beneficial legal and tax impacts depending on the size of your organization and its specific circumstances. You’re likely familiar with hospital and university foundations that exist to handle the institutions’ philanthropic and endowment activities. Note that this process is quite intensive, requiring the creation of a fully separate organization with its own board of directors and internal policies and practices.

Consult with your organization’s legal and tax counsel to determine the right move and immediate next steps. If you choose to establish a separate legal entity, be prepared for a protracted process.

9. Find an experienced investment manager for the endowment.

You’ll likely also want to find a Registered Investment Advisor (RIA) to manage your endowment investments on an ongoing basis. 

You can go ahead and find this partner now or wait until you’ve already established and grown your endowment account—there’s no specific order of operations here, as long as you check all the correct compliance, due diligence, and policy boxes along the way.

To determine whether you should seek investment support now, consider a few factors:

• The other accounts and reserves you’re building. Look back to Steps 2 and 3 above. If you identified a need to establish and/or grow your organization’s capital and cash reserves as part of building a stronger financial foundation, those should be your priorities before heavily investing in your endowment. These are less complex than endowments and do not require professional support outside of being held in FDIC-protected accounts.

• The size of your initial endowment. Professional investment advising costs money, and many RIAs have high minimum account requirements. You may need to wait until your funds reach a certain total before committing to that expense. However, several RIAs explicitly offer services to smaller accounts (some as low as $2,000), and investment vehicles like exchange-traded funds offer greater flexibility and lower costs for small investors—if you want professional guidance from the get-go, take the time to explore your options.

• Your board’s risk tolerance. Investing inherently brings risks, especially during times of inflation and interest rate volatility, and risk intolerance is common among board members. Lower-risk savings account options through large banks and credit unions certainly are viable choices, but they can drastically limit the growth of your funds. The ultimate goal should be to grow the endowment as an active investment account managed by a professional. If you take a more cautious route at first, remind your board of its fiduciary responsibility to manage and grow the endowment for the betterment of the organization—severely limiting growth due to unreasonably high risk intolerance will likely not be appreciated by donors.

There’s a lot to consider at this stage, but there’s also typically not an immediate rush. Take the time to determine the right approach for your organization’s endowment based on its size, your budget for professional advising, and your risk tolerance. 

Try reaching out to peer organizations to learn more about their decision-making processes for their own endowments. Get recommendations for RIAs, do your research, and ensure board alignment. 

10. Create endowment policies.

Work with your board to establish the official internal policies that will govern how your endowment works. Note that several official rules and regulations will likely need to inform your policies based on your circumstances and jurisdiction—see below for an introduction to these regulations.

A nonprofit’s endowment policies fall into four key categories:

Usage policies

Simply put, usage policies define how the fund can be used, i.e. their restricted or unrestricted purposes that you defined earlier. For both restricted and unrestricted funds, any purposes or limitations should be concretely spelled out. 

This means very clearly outlining the restricted purposes (and potentially defining the full process for adding a new purpose to this list if a highly relevant one arises down the line). For unrestricted endowments, listing a set of purposes would be counter-productive. However, you may still want to define what the fund cannot be used for if creating those limitations is appropriate in your circumstances—for example, paying the executive director’s salary.

Investment policies

Endowment investment policies lay out specific targets and boundaries for the fund’s investment practices. These might include:

• Types of investments allowed
• Target asset allocation mixes
• Approximate risk levels allowed
• Minimum time to hold assets
• Long-term goals, like a target rate of return, for the fund as a whole or various asset classes within it

These policies should be developed to help safeguard a fund’s performance and the sustainability of its long-term growth. Your investment advisor’s services should ideally include working with you to create these policies.

Withdrawal policies

An endowment’s withdrawal policies define how, when, and how much money can be withdrawn from the fund through liquidated assets. They’re also referred to as spending policies.

Most organizations implement annual withdrawal limits based on a set percentage of the fund’s total market value, but there are other common options. Manning & Napier outlines these common approaches to setting endowment withdrawal policies:

• Simple Market Value. The annual spend withdrawn from the endowment is determined by a preset spending rate (often around 5%) multiplied by the fund’s total market value. This no-frills approach results in variable withdrawals year-to-year but helps to leave more of the fund untouched and able to recover during years of underperformance.
• Average Market Value. The annual spend withdrawn from the endowment is determined by a preset spending rate multiplied by the average total market value of the fund across several years. This approach creates more even annual payouts, including during years of underperformance.
• Inflation-Adjusted. The annual spend withdrawn from the endowment is determined by multiplying a predetermined spend amount in Year One (for example, 4% of the fund’s total assets) by one plus the inflation rate. This creates a dynamic amount that varies each year based on inflation, meaning higher payouts during inflationary periods. However, this approach detaches the spend from the fund’s real-time value.
• Hybrid Rule. The annual spend withdrawn from the endowment is determined by adding a preset proportion of the payout determined via the average market value rule to a preset proportion of the payout determined via the inflation-adjusted rule. In essence, this allows you to weigh two factors with different levels of importance. For example, you may calculate total payout as 40% of the average market value rule plus 60% of the inflation-adjusted rule. This allows you to tap into the benefits and reduce the risks of two separate withdrawal approaches.

Confusing? A bit. This is another area where working with your investment counsel might be the right choice. 

Gift acceptance policy

In addition to usage, investment, and withdrawal policies, you should revisit your organization’s gift acceptance policy. Make updates as needed to account for your new endowment. Define what types of gifts it can receive, whether other unrestricted gifts to your organization can be added to the endowment, and conditions for turning down gifts if needed.

No two nonprofits’ endowment policies will look alike—your endowment should be fully customized to your unique needs and reasons for creating it in the first place.

Don’t forget to think through additional logistical policies as needed, for example:

• How your endowment committee will work, who will serve on it, and when it will meet
• How and when your board will be briefed on endowment performance and developments
• How often your organization will revisit the endowment’s investment policies to make updates in line with market conditions and fiduciary duties
• How your organization will report on endowment performance to the public in your annual report

Clearly, there’s a lot to think through. Take your time with this step and work with legal and investment professionals as needed. Some of the endowment regulations discussed below will likely impact how you shape your own investment and withdrawal policies, so review them and consult with experts before formally adopting brand new policies for your endowment.

11. Establish the account and follow your management plans.

Finally, put your endowment plan into action. Congrats!

Establish the financial account for the endowment and follow all your policies to the letter. Work with your investment advisor to get intimately familiar with reading the endowment’s allocation and performance data. 

Now you can start to think about how to present your endowment to donors—see below to learn a few endowment fundraising best practices.

Endowment fund rules to understand

Several key rules and best practices regulate how endowments can be used and managed. 

The first key concepts to understand, while not concrete regulations per se, include:

• Invasion. When an organization withdraws from an endowment to the extent that it encroaches and diminishes the fund’s initial principal investment or “corpus,” that’s referred to as “invasion.” In some cases, depending on your applicable regulations and the policies that you create for the management of your endowment, invading the corpus for necessary purposes can require court approval.

• Cy-pres doctrine. This legal concept empowers courts to interpret the terms of some gifting agreements like wills, estate disbursements, donations, and charitable trusts. A court can issue a cy-pres doctrine if an organization in bankruptcy needs to draw from assets in an endowment to pay debts. The court’s goal in these cases is to allow the organization to address its financial health concerns while honoring donor wishes to the degree it is able.

Build your endowment policies to prevent invasion. It should intentionally be quite difficult to reach that level of need.

What about other, more consistently enforced requirements? There are a few key regulations to understand. Their applications can vary widely from organization to organization, though, so it’s important to look carefully at your unique circumstances and jurisdiction before concretely reflecting them in your endowment policies and practices. 

Let’s take a look at the most prevalent endowment rules so that you can effectively orient your nonprofit to the landscape:

Foundation payout requirements

If your organization is a foundation or otherwise technically classified as a “philanthropy,” you are required to pay out 5% of investment assets annually for charitable purposes through grants to other eligible nonprofits. Community foundations have no payout requirements.

Private operating foundations (as opposed to other, “non-operating” foundations) must pay out much more of their investment income—at least 85% annually. These organizations exist to pay out the vast majority of their income to charitable causes but have the benefit of allowing their donors much higher maximum tax deductions from qualified gifts.

Uniform Prudent Management of Institutional Funds Act (UPMIFA)

UPMIFA, some form of which has been enacted in most US jurisdictions, regulates the management of investment funds in tax-exempt organizations. Its core purpose is to protect nonprofit assets from misuse and loss by laying out clear rules for endowment spending, investment practices, and gift restrictions.

This wide-reaching set of rules covers many topics, including prudent investment management (and everything that entails), investment and spending policies that should be reflected in your endowment’s own policies, reporting and audit requirements, and guidance for prudent asset diversification.

Note that UPMIFA is not federally enforced. Rather, individual states have developed and enacted their own versions of it. State agencies enforce UPMIFA rules, so they should be your first stop for questions. 

For a more detailed explanation of UPMIFA, we recommend Carnegie Investment Counsel’s complete guide.

Taxes on large university endowments

When the 2017 federal Tax Cuts and Jobs Act came into effect, some private nonprofit higher education institutions were required to pay a new tax on endowment investment income. 

Specifically, this rule applies to institutions that enroll at least 500 students and hold endowment assets greater than $500,000 per enrolled student. These institutions are required to pay 1.4% of their net investment income as an annual federal tax.

This rule applies to a very small group of organizations, but if yours happens to belong to it, you should consult with your investment manager to determine appropriate spending policies that will maintain your endowment’s performance while also accounting for the annual tax.

Key takeaway: Working with legal, tax, and financial advisors will be the single best way to gain a clear understanding of your compliance needs as you finalize your endowment policies and practices.

Endowment fundraising best practices to master

After receiving or allocating the principal gift, you and your donors can then add to the endowment over time, growing its principal and increasing the investment income that it generates for payouts. 

But how do nonprofits go about growing their endowments long-term? What practices can you implement to help make endowment fundraising an ongoing background activity? 

Here are a few recommendations:

1. Launch your endowment with a quick campaign.

An inaugural endowment campaign can be effective for garnering attention and support for a new fund, particularly if your endowment is restricted and serves a specific, direct purpose. For example, a scholarship endowment could be a specific, motivating reason to donate to an endowment fund. 

‍Specificity is important because the funds in an endowment are meant to go largely untouched—they won’t have an immediate, direct impact the same way a traditional fundraising campaign does. It’s akin to the challenges of annual fundraising for unrestricted support. Donors are often most easily compelled to give when they know that their gifts will drive a tangible impact.

That’s not to say you can’t solicit gifts for an unrestricted endowment. This is definitely doable with a robust case for support (see below).

For an endowment campaign, focus on personally reaching out to your major and mid-level donors similarly to how you would in the quiet phase of a capital campaign. Take the opportunity to use the endowment to showcase your organization’s increasing financial sophistication and responsibility. If your endowment was started by an initial gift from a donor, ask them to lend a hand in promoting the endowment and connecting you to other prospects who may be interested in the endowment’s purpose.

‍Note that once an endowment is established, it’s not often recommended to host standalone endowment fundraising campaigns. 

‍Since they’re such long-term investments, you won’t see an ROI on your campaign efforts for a long time. Instead, as we’ll explain below, look for ways to fold endowment fundraising into activities that you’ll already be doing like capital campaigns or customizing your major and planned gif solicitations to include the endowment.

2. Remember your nonprofit’s overarching capital structure.

Look back to the early sections of this guide that discuss nonprofit capital structures and financial priorities. As you begin to grow and promote your endowment, don’t lose sight of the bigger picture.

‍Simply put, your first financial priorities should remain the focus—prioritize your solicitations as needed. 

‍For example, if you’ve been in talks with a major donor to secure a large gift for a capital campaign, you might be able to present them with options for structuring their gift. It’s not uncommon for portions of large campaign gifts to go to endowments, especially if endowment growth has been built into the campaign’s goals. However, the overarching purpose of a campaign is generally to raise liquid capital for tangible purposes. Unless endowment growth is an express priority, becoming too fixated on boosting your endowment risks derailing your campaign fundraising plan. 

Or, say your nonprofit’s cash reserves are running low. A loyal annual donor has expressed interest in giving to the endowment. This is potentially very appealing, but what would be more impactful for your organization, an unrestricted cash gift to bolster your flagging operating funds, or a mid-size donation to a restricted endowment?

As your endowment becomes more ingrained into your normal development work, make sure that your entire team is on the same page about big-picture and current financial priorities to support the organization’s health. 

3. Keep the endowment’s express purpose front of mind.

Building on the previous tip, you should also avoid allowing the excitement of potential endowment gifts to result in strategic drift—a slow expansion or shift in the ways that you discuss the endowment, its purpose, and its impact with donors.

Donors should clearly understand a restricted endowment’s specific purposes. For unrestricted endowments, explain in your case for support exactly how endowment funds free up the capacity for growth. Do not imply that unrestricted endowment gifts will vaguely go towards a donor’s favorite program or area of concern. 

‍Again, team alignment is key for ensuring consistent messaging.

‍On the investment side, you should also keep an eye out for style drift—slow changes in the investment approach and asset allocation of a fund away from the original vision/policies, typically in pursuit of faster performance. The disjointedness of a drifting strategy can quickly become counterproductive. Ensure that your investment manager knows your endowment’s policies and target allocations and adheres to them as closely as possible.

4. Establish a quasi-endowment if you want to start small.

A quasi-endowment established directly by your board might be the better strategic choice for your nonprofit in a few cases. Consider this route if:

• You see the need for an endowment but don’t already have a donor interested in seeding it for you.
• You have other pressing cash or capital priorities but don’t want to lose momentum on your push for an endowment.
• You’ve received a large unrestricted gift (perhaps a bequest), want to use it responsibly over the long run, and don’t already have an endowment.

Quasi-endowments are highly flexible financial tools for nonprofits. They allow you to start an endowment yourself with any amount of money and for any purpose. They also allow you to draw down the principal over time if the intention isn’t to create a permanent investment fund. Or, quasi-endowments can be grown over time or lumped into traditional permanent endowments later as needed.

‍If you’re a smaller nonprofit or are facing any of the situations listed above, take the time to consider the ins and outs of quasi-endowments—they may be the perfect way to get started and give your organization a more flexible route to growth.

5. Fold endowment fundraising into your next capital campaign.

As mentioned above, many nonprofits choose to add endowment components to their major fundraising campaigns. After all, capital campaigns are intended to build an organization’s capacity for expansion and sustainable growth, which a healthy endowment can support.

‍This can be a smart way to grow your endowment and offer your donors options without fully shifting attention away from more immediate capital priorities. 

‍But what’s the best way to ask for endowment gifts during a capital campaign? Ideally, a prospect will commit both a campaign gift and an endowment contribution as a result of your solicitation. Easier said than done, you’re probably thinking.

‍Look to planned giving to help you grow your endowment during a campaign.‍

‍According to Capital Campaign Pro,

‍Endowments are best raised through planned giving… Consider including an endowment fund as one of the objectives of your capital campaign so you can use the campaign as an opportunity to encourage your donors to include your organization in their will.

‍By framing the gifts in different ways—the campaign gift as immediately impactful and the deferred endowment bequest as an investment in your organization’s future—you tap into a fuller range of giving motivations. You also circumvent a common concern that wealthy donors express about donating to endowments, namely that they don’t trust nonprofits to be savvy investors and that they’re better off keeping and growing their assets themselves.

‍Whenever you plan a major fundraising campaign, take the time to consider how planned giving might be incorporated into solicitations. This is by far the easiest way to make endowment growth a sustained priority without heavily distracting from your strategic priorities and capital needs. 

6. Have a case for support for your endowment.

To best equip your fundraising team to talk about your nonprofit’s endowment, you need to give them a roadmap to productive, compelling conversations with a case for support.

‍Cases for support aren’t just for campaigns. A case for support can be created to refine your messaging for any strategically important program or fundraising initiative. By laying out the “why” of your priority and outlining key talking points, you create more coherent and compelling messaging across all of your channels, including in one-on-one development conversations.

Your endowment case for support should cover some key details, including:

• Specifics about your endowment and what it supports
• How endowment gifts benefit your organization, either through restricted funds going directly to a stated purpose or through unrestricted funds that expand your capacity to ensure long-term operational sustainability
• The types of gifts you can accept for your endowment
• Talking points to help fundraisers enliven their discussions of impact, like concrete examples of how many scholarships a restricted endowment has funded or how unrestricted endowment payouts gave your organization the breathing room to launch a new program last year

From here, you’ll be able to distill the core case for support into different versions as needed. Use it to craft customized donor discussion guides heading into a solicitation meeting or draft a series of introductory emails announcing the creation of the endowment.

7. Invest in your planned giving program. 

As mentioned above, planned giving offers one of the easiest ways to consistently prioritize growing your endowment. Why?

‍First, many bequests are unrestricted. This gives you the flexibility to allocate incoming bequests to your endowment, essentially treating them as unexpected windfalls that you responsibly save and invest rather than spend in the short term.

‍Next, if you actively discuss the endowment with planned giving prospects, it’s often a relatively easy pitch. 

‍Planned gifts are usually deferred and revolve around the idea of building a legacy with your nonprofit—this aligns very well with the purpose and function of your endowment, growing your long-term capacity to drive impact. Donors already in the legacy-building mindset will be receptive to giving to your endowment or leaving a gift for you to create one if you clearly explain why that would be so beneficial for your mission.If planned giving hasn’t yet been a priority for your organization, we’ve written the complete guide to starting your program. Check it out:

To ensure your program runs smoothly and gathers the information you need, you’ll also need the right tools. FreeWill offers a range of innovative tools for nonprofits to facilitate planned and other non-cash gifts—learn more about our planned giving tools here. It’s the easiest way to kickstart your planned giving program and improve the donor experience.

8. Prioritize other non-cash gifts for your endowment.

In addition to planned gifts, incorporating other non-cash gifts into your endowment efforts will be beneficial. Non-cash giving is on the rise as more donors look for ways to maximize their tax benefits, fine-tune their portfolios, and support missions they care about.

Common non-cash gifts accepted by nonprofits include:

• Stock, both public and private
• Cryptocurrency
• Qualified Charitable Distributions from IRAs
• Grants from Donor-Advised Funds (DAFs)

‍Offering flexibility gives you another tool in your solicitation toolkit when discussing any type of gift. Since non-cash giving most often comes up in the context of major gifts and planned gifts, having the ability to accept these kinds of assets makes it easy to meet donors exactly where they are. 

Plus, it’s a great look that shows donors your nonprofit is financially savvy! Combine this with the responsibility and longevity conveyed by your endowment, and you’ll make a fantastic impression.

The FreeWill Smart Giving Suite can handle all of these types of gifts and makes the perfect complement to your endowment. It facilitates giving, improves the donor experience, and minimizes your transaction fees—0% for crypto and 1% for stock, capped at $1,000. Our tools also help you collect all the important transaction data you need to manage your finances and steward relationships with key supporters.

Using your nonprofit’s endowment as a tool for growth

You’ve successfully established an endowment and begun growing it—congratulations! This is a powerful investment in your nonprofit’s future, and you’ve likely found all kinds of new ways to up your fundraising game along the way.

What next? How do nonprofits actively leverage their endowments for further benefits?

• Showcase your endowment to prospective donors. Endowments demonstrate responsibility and long-term thinking. Impress potential donors to attract larger, more complex gifts (including non-cash and planned gifts) over time.

• Highlight your endowment to funders. When seeking grant funding, you often encounter funders who want to know how you’ll sustain funded programs once a grant ends. An endowment, either one that generally shows your commitment to capacity growth or one set up specifically to support the program, is the perfect answer to these sustainability questions. Meet funders as equal partners driving change to inspire more confidence in your organization’s abilities.

• Take the opportunity to launch or revamp new giving options. As discussed above, planned and non-cash gifts complement endowments quite well. Diversifying your fundraising programs is easy today with tools that help to minimize the upfront investment needed. Check out our full range of modern giving tools for an idea of the features to look for.

Key takeaway: Your organization’s endowment holds valuable assets but is also an incredible asset for growth in and of itself! 

The process of starting an endowment and getting it off the ground teaches nonprofits many lessons—carry them all forward to keep your organization thriving for years. Actively manage and maintain your endowment to ensure it’s serving its purposes well. Enjoy the growth and impact that you’ve worked so hard to create!

To learn more about nonprofit development and diversified giving programs, we recommend these additional resources:

• Planned giving: A complete guide to planned giving programs
• How to start a planned giving program: Step-by-step guide
• DAFs 101: Introduction and how-to guide for nonprofits
• How to accept crypto donations: Complete nonprofit guide
• Best practices for securing non-cash donations during tax season
• Major gifts: What you need to know for fundraising success

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