Preparing for the future: It's easier with an endowment

The gold standard for many nonprofits whose missions are critical to our society is the ability to provide reliable services to the people who are counting on them, regardless of economic ups and downs. This is especially true in the wake of weather-related and other natural disasters, and even man-made tragedies, that create community upheaval. In the face of the sheer unpredictability of when community needs might escalate, it's often difficult for a nonprofit organization's board and staff to balance fundraising for long-term security on one hand, with generating enough funding to support the organization's operating budget from year to year on the other hand.

To protect against economic ups and downs, and also to be prepared in the event that a disaster or tragedy hits their community, many nonprofits build and maintain a financial cushion. Sometimes this takes the form of a rainy day fund or reserve fund, which can be accessed by the nonprofit's board and staff to fill the gaps in budget shortfalls. Many organizations, in addition to building reserve funds, establish formal endowments to help ensure that the organization can meet its mission for years to come. Endowments are designed so that the corpus is preserved and increases in value over the years. Interest earned is used by the nonprofit only according to the stated purpose of the endowment. 

Donors are often interested in learning the best ways to structure their gifts to a favorite nonprofit's endowment to leave a community legacy that will live on for generations. Known as "donor-permanently-restricted gifts" under the Uniform Prudent Management of Institutional Funds Act, or UPMIFA, these donations are subject to specific record-keeping and investment requirements by the nonprofit to preserve the donor intent of these gifts. 

Donors may not always realize the flexibility they have in structuring gifts to nonprofit endowments, even with the heavy requirements. A prime example of a key donor decision is whether to make a lifetime gift to an endowment or leave a gift to an endowment through a bequest. In either case, the funds flowing to the endowment will be restricted and used only according to endowment rules and the policies set by the nonprofit's board. Keep these factors in mind when evaluating the timing of an endowment gift:

A lifetime gift to an endowment allows the donor to enjoy recognition for making the gift, including naming rights opportunities, and perhaps even participating in the nonprofit's fundraising committees to encourage other donors to follow suit.

Giving to an endowment during a donor's lifetime means that the donor can take advantage of giving highly-appreciated assets and benefiting from possible income tax deductions. And of course, the gifted assets are removed from the donor's estate for estate tax purposes if that is projected to be an issue down the line.

A bequest to a nonprofit endowment, on the other hand, gives the donor the flexibility to fund the gift through beneficiary designations of life insurance policies, or, better yet, qualified retirement plans that would be subject to both estate tax and income tax following the donor's death. All taxes are avoided on retirement assets that flow directly to a qualified charity through a beneficiary designation. 

Even donors who are financially secure sometimes worry about running out of money. Leaving a bequest to an endowment may give them peace of mind that they will own their assets until they die, and they can change the bequest any time they want while they are living if charitable or family priorities shift along the way.

Please reach out to the team at Akron Community Foundation with your endowment-related questions. We are dedicated to honoring donor intent and doing everything we can to help nonprofits stay strong for the people who count on them.

For more information on agency endowment funds, contact Brian Reitz, Agency Endowment & Engagement Officer, at breitz@akroncf.org.

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.