What is Endowment?

Two women at a conference room table discussing ideas

By Lori Kranczer

Nonprofit Endowment FAQs: Your Top Questions Answered

Nonprofits have many questions about endowment: how they work, who’s involved, what they cost, whether they are worth the effort, and how to manage them properly. This FAQ addresses the most common questions we get from organizations that are considering building an endowment or are currently managing or growing one.

What Is an Endowment?

An endowment is a pool of invested assets where the principal amount (called the corpus) remains intact while a percentage of investment earnings supports your organization's mission. 

The key difference between endowments and other funds is permanence. Some organizations may have multiple designated funds to serve a purpose, such as a scholarship or program. With an endowment, you commit to preserving the principal for the long term, allowing it to grow and providing financial stability.

What is the Minimum Amount to Start an Endowment?

It’s less than most people think. While you may see large universities with billion-dollar endowments, organizations can start with remarkably modest amounts, especially when starting with a board-designated, or quasi-endowment. And remember, everyone starts at zero.

The real question is not "How much do I need?" but rather "Do I have enough to make professional management worthwhile?" Speak with your investment advisors to determine their required minimum balance to provide cost-effective service. If you don’t meet the threshold, consider partnering with a community foundation that can pool your assets with others for professional management.

What Are the Different Types of Endowments?

Permanent (True) Endowments (Donor-Restricted): The principal can’t be spent; only investment income is available for use. These are established by donors who want their gifts to provide support in perpetuity. They can be created during the donor’s lifetime or in a donor’s estate plan.  Once in effect, they cannot be eliminated without intervention such as court approval, with some exceptions.

Term Endowments: These function like permanent endowments for a specified period or until certain conditions are met. After the term ends, the principal can be spent. Donors might establish these to provide support for a specific program, a number of years, or until their death.

Quasi-Endowments (Board-Designated): The board sets aside funds to be managed like an endowment, but retains the right to change policies or access the principal if necessary. This flexibility makes quasi-endowments ideal for organizations beginning their endowment journey. These should not be confused with board-designated funds that are set aside for a particular purpose (e.g., the “Director’s Discretionary Fund”)

Most organizations start with quasi-endowments because they provide flexibility while building experience with endowment management. They can also be created using surplus or windfall funds. It’s at the direction of the board.

How Much Can I Spend from My Endowment Each Year?

Most nonprofits distribute 3-5% of their endowment's value annually.

Some factors affecting spending rates:

Higher spending (4-5%) provides more current income but risks depleting the principal over time if investment returns do not keep pace.

Lower spending (3%) preserves and grows the endowment more aggressively but provides less immediate support.

Under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), you have discretion in setting spending amounts, but spending more than 7% creates a presumption of imprudence that the board would need to justify. Most organizations we work with use 4%-5%.

What Does It Cost to Manage an Endowment?

Management costs typically include Investment Management Fees, Custodial Fees, Professional Services, and Administrative Time. Also consider the time and expenses associated with fundraising for additional endowment funds to add to the pool.

Smaller endowments often find that community foundation partnerships offer the best value because administrative and investment costs are shared across multiple organizations.

For any of the options, we recommend researching many sources and comparing cost structures. Yes, read the fine print.

How Is an Endowment Different from Operating Reserves?

Operating reserves are savings set aside for short-term needs and emergencies kept in highly liquid, low-risk accounts. You should be able to access these funds quickly if necessary.

Endowments are long-term investments designed to provide permanent support. The principal is invested for growth and cannot easily be accessed without violating donor intent or board policy.

Every organization needs both. Build adequate operating reserves first, then consider starting an endowment. Trying to create an endowment without proper reserves can leave you vulnerable to emergencies and force you to make rash financial decisions.

Can We Ever Spend the Principal?

This depends on your endowment type and governing documents:

True endowments with donor restrictions: Generally, no, the principal must remain intact unless you obtain court approval or the donor's permission to modify terms.

Quasi-endowments: Yes, your board has the authority to access the principal, though doing so should require careful deliberation and a strong justification, depending on your policies.

What Happens If the Endowment Loses Value?

Market fluctuations are normal. In some years, your endowment will grow significantly; in others, it will decline. This is why you need:

Long-term perspective: Evaluate performance over decades, not quarters. You are in it for the long term.

Spending policy that protects principal: A common method is using a trailing three-year average for distribution calculations to prevent you from over-distributing during temporary market highs or completely suspending distributions during market lows.

Diversified investment strategy: Proper asset allocation across stocks, bonds, and other investments reduces volatility.

Patient board members: Educate your board about market cycles so they do not panic during downturns and demand counterproductive changes. Likewise, endowments grow in value through both investments and fundraising. Do not rely only on investment performance. Surpluses can be used to support quasi-endowments, but a planned giving and legacy giving program is necessary to grow the endowment over the long term.

How Do We Attract Donors to Our Endowment?

Endowment giving requires different messaging than annual appeals:

Communicate Legacy: Understand your donors' values and interests to create lasting impact beyond their lifetimes. Endowment gifts allow them to support causes they care about in perpetuity. Offering recognition and naming opportunities creates a meaningful legacy.

Integrate Planned Giving: Bequests and other estate gifts naturally grow endowments. These gifts are important to fuel the growth of the endowment.

Provide Multiple Options for Endowment: Some donors want to restrict their gifts to specific programs; others prefer unrestricted endowments. Offer both options.

Include Endowment in your Comprehensive Campaign: Whether you are raising funds for a program or building, endowment should be a component of the campaign.

When Should We NOT Start an Endowment?

We are huge proponents of endowment, but sometimes an organization is not positioned to start one, such as if your organization is less than 5-7 years old without proven operational stability or reserve. An endowment is an investment in the future of an organization to hold off if you say yes to any of the following:

• You lack adequate cash reserves to cover at least 6  months of expenses.

• Your board does not understand or support long-term financial planning.

• Your mission addresses a time-limited problem that may not exist in 20 years.

• You cannot afford professional investment advice or administrative support.

In these situations, focus on building operational strength, developing consistent revenue streams, offering legacy giving opportunities, and establishing adequate reserves before pursuing an endowment.

The Bottom Line

Endowments represent powerful tools for building long-term organizational sustainability. Understanding the basic types, costs, management requirements, and fundraising strategies can help you make informed decisions about whether and when to establish an endowment for your organization.

About the authors:

Lori Kranczer is the founder of Link Elevating Philanthropy, a boutique nonprofit and philanthropic consultancy in New York City.  

Connect with Lori on LinkedIn.