Dallas CPA Society CPE Day
Hilton Anatole Hotel
Dallas, TX
May 1, 2009
Cynthia W. Krause
Vice President of Gift Planning
Baylor Health Care System Foundation
HISTORY: Twenty years ago having an endowment was often looked at as having an
embarrassment of riches, being over funded – you could be chastised for holding funds. Boards
were ambivalent – torn between justifying the existence of endowments versus spending money for
current needs
I.
The Role of Endowment
Today endowments are a sign of:
 Responsible
 Well-prepared
 Forward looking nonprofit
 Ready to weather economic downturns
 Ensure long-term survival
 Proactive process
II.
Defining Endowment
Broad Definition: Funds set aside for the long-term benefit of a non-profit organization
versus funds for current operations.
 Operation funds generally invested in cash equivalents and short term bonds to
maximize income vs. equities/ longer term bonds to achieve growth and an
increasing stream of income over the years
A.
Creating Your Unique Definition
The concept of an endowment is difficult to define because so many institutions
define it in their own ways so there’s confusion in comparing practices or
establishing a baseline. Some use statutory legal definition including only those
funds legally restricted – others have endowments but don’t define at all and have
lots of funds scattered in many accounts with different investment structures.
The first step to having an endowment is to be able to define it.
B.
What to include in definition:
1.
Purpose of endowment
2.
Description of types of funds considered “endowed”
3.
Types of funds committed to endowment
4.
Spending policy
5.
Investment goals
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Many planned giving programs are begun when the board decides to have an
endowment campaign to create or increase their endowment. This is why
endowments and planned giving are so closely tied together
Nonprofits are well-advised to adopt a board resolution to allocate deferred planned gifts;
bequests, beneficiary designations of insurance and retirement plans, remainders from
charitable remainder trusts, etc., and other unexpected gifts, to endowment versus to
operating budgets (exceptions may be small gifts).
Why?

III.
Because these gifts can’t be budgeted since they accrue at death of donor (which
doesn’t happen with the predictability suggested by the annuity tables!!), and

Because they create fluctuations in operating revenue that may be difficult to
cover in subsequent years

Because the long-term benefit of these gifts is lost if they are immediately spent
Types of Endowment
A.
True Endowment (Permanent endowment)
Funds permanently set aside (either by a donor’s document or legally restricted) to
generate income for nonprofit.

Can’t spend the principal

Income can be narrowly or broadly defined (ex: only dividends, interest and rental
income from endowed assets OR can include realized or unrealized capital gain –
depends on state law and governing document of the funds

Restricted endowment: when donor limits the use of endowed funds

Unrestricted endowment: when donor leaves spending discretion of income to
charity
EX: John Doe leaves $200K bequest to ABC Charity to provide scholarships for
students from Paris, Texas with GPAs of 3.5 or greater. His will specifically provided
that the corpus of the gift was to be preserved and only the income used for
scholarships
B.


Quasi-Endowment
Funds committed to long-term use (endowment) generally by board resolution.
Unlike a permanent endowment, there are not restrictions on the use of principal,
other than self-imposed restrictions placed on assets by a board at a certain point in
time, which restrictions can be removed by future boards and the principal made
available for use.
Normally, boards establish procedures to govern the distribution of income and
withdrawal of principal (Church of the Incarnation Foundation)
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
C.
Examples of board restricted funds
 Unrestricted outright bequests
 Funds from the sale of an asset
 Surplus funds
Term Endowment
Gift where the principal is restricted for a certain period of time.
Ex: Donor creates a gift for ten years to benefit the work of a physician at her local
hospital. After ten years, the board may use the principal or allocate it to quasiendowment.
D.
Pooled Endowments
Sometimes nonprofits pool endowed funds to achieve efficiency in investing the
assets. Pooling these assets requires special accounting because you must be able
to segregate and track income from restricted funds or term-endowments.
Tracking can be tough when the endowment pool has hundreds of sub-accounts
and income restrictions vary from fund to fund. Therefore, most nonprofits set
minimum gift amounts for restricted funds and term endowments like $50,000 or 100K.
Sometimes pooling isn’t permitted if a donor’s document requires the funds be
invested separately. Then these must be managed in a separate account
IV.
Does Your Organization Need an Endowment?
There’s no purely objective test that leads an organization to decide to establish an
endowment
A.
B.
V.
Gift planning programs and endowment
 Main goal: to raise funds for endowment to insure viability of nonprofit in the
future
 The following questions may help your board stay focused on objective issues in
making this decision vs. emotional issues in deciding whether to create an
endowment.
Objective Needs-Analysis for Organizations
1. Does your organization serve a need/purpose that's likely to exist on a longterm basis?
2. Do cyclical economic variances impact giving?
3. Does your organization face increasing operating costs?
4. Are there new programs that cannot be operated due to lack of funds?
5. Do you anticipate future needs that have no current funding sources?
6. Does your organization face increasing competition for annual gifts?
7. Are you dependent upon government or private grants for operational
expenses?
8. Are you losing current donors to mortality?
Is Your Organization Ready for an Endowment?
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Important to look at your organization’s history and identity factors that may serve as
indicators of success or barriers to donors who might be asked.
VI.
A.
Indicators of Success
1. In existence at least 8 – 10 years
2. History of strong program growth over time
3. Solid fundraising program that’s grown since it started
a. growing annual fund program
b. solid base of repeat donors
c. major gifts
d. unsolicited bequests
e. readiness or entry into charitable gift planning (planned giving)
4. Stable nonprofit staff
5. Financial officer or other staff member responsible for managing or providing
oversight of endowment
6. Commitment by board to build endowment
B.
Potential Barriers to Success
1. New organization, struggling to get started
2. Turnover on staff or not enough staff
3. No fundraising program; erratic fundraising, solely government based funding
or heavy dependence on a few corporate or foundation donors
4. Ambivalence of board about need for endowment
Common Endowment Myths to Overcome
A.
The Myths – and how to counter them
1. Organization will appear rich
Must position endowment as resource for future; reflection of fiscal
responsibility of board
2. Raising endowment funds will hurt annual and special event giving
Must position annual giving and endowment building as two separate
opportunities. Making gift to endowment is way to ensure charity will receive
annual gift from donor after his death
3. Planned giving will diminish the potential of our capital campaign
To contrary, PGs are way to increase or protect investment donor’s made in
campaign. In fact, emphasizing PG in campaigns may allow donors to make larger
gifts to campaign than they otherwise thought possible
4. Raising endowment through use of planned giving takes too much time/effort
and staff training
Grumbling about time and effort required reflects too great a focus on
administrative details of running a charity and too little focus on long-term goals of
charity. Successful PG programs do require time & money but benefits far
outweigh costs
5. Donors will restrict the use of funds
Restricted gifts will bring in more donors – balancing donor’s passion with
charities goals. Make sure to clearly outline charity’s goals so more donors can
plug into areas meaningful to them – create buckets. Also, to keep these funds
from becoming too difficult to manage, work with donors to make gifts as flexible
for long-term use of charity as possible
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6. Endowment giving limited to small segment of donor base
 Remember 90/10 rule – or 85/15?
 Matter of perspective – PG donors are ages 30 – 90+
 PGs range from $1,000 - $1M+
 Donors with most potential to make PGs are ongoing contributors at any
dollar level – remember the gift pyramid
VII.
VIII.
Making a Case for Endowment
A.
The importance of a case statement
 Once you’ve committed to endowment, must reduce this to a compelling
case to external constituents for donor support.
 Must mesh mission and purpose of your organization with need for longterm support. Need clear, compelling argument for donors’ role in
charity’s future
 Put this case forward in all materials related to building endowment
B.
The need for board commitment
 Accidental endowments: typical big-gift versus planned endowments:
proactive board action to establish a fund and board resolution to build
endowment.
 Examples:
 Transfer of surplus funds
 Mature planned gifts at death of donors
 Allocate part of capital campaign to maintain facilities and
programs
Structuring the Endowment
A.
Importance of Consolidating the Assets
1. Critically important to long-term success of endowment.
2. Endowment assets scattered in variety of brokerage houses, banks, checking
accounts or CDs, it’s difficult to effectively manage costs and have
consistency in spending and investment policies
3. CFO have hard time generating single report detailing fund earnings, funds
available for expenditure, and historical info on use of funds to report to
donors
4. Consolidation allows nonprofit to focus on:
 Performance
 Purpose
 Long-term goals
B.
Forms of Endowment
THREE ALTERNATIVES:
Choice depends on:
 Goals of charity in creating endowment
 Size of endowed funds
 Resources available to nonprofit to manage endowment
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1.
Segregated fund held by the charity
o What is it?
A fund.
o How is it established?
Board passes a resolution setting aside specific funds in quasiendowment form in a segregated account
o How does it work?
Account established at brokerage firm, trust company or bank in
checking account labeled “endowment”
o Advantages
One of simplest ways to create endowment – board resolution
Can accomplish w/o creation of separate legal entity, without
application for new tax ID # or creation of separate board
o Disadvantages
Most vulnerable to board changes – easily created, easily
dismantled
o How to protect this model
- Make invasion of funds for purposes other than those
originally intended as difficult as possible with written
guidelines specifying how funds will be used
- Establish board processes for approval and distribution of fund
assets with super majority to change from original purposes
- Create informal group of board members (and selected nonboard members) and give them responsibility of:
 Managing funds
 Distribution recommendations
 Duty to safeguard assets
This provides separation of powers vs. having it handled by
typical board finance committee
2.
Designated fund held by a community foundation or other umbrella
organization
What is it?
Restricted fund held for benefit of a specific organization or purpose
by another organization like a community foundation (or BFT). Not
true endowment since governing fund agreement generally allows
distribution of income or principal. Fund is restricted in organizations to
which distributions can be made.
How is it established?
By executing fund agreement between charity contributing funds
and charity receiving funds that restricts use of assets for the
contributing charity’s benefit.
How does it work?
Fund document should:
- Specify purpose for which distributions may be made and method
for requesting and approving distributions
- Also allow charity to request full distribution when its ready to
fund a supporting foundation
NOTE: Ability to withdraw funds is very important – since funds
belong to receiving entity once transferred, contributing charity
o
o
o
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o
o
3.
o
o
o
o
o
IX.
must anticipate the eventual transfer event and make some
provision in agreement to move fund (with approval of charity
holding funds)
Advantages
- A community foundation serves as incubator for endowment
- Provides benefits of oversight by a board of community leaders
- Pooled investment management
- Barrier to distribution of funds
- Does not require creation of separate legal entity
- Cost of creating fund agreement is minimal
- Extra layers of management provides protection from unwarranted or
unwise use of funds
- Provides more asset protection than segregated fund inside charity
Disadvantages
- Less flexible than a supporting foundation
- Generally requires charity to give up ownership of funds
Supporting Foundation
What is it?
Separate foundation that qualifies as a public charity because its sole
purpose is to support an organization that meets the criteria of IRC Sec.
501(c)(3). It’s a separate 501c3 – actually is a 509(a)(3).
How is it established?
Either by incorporation under the nonprofit corporation laws of the
state where charity located or by trust document. The corporate form
requires articles of incorporation and by-laws that are filed with court and
attorney general of state. Trust form requires irrevocable
trust
document.
How does it work?
Advantages
- Provides greatest protection against unauthorized use or depletion
of funds of foundation
- Must make payments to or for the charity it supports AND must
also meet one of 3 structural tests
1. Must be operated, supervised or controlled by primary charity
2. Must be supervised or controlled in connection with primary charity
(those controlling and managing primary charity also control and
manage supporting foundation
3. Must be operated in connection with charity
In other words – must have close working relationship with
supported charity and be responsive or attentive to it.
Disadvantages
- Expensive: start up costs, ongoing expenses, separate bookkeeping,
investment management, solicitation of gifts, recording gifts, audits,
tax-filings
- IRS and Congress on the warpath against them right now – see them as
abusive – very hard to get approval
Dealing with Designated Gifts
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
A.
Donors increasingly want to create designated gifts. NCPG donor survey stated the
most compelling reason to make PG – knowing purpose for which funds will be
used.
The Issues

Fact that donors like to designate specific uses for gifts does NOT have to
mean the can contribute gifts of any size with restrictions
1. Size
Set minimum size ($25K, $50,$100) for endowment fund separately accounted for,
meaning annual accounting, valuation, annual tracking of income distributions.
2. Limited purposes
Example: Have policy stating: “We won’t accept any gift to endowment fund not
in keeping with our long term mission or that is too difficult to administer”.
Thisis another reason for gift acceptance policies which we’ll discuss tomorrow
3. Accounting costs
B.
X.
XI.
The Solutions
Pre-emptive strike
1. Designate broad areas of need
Create 4 – 6 areas of need – endowment buckets
2. Combine smaller accounts
Marketing the Endowment
A.
Create Visibility
 Annual report, separate brochure, emphasize on website, add endowment
goals as part of campaign
B.
Establish Internal Accountability
 Report to donor/family annually
C.
Donor Stewardship
 Taking report to donor/family annually, telling them about area fund is
supporting keeps them in the loop and hopefully giving in other areas
Managing the Endowment
Raising endowment funds is only part of the process. Most difficult and long-term aspect
of endowment is proper management
A. The Endowment Agreement
Sets out terms of gift and defines purposes / limitations.
1.
2.
Benefits of Endowment Agreement
a. Charity and donor can reach agreement on goals of gift
b. Charity can build in a mechanism for change, if needed
Creating flexibility is key
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a.
Greatest challenges to charity are restrictions donors place on
use of funds
b. Key is to integrate donors concerns and goals into a gift design
that can last into perpetuity and support charity’s mission
c. Examples of problems
 Donor in 40s make major gift to CF to provide support for
homes unwed mothers when they were ostracized. Few
such homes today because society’s attitudes on unwed
mothers is accommodating at the least. Counseling and help
is provided but women usually stay in their homes.
 Donor bequest $500K in 1970 to maintain building her dad
had constructed on hospital campus. Several years after her
death, hospital renovated, named building torn down and
courtyard for patients constructed on spot. Hospital must
now go to court to have restrictions removed and funds
allocated to maintenance of newer buildings.
d. Three ways to change original purpose of endowed gift
 Incorporate language in end. document that permits board
to make changes when original purpose no longer valid
 Donor approval of change under Uniform Management of
Institutional Funds Act; or
 Court action
B. Determine how to use funds
1.
2.
Set spending policy: spending policies govern the rate at which funds are
distributed annually
Benefits of spending policies
a. Creates discipline in spending (when times are bad, or special
projects rise, board may see endowment as the easiest way to fill
gap
b. Allows charity to budget effectively – policy should allow
nonprofit to determine annual distribution and incorporate that
figure into its budget
c. Provides investment manager with critical info to guide asset
allocation of investments
d. Two examples of spending policy structures that create
consistency and make sense
 X% of average market value at end of prior fiscal
year
 X% of average of last sixteen quarter-end market
values (4 years) – this formula or version allows
for consistency from year to year
C. Reporting to Stakeholders
1.
Endowment reporting offers opportunity for stewardship
2.
Once donor no longer alive, information can be sent to donor’s
descendants, with personal note about donor’s goals and objectives in
creating fund. Hopefully encourages them to make additional gifts
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