Posted October 1st, 2011

Campaigns for Endowment: Should Restrictions on Planned Gifts Be Encouraged?

Editor’s note: The August and September editions of Give & Take featured definitions and types of endowment and issues surrounding what type of endowment may be appropriate for a given program. This month, we examine the opportunities and the pitfalls of endowment campaigns.

As America’s nonprofit community has over the years successfully conducted traditional campaigns for outright gifts that have frequently reached and surpassed their goals, many board members and other leaders in the philanthropic world have turned their attention to the importance of endowment. More and more they are interested in building a sound economic foundation through an endowment that generates funds for ongoing operations year after year.

Blending these ideas, some have conducted campaigns primarily for the purpose of building endowment. What factors should be weighed before embarking on such a plan?

Two types of campaigns

There are at least two types of endowment campaigns. Most common is the traditional campaign that encourages outright gifts toward endowment where the gift is completed during a specified period of time. For example, a donor might pledge $1 million restricted for endowment to be transferred in the form of cash or other property over a five-year period. The donor may specify that the income from the funds may be used for the general purposes of the recipient or for a specific purpose such as scholarships, research or other uses.

Another type of endowment campaign has emerged that focuses primarily on the encouragement of future gifts from estates that are restricted to endowment when received.

As an example, a 60-year-old couple might be encouraged to create a $1 million charitable remainder trust for their lifetimes, with the remainder restricted to the endowment of the organization. The organization then announces that a $1 million “endowment” has been created, the actual enjoyment of which will be postponed for up to 25 years, the joint life expectancy of the donors.

When the donors’ income interest finally ends, $40,000 to $50,000 per year would typically be available depending on the “spend rate” policy of the charitable recipient.

Restricting the normally unrestricted

In our experience, the vast majority of gifts that take place at the death of a donor, even larger ones, are unrestricted when received. In today’s environment, many organizations now depend to a greater or lesser extent on unrestricted maturities from bequests and deferred gifts to balance annual operational budgets.

This trend mirrors the experience of many of America’s nonprofits during the difficult economic period during the 1930s. For example, The New York Times reported on April 3, 1939, that a large increase in bequest income during the Depression in the face of falling outright gifts led to an overall decline of only 2 percent in charitable gifts for a number of leading educational institutions during that period.

Encouraging limitations?

In the face of these factors, campaigns that will result in restricting deferred gifts to endowment should increasingly be undertaken only after careful consideration. If an organization enjoys a predictable flow of current gift revenue that is unlikely to be affected by economic downturns, such a campaign may represent a prudent course of action.

For those less confident of future unrestricted funding, it may be less desirable to actively encourage the restriction of bequests and other deferred gifts. The practical result of such a campaign may be simply to repackage planned gift development efforts and therefore restrict a much larger share of the funds raised.

Deterring foundations?

Foundation grants may also be affected if a large future “endowment” is announced. One nonprofit reported that it has been less successful in attracting local foundation grants following publicity surrounding a $20 million endowment, which had been raised almost exclusively through the future value of life insurance and other deferred gifts.

The actual cash value of the endowment was a small fraction of this amount, and much of that was committed to the payment of life insurance premiums necessary to keep the life insurance policies comprising the future endowment in force. Lower interest rates are now leading to reductions in the expected value of such endowments, along with the expected value of all interest-sensitive policies, on which guaranteed return rates have fallen dramatically in recent years.

Individual donors can sometimes experience similar reluctance when asked to make contributions after hearing of the creation of a multimillion-dollar endowment for an institution.

From a donor-relations standpoint, we have also found that the volunteer-based strategy of an “endowment campaign” may actually make it more difficult to complete some deferred gifts. Many donors have an understandable reluctance to discuss such sensitive gifts with volunteers from the community who may be peers or social acquaintances.

Restrict gifts one by one

A deferred gift can be a wonderful source of endowment when, after consideration by the donor and representatives of an organization on a case-by-case basis, it is decided to restrict the gift for endowment when it is received. But a broad-based campaign with the stated goal of restricting deferred gift commitments for endowment may eventually lead to a full “reservoir” of funds—but funds that can’t be tapped when needed most in times of economic “drought.”

An organization should therefore carefully consider all present and future ramifications before embarking on a campaign to restrict future gifts solely for endowment purposes.

Excerpted from Sharpe seminars. See sharpenet.com/seminars for more information.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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