Designated Endowment: How Much Should We Restrict the Future? | Sharpe Group
Posted October 1st, 2007

Designated Endowment: How Much Should We Restrict the Future?

In recent years, America’s nonprofit community has concluded an unprecedented number of campaigns for outright gifts that have reached and surpassed ambitious goals for capital

At the same time, many board members and other leaders in the philanthropic world have become aware of the importance of endowment. Through endowment that generates funds year after year for ongoing operations, an organization can build a sound economic foundation.

Blending these ideas, some organizations are considering or implementing campaigns 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 are traditional campaigns that encourage outright gifts for endowment to be made during a specified period of time.

For example, a donor might pledge $1 million restricted for endowment to be paid in cash or other property over a specified pledge period. The donor might stipulate that the income from the funds may be used for the general purposes of the institution or for a specific purpose such as scholarships, research, or other uses.

Another type of endowment campaign now being conducted by some is different and deserves closer scrutiny. These campaigns focus to a large extent on encouraging bequests and deferred gifts that are restricted to endowment.

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 life expectancy of the donors.

When the donors’ income interest finally ends, perhaps $50,000 per ear will actually be available as earnings from the endowment.

This second type of arrangement may certainly help increase deferred gift expectancy levels. But how does such a campaign harmonize with the overall strategic plan and objectives of the organization?

Restricting the normally unrestricted?

In our experience, the vast majority of bequests, charitable remainder trusts, gift annuities, and other planned gifts, even larger ones, received each year are unrestricted. In today’s environment, many organizations now depend to a greater or lesser extent on unrestricted maturities from deferred gifts to balance annual operational budgets and fund capital intensive projects that may not have been included in regular operating budgets.

This trend mirrors the experience of many of America’s nonprofits during the difficult period between 1931 and 1949. The New York Times reported on April 3, 1939, that it was a large increase in bequest income during the Depression in the face of falling outright gifts that led to an overall decline of only two percent in the funding of a group of leading educational institutions during that period.

Taking a lesson from the past, when times are good, the leadership of many institutions may wish to voluntarily restrict all or a portion of matured planned gifts to a “quasi-endowment” fund which can be tapped when needed in future years.

Encouraging limitations?

In the face of these factors, then, campaigns that will result in restricting deferred gifts to endowments restricted for narrow purposes should 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 be more appropriate.

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

Deterring foundations

Foundation grants can also be affected if a large future “endowment” is announced. In the wake of a campaign where many future “endowments” were announced, one organization reported less success in attracting local foundation grants following publicity of a $20 million “endowment,” which had been raised primarily through crediting the future value of life insurance and other gifts that would not be received for decades in some cases.

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 to keep the policies comprising the future endowment in force. Lower interest rates since the close of the campaign have also resulted in reductions in the expected value of the insurance policies when they eventually mature.

Individual donors can have similar reluctance when asked to make regular contributions after hearing of the creation of a multi-million dollar “endowment” of this type 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 planned 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

Planned gifts 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 it is best to restrict the gift for future endowment. But a broad-based campaign with the stated goal of restricting bequests and other future 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 drought.

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

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The publisher of Sharpe Insights 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 Sharpe Insights 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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