Many people think about universities when they hear news about endowment funds. That’s not surprising, as the market value of college and university endowment funds is $807 billion.
Much of this is due to a growing number of university alumni contributing to endowment funds as years pass, as well as prudent investments.
However, endowment funds are not exclusive to educational institutions. They are also used by churches, hospitals, nonprofit charities, and community foundations.
An endowment fund is money invested to generate revenue for charitable activities. Unlike typical investments, the beneficiaries are nonprofit organizations rather than individual investors. In San Diego, these funds are crucial for supporting community initiatives.
The principal value of the endowment fund is kept intact, while the investment earnings can be distributable dollars used for charitable grants to nonprofits. Thus, an endowment fund can be held permanently, allowing donors to support causes they care about in perpetuity.
Donations to endowment funds are tax-deductible. San Diego Foundation (SDF) donors often set up endowment funds so they can receive charitable tax benefits immediately upon making their donation, while maintaining the social-good grantmaking power for the long-term.
Institutions and individuals can donate both cash and non-cash assets – such as stock, mutual funds or real estate – to fund the endowment.
Charitable organizations with endowment funds build investment strategies – typically steered by investment committees – that increase the fund’s impact and create sustainable growth. Assets are invested into investment portfolios to maximize performance and charitable giving. San Diego nonprofits use these funds to address critical needs in our region.
University Endowment Funds vs. Nonprofit Endowment Funds
While university and nonprofit endowments serve charitable purposes, there are critical differences in their structures and objectives. Understanding these differences can help San Diego donors decide how to best support local causes in our region and beyond.
University Endowment Funds
Colleges and universities often rely on endowment funds to support various academic and operational initiatives. These funds are typically fueled by contributions from alumni, investments, and sometimes, major fundraising campaigns. The primary goal is to ensure the institution’s long-term financial stability. The funds may be allocated to scholarship programs, faculty positions, research endeavors and facility enhancements. The management of university endowments often involves a dedicated team, including financial experts and investment committees.
Nonprofit Endowment Funds
On the other hand, nonprofit organizations such as charities, hospitals, and community foundations establish endowment funds to secure sustained financial backing for their charitable activities. Donors contribute to these funds to support specific causes or the organization’s overall mission. Nonprofit endowments may focus on community development, the environment, education or social services. The investment strategies for nonprofit endowments are crafted to align with the organization’s goals and ensure a lasting impact.
Understanding these distinctions helps donors and organizations develop effective strategies for managing and growing endowment funds. For SDF donors, this means making informed decisions to maximize local impact.
Endowment Fund Policies
Most endowment funds have the following three components:
- Investment policy: Details allowable investments and manager restrictions to meet return targets.
- Withdrawal policy: Establishes the amount an organization or institution is permitted to withdraw from the fund at each period or installment based on the organization’s needs and the amount in the fund.
- Usage policy: Defines the fund’s purpose and ensures grants align with this purpose effectively.
3 Types of Endowment Funds
Endowment funds can be categorized into three types:
- Restricted endowments: The most common type of endowment, a restricted endowment has a principal held in perpetuity. Earnings are granted based on the donor’s recommendation, such as with a donor-advised fund.
- Term endowments: The principal of the endowment can be granted after a certain period of time or event.
- Quasi-endowment: Also known as “board-designated endowments”, quasi-endowment funds are funded by the nonprofit organization itself. The principal may be used or granted at the discretion of the nonprofit’s board.
Penalties may apply if endowment terms are violated.
Frequently Asked Questions (FAQs)
What is an endowment fund?
An endowment fund is money invested to generate revenue for charitable activities.
How does an endowment fund work?
Unlike typical investments, the beneficiaries are nonprofit organizations rather than individual investors. The principal value of the endowment fund is kept intact, while the investment earnings can be distributable dollars used for charitable grants to nonprofits. Thus, an endowment fund can be held permanently, allowing donors to support causes they care about in perpetuity. Donations to endowment funds are tax-deductible. Institutions and individuals can donate both cash and non-cash assets to fund the endowment.
What is the goal of an endowment fund?
The goal of an endowment fund is to provide a sustainable source of income for charitable activities by investing a principal amount and using the generated earnings for grants and support. Keeping the principal intact ensures long-term financial stability and continuous support for nonprofit organizations and community initiatives donors choose to support.
What is the difference between an endowment fund and non-endowment fund?
An endowment fund invests a principal amount to generate earnings for ongoing charitable activities, preserving the principal for long-term support. A non-endowment fund, on the other hand, uses both the principal and any earnings for immediate or short-term needs, without the intention of preserving the principal indefinitely.
Can you withdraw money from the principal of an endowment?
Generally, you cannot withdraw money from the principal of an endowment fund, as the principal is meant to be preserved to generate growth and long-term grantmaking. However, certain types of endowments, like term or quasi-endowments, may allow principal withdrawals under specific conditions. Penalties may apply if you seek to withdraw money from the principal of your endowment fund. Check your fund’s endowment policy for details.
What is the minimum amount to start an endowment?
That generally depends on where you establish your endowment fund. Minimums are different based on the institution. At SDF, we require a minimum of $25,000 to open a charitable fund. At other institutions, there may be no minimum amount of assets required to start an endowment.
What are the tax benefits of contributing to an endowment fund?
Contributions to an endowment fund are typically tax-deductible, providing donors with immediate tax benefits. The specific deductions depend on the type of asset you donate (cash, securities, real estate) and compliance with IRS regulations.
Learn More
In addition to managing non-endowment funds, San Diego Foundation manages more than 1,300 endowment funds of more than $890 million.
Our assets, including endowments, are professionally invested based on specific fund types to maximize return, strengthen grantmaking and create sustainable growth.
If you want to learn more about endowment funds or how donor-advised funds (DAFs) can boost your philanthropy in San Diego and beyond, contact our Development & Stewardship team at (619) 814-1332 or [email protected].
Or download the Essential Guide to Donor-Advised Fundsto learn more about DAFs.
Download the Essential Guide to Donor-Advised Funds
This helpful resource provides you the information you need to better understand the impact and benefits of donor-advised funds.
