Establishing an Endowment Fund

Setting Up the Fund

  1. If the goal of the legacy giving program is to build endowment fund, the first step is to establish an endowment fund. Even if there is only $1 in the fund, this action by the Board makes the fund a reality. It also forces the Board to agree on a Terms of Reference for the fund, its management and its purpose.
  1. Developing a Terms of Reference for the fund is essential. Donors will want to know what the fund will be used for and how the money will be managed. The Terms of Reference should include investment criteria, disbursement criteria and conditions of use of the disbursements. As an example, you may decide that the fund will only be invested in Term Deposits, that only have of the interest yield will be disbursed each year and that the annual disbursement will be added to general revenue.
  1. Donors tend to respond better to funds that have a specific purpose, such as scholarships or special grants for program development. When developing the Terms of Reference, keep in mind the needs of the donor as well as the needs of the organization. There should be a case for the endowment that appeals to donors.
Growing the Fund
  1. Endowments funds usually grow in three ways: a. direct donations to the fund; b. bequests either designated to the fund or the board may make the decision that bequest receipts are put into the fund on a case by case basis; c. some organizations have a policy of transferring any excess, undesignated revenue into their endowment fund.
  1. Donations from Board members to the fund may provide the initial seed money and demonstrate the organizations commitment to growing an endowment fund.
  1. The fund can be marketed in the same way as other fundraising programs. As an example, a gift to the fund may be an option on an annual direct mail campaign. When the fund is established, this may be a good time to notify all donors that this is now an option for them.
  1. Seeking bequests usually requires one on one visits with people who know the organization well and may consider a designation in their will. A brochure or presentation for this purpose may help the people making the request.
  1. Sending letters or brochures to professionals involved in estate planning that are known to the organization is also an effective strategy. People often ask their lawyer at the time they make out their will if they can recommend a charity. Making these people aware of your organization and its endowment may keep your organization top of mind when this question is asked.
  1. Many organizations use a form of recognition to promote the fund. As an example, a “Legacy Circle” may be established. People who identify themselves as having named the organization in their will are made members of the “Legacy Circle” and recognized in various communications. As an example, one organization I have worked with in the past held an annual breakfast for their “Legacy Circle” members.
  1. There are other forms of planned giving that can be used to build an endowment fund such as life insurance and gift annuities. Statistics show that 95% of planned gifts come in the form of bequests. Also, bequests are the simplest to discuss with people. For these reasons, it is recommended that a program focus on bequests, at least in the early stages of its development.
  1. An annual update on the fund’s growth, its performance and use is a good way to keep donors and potential donors connected with the concept.
Tax Considerations (vary from country to country, so check with your local tax authority)
  1. Unless an endowment fund is managed properly, it can interfere with the requirement a charitable organization has to disburse a certain percentage of its donations in any given year.
  1. The tax authorities may have made provision for the establishment of endowment funds. In some cases, a donor must instruct the organization at the time of the donation that the donation is to be used as an endowment. Usually the best way to ensure that both the donor and the tax authority are satisfied is to have a prepared form that the donor fills out and signs and sends in with their donation.
  1. Money received from bequests is exempt from disbursement quotas and can be endowed without other special instructions from the donor.
  1. It is not uncommon for people who donate their entire estate to an organization through their will to name the organization as executor of the estate. There is really no way to prepare fully for this eventuality, especially if it happens infrequently, but it is important to know that this could happen. If it does, usually the Board grants this authority to a staff person, who would then seek professional advice to administer the estate.