Creating a donor-centered environment means talking about endowments

Endowment is one of the most misunderstood terms in the nonprofit sector. Given the fact that the term lacks a formal legal definition, the confusion is understandable. 

There are many who still hold on to the traditional definition of an endowment – that is, funds that are held permanently by a charity where the annual income derived from those funds is used to support the charitable activities/programs of the organization. While this definition is not necessarily an incorrect one, it is rather limited and isn’t overly helpful as we try to navigate the modern world of endowments.

Over a decade ago, changes to the disbursement quota rules in Canada ushered in a new era of charitable giving. These new rules eliminated some of the most onerous spending restrictions for charities and allowed for considerable flexibility in the structuring of charitable gifts.  

Under the old rules, if a donor wanted the gift to support the long-term health an organization (for example, creating a chair position at a university), they needed to place prohibitive restrictions on the gift, including how and when the gift’s capital might be spent

The new rules eliminated these restrictions and created an open-playing field for charitable gifts. For example, if a donor wanted to structure a gift so that it was used over a fixed number of years, the charity would be able to accommodate such a gift.  If a donor wanted a charity to spend the income from a gift over a period of years, and then spend the capital in a lump sum at a future date, this could be done. When it comes to the structuring of charitable gifts, there is now a great deal of flexibility, provided there is agreement between the donor and the charity.

So what does this mean for endowments? It means we need to expand our understanding of the term to be inclusive of the new rules.  It means we need to be mindful that there is considerable flexibility when it comes to the structuring of donor gifts.

Are endowments good for charities or donors?

With capital campaigns and immediate issues on the front burner, it’s no wonder that deferred and/or longer-term gifts like endowments get put on the backburner and are not presented as options to a donor. But I believe many donors would opt for longer-term gifts if presented with the option. 

How would having more endowment gifts impact the long-term needs of Canadian charities? Could it hamper charities in the short run? The answers to these questions are important but perhaps less so than creating a donor-centered environment where donors understand not only the needs of the organization but ALL of the options and structures available to them.

Endowments, when appropriately managed and resourced, can provide a charity with a sustainable source of funds, bring stability, diversified funding and more options for donors. 

Does your charity need an endowment policy?

As part of our work at Spire, we are often asked by clients to review their endowment policy.  Occasionally, we are even asked to develop a brand new policy. But these requests have got me thinking. Do charities need a separate endowment policy? The short answer is no but let’s get into why I think so.

There are essentially two types of restrictions that can be placed on a gift – how/when it is spent and how it is used (i.e., in support of charitable activities). My suggestion is for charities to address these two types of restrictions in their policy. Whether that’s done in the context of an Endowment Policy or as part of a broader Gift Acceptance Policy is entirely up to the organization. I tend to recommend that charities have fewer policies, so I would suggest trying to incorporate this into an existing policy.

Your endowment policy must address the following issues:

1. How/when a gift is spent

It is important to note that the charity and the donor must agree on how the gift is spent.  For example, a donor may want to set up a perpetual endowment fund (where capital is held intact) but the charity may, for very understandable reasons, not want to accept a gift under those terms.   

An endowment policy must address the terms under which an organization is willing to accept a gift. As an organization, are you willing to allow for permanent, perpetual endowments where the capital is held intact? Or are you only willing to accept a gift that must be spent after a certain number of years? These are the parameters which set the tone for how your organization manages endowments. If you are willing to accept permanent endowments, your policy should ensure that funds are spent in accordance with disbursement quota requirements.

2. How a gift is used

A donor may restrict the terms under which a gift is used. These restrictions include limitations, conditions or other restricting factors.

Will you allow donors to direct their gifts to certain programs or activities? Will there be a minimum gift requirement in order to allow such restrictions?  I think these questions are best addressed in the context of a broad gift acceptance policy which covers off these issues.

3. Gift requirements for a separately named fund

Many donors will want to create a separate fund and will ask that the charity report to them each year on how their gift is used. Some charities call this an Endowment Report or simply a Donor Report, but it is an important element of donor stewardship. Your policy should outline the minimum requirement for a separately-named fund.  

4. Donor reporting

If a donor has created a separate fund, your policy should incorporate how you are going to report on that fund to the donor. How often will you report to the donor? Will you report on the fund’s investment returns? Will you advise the donor on how the disbursed funds have been spent (e.g., on what charitable activities)?

Reminder: Your endowment policy is NOT your investment policy. Your organization should have a separate investment policy which articulates how the organization’s assets are invested.

Again, I believe that most of these issues can be addressed within an organization’s gift acceptance policy and that there is typically no need for a separate endowment policy. But addressing these issues will help guide donor conversations and set the path for a more inclusive giving environment.

Eliminate the confusion around endowments by answering the right questions

Should my charity have an endowment fund? Should it allow or encourage donors to create endowments? This question perpetuates the confusion. When the question is, should our charity allow donors to place restrictions on how gifts are spent and how they are used? The answer of whether you should have endowments will reveal itself.  

There are a number of powerful ways that donors can support the short-, medium-, and long-term goals of charities. By understanding and embracing a broad definition of endowment, charities can meet the needs of their loyal supporters and create a truly donor-centered environment.

This post was contributed by Brad Offman. Brad is the Chief Executive Officer of Spire Philanthropy, a management consultancy specializing in corporate-charitable partnerships and philanthropic advisory services. He is the former Senior Vice President, Strategic Philanthropy at Mackenzie Investments, former President of the Mackenzie Investments Charitable Foundation. Prior to joining Mackenzie, Brad served as Vice President, Development at the Toronto Community Foundation.

January 23, 2023 at 2:50 pm
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