Posted on Wednesday, February 08, 2017
The term “endowment” is common in the nonprofit sector and may actually mean something different depending on how it is used.
A donor-restricted endowment is a contribution to the organization in which the donor stipulates that the contribution be invested for a specified time or in perpetuity. The earnings on the contribution may be restricted by the donor for a specific purpose or unrestricted, in which case the earnings can be used to support the organization’s general operations. For a donor, this allows their contribution to have a much greater impact because it is invested to provide a permanent source of income to the organization.
Endowment funds are regulated by the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which is adopted at the state level. UPMIFA serves as the basis for governing an endowment when the donor does not communicate the terms of the contribution to the nonprofit. The underlying requirements of UPMIFA are investing in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and prudence in incurring investment costs (only costs that are appropriate and reasonable). UPMIFA does allow for spending of the principal contribution; however, the expenditures must be prudent. In addition, there is a set of criteria to be used in determining prudent expenditures.
A nonprofit board can also set up an endowment in which it places unrestricted money received into a board designated or quasi-endowment for a specific purpose. Unlike a donor-restricted endowment in which the funds have been restricted by the donor, funds in a quasi-endowment have no donor restrictions. If needed, the board can undesignate quasi-endowment funds for other purposes. Often, organizations set up a quasi-endowment fund with a local community foundation, in which the organization can earn a set percent of income each year.
Before your organization starts an endowment, make sure an endowment fits into your organization’s needs. By placing funds in an endowment, money is being set aside for future use as opposed to supporting current activities. Remember, donor-restricted endowment funds are most often permanently restricted (which means forever) with only the earnings (or a prudent amount of the principal) accessible to the organization. Organizations can have large endowments but be cash poor because they do not have enough unrestricted cash to pay for current needs.
If you do decide to start an endowment or receive endowment funds, your organization should develop an endowment policy to make sure the funds are prudently managed.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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