What Is an Endowment?

An endowment is a legal structure (read: a fund) that pools, manages and invests donated assets to fund specific goals. Endowments typically fund nonprofit institutions or charities like universities, museums and hospitals. 

🤔 Understanding endowments

Simply put, an endowment is a fund organized as a trust, foundation or charity that pays out to nonprofit beneficiaries or programs (“endowment” can also refer to a nonprofit’s investable assets). 

Endowments usually fund specific purposes like scholarships, research or daily operations. You can often find them at:

• Educational institutions like universities
• Cultural organizations like museums, libraries and churches
• Service-oriented institutions like hospitals and retirement homes

Individuals and institutions can set up or donate to endowments that fund worthwhile goals. Nonprofits can also design their own endowments to secure their own ongoing funding. In both cases, donations (including cash, stocks, bonds and real estate) are tax-deductible. 

Many endowments leave their donated balance, or principal, intact. The fund administrator invests this capital into a risk-adjusted portfolio that generates spendable income. Theoretically, a well-designed endowment can produce income indefinitely.  

Endowment structures

Most endowments set up three basic policies to ensure they’re properly managed:

• Investment policies dictate the type and risk level of investments permitted (large-cap stocks, corporate bonds, etc.) 
• Withdrawal policies establish how much the beneficiary can withdraw per installment or period of time. Annual withdrawal limits tend to be low (around 5%) to ensure the fund lasts. 
• Usage policies explain how beneficiaries can use withdrawals, such as to fund scholarships or specific departments

Types of endowments

Endowments come in four flavors:

• Restricted endowments generally require beneficiaries to maintain the principal and spend investment profits. Many also restrict how withdrawals can be spent. 
• Unrestricted endowments permit beneficiaries to save, invest and spend funds as they see fit
• Term endowments require beneficiaries to hold the principal until a set event or period of time has passed
• Quasi endowments usually hold the principal and spend investment funds on specified goals. Many are set up and funded by their own beneficiaries. 

Pros and cons of endowments 

Pros:

• Funds provide financial stability to nonprofits
• Funds encourage philanthropic donations
• Well-managed endowments can produce income indefinitely
• Donations are tax-deductible

Cons:

• Invested funds are vulnerable to market volatility
• Startup and management expenses eat into fund returns
• Most endowments require the principal to remain invested, leaving little “usable” money
• Endowment spending can be controversial

• For example, universities like Harvard boast billions in untouched endowments while continually raising tuition

What this means for you

You often hear about large endowments funded by mega-billionaires. But even retail investors can make tax-deductible donations to existing endowments. 

That said, if you want to establish an endowment, you generally need a substantial starter donation. For example, many endowment managers recommend a “minimum initial gift” of at least $10,000-$25,000. Others allow donors to start with smaller amounts and build funds over time. 

Donating to an endowment can help you lower your tax bill while positively impacting the world. But generally, you’ll want to donate to an existing fund instead of starting your own.