Preparing for the future: It’s easier with an endowment

Preparing for the future: It’s easier with an endowment

The gold standard for many nonprofits is the ability to provide reliable services to the people who are counting on them, regardless of economic ups and downs. In the face of the sheer unpredictability of when community needs might arise, it’s often hard for a nonprofit organization’s board and staff to balance fundraising for long-term security on one hand, with generating enough funding to support the organization’s operating budget from year to year on the other hand.

To protect against economic ups and downs, and also to be prepared if a disaster or tragedy hits their community, many nonprofits build and maintain a financial cushion. Sometimes this takes the form of a rainy day fund or reserve fund, which can be accessed by the nonprofit’s board and staff to fill the gaps in budget shortfalls. Many organizations, in addition to building reserve funds, establish formal endowments to help ensure that the organization can meet its mission for years to come. Endowments are designed so that the corpus is preserved and increases in value over the years. Interest earned is used by the nonprofit only according to the stated purpose of the endowment.

Donors may not always realize the flexibility they have in structuring gifts to nonprofit endowments. A prime example of a key donor decision is whether to make a lifetime gift to an endowment or leave a gift to an endowment through a bequest. In either case, the funds flowing to the endowment will be restricted and used only according to endowment rules and the policies set by the nonprofit’s board.

Keep these factors in mind when evaluating the timing of an endowment gift:

A bequest to a nonprofit endowment, on the other hand, gives the donor the flexibility to fund the gift through beneficiary designations of life insurance policies, or, better yet, qualified retirement plans that would be subject to both estate tax and income tax following the donor’s death. All taxes are avoided on retirement assets that flow directly to a qualified charity through a beneficiary designation.

Even donors who are financially secure sometimes worry about running out of money. Leaving a bequest to an endowment may give them peace of mind that they will own their assets until they die, and they can change the bequest any time they want while living if charitable or family priorities shift along the way.

Are you considering the ways your organization can accomplish its 2023 fundraising goals? Keep these tips in mind when speaking to donors or prospects:

First, re-focus on high-net-worth donors. Despite the economy’s strong recovery from the Great Recession of 2008-2010, research points to fewer donors, but larger donations. Taking advantage of this “new normal” will require nurturing and building relationship with the most impactful donors.

Second, gifts of highly appreciated stock, whether in public or privately-held companies, remain tax-efficient for the donor and beneficial to your organization’s endowment fund. Not all stocks are down (with January 2023 indices up!) and we can help you structure these gifts.

Third, speak to both your short-term and long-term needs. If anything, the economy is cyclical. While quick and hoped-for relief is on the minds of many, long-term needs will always be on the horizon. Thus, there is a need for ample reserves so as not to turn away people in need. Accordingly, the Community Foundation can facilitate gift-making directly to your endowment fund by donors.

Lastly, stay connected with the Community Foundation team. We speak daily with donors who have their own goals. For donors expressing concerns in light of the current economy, planned giving commitments like bequests and charitable remainder trusts may be the answer. The Community Foundation can collaborate with your team to structure and facilitate those gifts.

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