Endowments – the Holy Grail For nonprofits?

Well, that depends on your nonprofit. Let’s begin by saying that not every non-profit can afford to set up an endowment in the fullest sense of the word, but there’s an alternative for those of us who are small and still want to have that safety net.

In this article, I’m going to first discuss Endowments, and then go on to talk about Quasi-Endowments, which are much easier to set up and manage, for smaller organizations.

Like I said, endowments are not for every nonprofit. An endowment is a financial fund or gift donated to a nonprofit organization, university, hospital, or cultural institution to provide long-term financial support.

So, let’s look at how endowments work and see if they could work for your organization too. Will owning an endowment account benefit your nonprofit?

First of all, let’s look at the endowment’s characteristics.

All endowments have these same core characteristics.

Principal Preservation: The initial donation (the principal) is invested and kept intact, while only a portion of the generated investment income is spent.

Perpetuity or Terms: Many endowments are designed to last forever, though some are structured for a specific timeframe or event.

Donor Intent: Funds are governed by rules set by the donor or the institution’s board regarding how the earnings can be used.

Let’s look at the Main Types of Endowments

Restricted (Permanent) Endowment: The principal must be kept forever, and earnings are spent strictly according to the donor’s designated purpose (such as a specific scholarship or research fund).

Unrestricted Endowment: The receiving institution can spend, save, or invest the assets and earnings at its own discretion.

Term Endowment: The principal or earnings can be spent after a specific number of years or once a particular event occurs.

Quasi-Endowment (Board-Designated): An institution’s own governing board sets aside unrestricted internal funds to act like an endowment, retaining the option to spend the principal later if needed.

Common Uses

Higher Education: Funding student scholarships, bursaries, academic research, and endowed faculty chairs (such as specific University endowments like Stanford’s).

Community and Parks: Supporting local infrastructure, conservation, or public programs (such as through the City of Boston’s charitable trusts).

Setting up a charitable endowment fund allows you to create a permanent legacy that supports your favorite causes in perpetuity.

In Canada, there are two primary paths you can take: utilizing an existing community foundation or Donor-Advised Fund (DAF), or establishing a private foundation.

In the United States, the process is very similar. Just like in Canada, a donor or an organization looking to set up an endowment essentially chooses between two main paths: creating a direct, legally restricted fund with an existing public charity, or establishing a distinct, independent giving vehicle.

However, because the US operates under a different tax and regulatory framework (primarily IRS code and state-level laws), the specific structures within those two paths differ from Canada.

So Let’s go! Let’s set up that fund.

1. Define the Purpose and Restrictions of your proposed fund

First, you must decide how restrictive your fund will be. You can establish:

A Designated Fund (supporting a specific charity forever).
A Field-of-Interest Fund (supporting a general cause like environmental conservation or youth sports).
An Unrestricted Fund (allowing the foundation’s board to address the community’s greatest immediate needs).

Let’s say we’re going to set up a designated fund, what’s next?

2. Draft the Endowment Agreement

If working directly with a charity or a community foundation, you will need to sign a legal Endowment Agreement. This document outlines:

The formal name of the fund (e.g., The Sue Ashworth Legacy Fund).
The disbursement rate (how much is given out annually—in Canada, registered charities must meet a minimum disbursement quota set by the CRA, generally 3.5% on the first $1 million of applicable property and 5% on the amount above $1 million, subject to applicable thresholds).
What happens to the money if the chosen charity ceases to exist.

You can learn more about these requirements directly from the Canada Revenue Agency’s disbursement quota guidelines.

3. Fund the Endowment

You can fund your endowment with cash, but there are also highly tax-efficient alternatives including:

Publicly traded securities
Registered accounts
Charitable bequests

Charitable tax receipts may be issued when the donation is made, depending on the type of gift, the recipient’s eligibility and the applicable tax rules.

Where to Start Locally

If you want to bypass the massive legal expenses of setting up a private foundation to manage it for your nonprofit, you can reach out to established platforms that manage endowment allocations for you:

Community Foundations: Organizations like your local community foundation accept contributions to build personalized permanent endowments. In Canada, Community Foundations of Canada provides a directory to help you find one in your area.

National DAF Programs: Organizations like Vanguard or JP Morgan Chase allow you to set up a donor-advised giving account that can offer some of the advantages of a private foundation without the same administrative costs. However, these accounts are generally donor-directed giving vehicles, rather than endowments owned and controlled by your nonprofit.

The rules governing endowments in the United States balance a mixture of state law and federal tax law.

The primary difference between Canada and the United States lies in how payout rules are enforced: the US regulates specific payout percentages strictly for private foundations but relies on a legal standard of “prudence” for many public charities and universities. Conversely, Canada mandates an annual disbursement quota for registered charities and foundations based on applicable property values and thresholds.

Which brings us to the legal framework.

United States: True endowments (donor-restricted funds) are generally governed by state law via the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which has been widely adopted across the United States. Federal tax law via the IRS primarily intervenes if the endowment is structured inside a private foundation.

Canada: Endowments are subject to federal charity tax rules administered by the Canada Revenue Agency (CRA), alongside applicable provincial laws governing charities and charitable property.

All of this sounds very complicated, and time-consuming. We’re a very small nonprofit and we don’t have the time or money to do it all. Does that mean we shouldn’t bother?

Actually, no.

For a very small nonprofit, a board-designated quasi-endowment may work better than setting up a standalone charitable endowment like the ones we’ve been discussing.

Hold on a minute! What’s a board-designated quasi-endowment?

A board-designated quasi-endowment is an investment fund established internally by a nonprofit’s board of directors using unrestricted assets. Unlike a traditional endowment, which is legally restricted by external donors, a quasi-endowment is restricted only by the board’s own policy.

Because the restriction is self-imposed, the board generally has the authority to “un-designate” the funds and spend the principal if the organization faces an unexpected financial crisis, subject to applicable law and any contractual restrictions.

Hmmm… How does it work better?

Why a Quasi-Endowment Works Better

Flexibility: A quasi-endowment (or board-designated fund) is created by your own board using unrestricted assets. If your small nonprofit faces a sudden cash-flow crisis or operational emergency, the board can vote to dissolve or tap into the principal.

Lower Administrative Burden: You can start small—sometimes through a local community foundation that pools your money, handling the legal, tax, and investment paperwork for you.

Donor Signaling: It shows financial discipline and long-term planning without locking your organization into rigid, legally permanent restrictions that can choke daily operations.

That sounds good so far. How does it work?

How a Quasi-Endowment Operates

Funding Sources: Built using general operating surpluses, unexpected windfall bequests, or unrestricted cash reserves.

The Payout Policy: The board establishes a rule—such as spending only 4% to 5% of the fund’s average value annually—to support operations or a specific program.

Investment Strategy: Because the principal is intended to last long-term, the funds are typically invested in a diversified portfolio (stocks and bonds) to outpace inflation, rather than sitting in a low-interest checking account.

Accounting Treatment: Under applicable nonprofit accounting standards, these funds are generally identified as board-designated assets, with their classification and disclosure depending on the accounting framework used.

So far, so good, but what are the benefits for my small, grass-roots organization?

I’m glad you asked.

Key Operational Benefits

Financial Shock Absorber: It can provide a stream of income during normal years, while serving as a potential emergency funding source if your nonprofit faces a severe cash-flow crunch. Of course, investment returns aren’t guaranteed.

Donor & Grantor Magnet: It can signal to major donors and institutional foundations that your nonprofit practices strong fiscal discipline and is planning for long-term sustainability.

Low-Cost Infrastructure: It avoids some of the expensive legal setup, separate tax filings, and ongoing administrative requirements involved in launching an independent charitable trust or private foundation.

And of course, an endowment is only one piece of your nonprofit’s financial picture. Having a sustainable grant funding strategy can also help you plan for the future instead of relying on one source of income.

This all sounds like a great idea. How do I get one of these accounts set up?

Action Plan to Set One Up

Draft a Board Resolution: Pass a formal motion stating the purpose of the fund and the initial dollar amount being transferred into it.

Create an Investment Policy Statement (IPS): Define how the money will be invested, your risk tolerance, and who will manage the portfolio.

Establish a Spending Policy: Set a conservative annual distribution target (e.g., 4% of a rolling 12-quarter average) intended to help protect the fund over the long term, while recognizing that investment losses are still possible.

Partner with a Community Foundation (Optional): If your small staff lacks investment expertise, you can explore placing these board-designated funds into an agency fund at a local community foundation to outsource the portfolio management, provided the arrangement preserves the flexibility your organization needs.

So, Is an Endowment Right for Your Nonprofit?

Well, that depends on where your organization is today and where you want it to be in ten, twenty, or even fifty years.

If you’re a small nonprofit struggling to cover next month’s operating expenses, locking away a large portion of your available funds probably isn’t the best idea. But if your organization has unrestricted reserves, a stable financial plan, and a board that’s thinking about the future, a quasi-endowment may be worth exploring.

And remember, you don’t have to do everything at once.

Building long-term financial stability takes time. An endowment or quasi-endowment can be part of that plan, but so can diversifying your revenue, strengthening donor relationships, and developing a consistent grant funding pipeline.

If you’re still exploring ways to fund your organization’s future, start by learning what grant funding is and how it works. You can also explore how to find foundations for grants that align with your nonprofit’s mission and long-term goals.

At Grant Advance Solutions, we help nonprofits research potential foundation funders, identify funding opportunities, and build stronger grant funding strategies.

Because whether you’re building an endowment, preparing for your next grant application, or simply trying to keep the doors open, the goal is the same: making sure your nonprofit has the resources to continue doing the work that matters.

And isn’t that what we’re all working toward?