Nonprofit
Endowments 101: What They Are and How They Work
Endowments often represent something bigger than dollars on a statement of financial position. They reflect an organization’s long-term vision, its promise to future beneficiaries, and its commitment to sustaining impact over time.
That said, endowments come with layers of responsibility that go well beyond fundraising, especially when it comes to compliance, accounting treatment, and stewardship. Understanding how endowments function behind the scenes is essential for nonprofit leaders who want to manage these funds with confidence and care.
What Is an Endowment?
At its core, an endowment is a pool of funds invested to generate income for a nonprofit or charitable organization. What makes an endowment unique is that the original gift—often referred to as the principal or corpus—is generally intended to remain intact, while the earnings are used to support programs, operations, or other donor-directed purposes.
Think of it like a charitable investment account: the principal is preserved, while a portion of the investment income is distributed annually to support the organization’s work.
Types of Endowments
There are three main categories of endowments, each with its own level of restriction:
- True Endowments (Permanently Restricted): Donors designate their gift as permanently restricted, meaning the principal must remain untouched and the gift is to be held in perpetuity. Only the income generated can be used, and only for the purposes the donor specified.
- Term Endowments (Partially Restricted): Similar to a true endowment, but with a predefined time limit. After a set number of years or events, the organization may access the principal.
- Quasi Endowments (Board-Designated): These funds are set aside by the board rather than by a donor. While they may be treated like a true endowment, the board typically has the authority to access the principal if needed.
How Endowments Are Managed and Invested
Most nonprofits work with financial advisors or investment committees to manage endowment funds in a way that balances long-term growth with steady annual distributions. A typical spending policy might allow 4-5% of the fund’s average balance to be used each year, ensuring the fund can grow and sustain support over time
Accounting & Legal Considerations
Under FASB ASC 958, nonprofit organizations must classify net assets as either with donor restrictions or without donor restrictions. Endowments typically fall into the “with donor restrictions” category unless the board itself establishes the fund.
Additionally, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) governs how nonprofits manage and invest endowment funds in most states. UPMIFA allows organizations to spend from an endowment, even below the original gift amount, if done prudently and in line with donor intent. Proper tracking and documentation are essential to stay in compliance.
Why It Matters
Endowments are powerful tools for financial stability. They create a reliable revenue stream, support long-term planning, and demonstrate a nonprofit’s financial health to donors and stakeholders. But with that potential comes the responsibility of careful oversight.
Whether you’re looking to establish a new endowment or need support managing an existing one, Dugan + Lopatka can help your organization stay aligned with best practices, ensure compliance, and plan for the future with confidence.
D+L: Trusted Guidance for Nonprofit Endowments
Managing an endowment requires more than technical accuracy—it calls for advisors who understand the nonprofit landscape and the long-term implications of every decision. At Dugan + Lopatka CPAs, we bring decades of experience supporting mid-sized and larger nonprofit organizations with accounting, compliance, and strategic financial guidance.
If your nonprofit organization is navigating endowment accounting, reporting requirements, or broader financial strategy, our team is here to help. Connect with D+L to learn more about our outsourced accounting services and nonprofit expertise.