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The Main Event: Endowment Planning vs. Fundraising

By James A. List, Esq.

When it comes to fundraising, many charitable, academic, and religious organizations are incredibly skilled. Some of these organizations have instant name recognition. They regularly receive media coverage. And they pull in hundreds of thousands of dollars from supporters in annual fundraising efforts.

There’s no doubt that successful fundraising is an acquired skill. It does not happen by chance.  It’s the reason why organizations compete so intensely to hire persons with outstanding fundraising skills and a successful track record.

Given that, it is somewhat baffling why so many of the organizations that are most successful in fundraising struggle when it comes to building an endowment. Other non-profits, meanwhile, seem to have struck a balance, building both highly effective fundraising efforts and endowments that rival the budgets of emerging nations. Why is that?

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It is important to recognize that there is an inherent conflict between annual fundraising objectives and building an endowment. On the fundraising side, all organizations have to balance their budgets. Virtually all strive to grow the services they offer and the number of people they serve. Senior executives of these organizations often have bonuses tied to annual fundraising objectives. Boards of directors and trustees want to accomplish certain goals and have an obligation to their donors and constituents to do so.

Now add to this the fact that there are various non-profit certifications and standards, all of which tend to focus on annual fundraising, capital campaigns, board participation, and donor designations. An organization’s by-laws may even establish funding expectations.

All of these annual organizational goals conflict with building endowments. Endowments represent a long-term commitment for an organization. Endowments take time to build with donations and earnings. And bottom line, executives, board members, supporters, donors, and other constituents tend to be impatient. They want to see tangible results NOW.

Even in cases in which a non-profit has managed to build a substantial endowment, it’s often tempting to use endowment income or principal to meet current operating needs. Doing so, however, clearly inhibits growth and delays the endowment from providing its ultimate goals.

Take, for example, the case of a private high school that wants to create an endowment providing four $2,500 scholarships each year to needy children in each grade. To make that happen, Year One would require $10,000 per annum, Year Two $20,000 per annum (eight total scholarships), and so on, until there are $40,000 per year of scholarships being awarded, four for each grade.
Assuming that the endowment earns 5 percent a year, the endowment would require $800,000 to be able to support these 16 scholarships.
 
That seems fairly clear cut, but every year the school has budget shortfalls. The teacher’s 401(k) plan is chronically underfunded. To address this issue, the school’s trustees vote to use 1.5 percent of the earnings from the endowment, or $12,000, to fund the 401(k). That decision, however, leaves the school facing a number of difficult choices – it can make aggressive and risky investment decisions in its endowment portfolio, eliminate the scholarships, or use endowment principal. The last choice impacts future earnings, as there is less principal invested. Besides, these decisions may be contrary to the donor’s intent.

This example illustrates the dilemma many non-profit organizations face in trying to build an endowment. The long-term nature of endowments is somewhat contrary to our collective natures. Directors, trustees, constituents, and donors want to see results. And trustees and employees often prefer funding a summer camp next year to deferring that camp for 10 years so that it can be funded every year thereafter.

Capital campaigns also conflict with endowment building. Capital campaigns have very specific goals – construct a new building, renovate existing facilities, acquire more land. The organization solicits regular donors for these campaigns. And sometimes when these capital campaigns fall a little short of their financial goals, other sources – most prominently, endowments – are “raided” to make up the deficit. 

To address these and other issues which can make it difficult for an organization to build its endowment, non-profits should adopt the following guidelines:

  1. Set specific endowment goals, with particular attention to the amount of principal required before funding programs, the use of income and principal, the investment policy, the protections from operating budget demands, and protections to a donor’s intent.
  2. Separate endowment fundraising campaigns from annual and capital fundraising efforts, which will help to ensure that endowment gifts do not compromise other gifts from the same donors. (Endowment campaigns, in fact, are often directed to a small sub-set of the overall donor pool.)
  3. Understand the basics of estate planning and taxes, and be willing to meet with a donor’s financial, legal, and accounting advisors.
  4. Study potential donors and understand their charitable motives. 

With respect to charitable motives, it’s important to recognize that people make donations for a variety of reasons. Some sincerely care about the organization’s mission. Sometimes, an individual has suffered from a disease or illness, and their family and friends make contributions to organizations which provide support, research, and care. Some donors wish to thank a non-profit that has enriched their lives. Still others are motivated by recognition. There are donors (or their families) who take great pride in seeing their family name on a building. 

Rare is the donor who cares solely about taxes or recognition. Most endowment decisions are impacted by all of these issues. What makes this difficult for the organization is that each endowment donor is unique. As a result, endowment gift planning has to be done in small groups or with individuals, and it has to be personalized.  This time commitment is a huge challenge for most non-profit organizations – but it can be made easier if these guidelines for building an endowment are carefully followed.

James A. List is founding partner of The Law Offices of James A. List, LLC, a Mid-Atlantic law firm which serves business owners and individuals with estate planning, asset protection, and trust needs. In the estate planning area, the firm counsels clients in the use of asset protection trusts, special needs trusts, and dynasty trusts; traditional wills and revocable and irrevocable trusts; and powers of attorney and medical directives. The firm also focuses a substantial part of its practice on working with families which have members with developmental disabilities.

 

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