Endowment funds ensure that your donations will be used by the charitable organization for certain specific purposes.
Consider, for example, St. Helena Hospital Clearlake which seeks funds specifically to build a new emergency room in Clearlake.
Endowments can stabilize the long term future of the charity and can create a lasting legacy for the donors. Let’s examine how endowments work.
Endowments are created by written agreement between one or more donors and a charitable organization to use for specific charitable purposes.
The agreement expressly states the purposes for which the donation may be used; how the donations may be invested; how much may be spent each year; and sometimes how long the fund is intended to last.
The agreement restricts the charity to accepting the gift according to the express terms of the agreement.
To the extent that the agreement is silent on any of these issues, California’s “Uniform Prudent Management of Institutional Funds Act” (“UPMIA”) controls.
Because the endowment is a restricted fund it is not part of the charity’s general fund and cannot be used to pay general overhead.
Once established with an initial contribution, an endowment fund can receive further contributions from other like minded donors.
Such additional contributions also become subject to the same fund restrictions.
For example, a donor may give money to a high school to establish a high school endowment for the sole purpose of awarding an annual college scholarship to a worthy graduating senior.
The endowment may specify the selection procedures. The endowment may also specify that the high school may spend only the interest to pay the scholarship.
If the endowment fund agreement is silent, then California’s UPMIA law controls issues related to the fund’s investment strategy, spending strategy, and duration.
Regarding investments, California law says that the institution managing the fund, “shall manage and invest the fund in good faith and with the care an ordinarily prudent person in like position would exercise under similar circumstances.”
Meeting that standard entails consideration of numerous investment requirements, including that the fund investor has diversified investment portfolio; that the fund investor balance the competing needs to distribute for present charitable expenses and for future use; and that the fund investor consider the general economic conditions in making investment decisions.
Next, regarding payments, California law provides that spending over seven percent (7%) of the funds average value during the last three years is considered to be imprudent and in violation of the prudent investor rule.
The 7 percent rule is only a rule of thumb, however, and can be overcome by showing that it was reasonably prudent under the circumstances to pay more. Naturally, the fund agreement can provide otherwise.
Endowment funds can last indefinitely or can last for a term of years. The endowment agreement can specify whether the fund is a permanent endowment or term of years endowment.
If the agreement provides that the fund use “income” only (or a similar concept) then California law treats this as a permanent endowment.
A permanent endowment should invest for growth and use only the investment income for charitable purposes.
Anyone wishing to further a particular charitable purpose may wish to contact those charities whose mission encompasses the specific purpose.
If a charity already has an existing endowment fund that is directly relevant then contributions can be made to the existing fund.
If not, then perhaps the charity may be willing to establish an endowment agreement for such purpose.
Lastly, gifts to an endowment fund can be made while one is alive, or later through bequest after one dies.
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