Endowments: Dipping in is perilous

Just as market declines, inflation and job worries have your clients considering their long-term savings as potential spending sources, your clients’ favorite nonprofits may be doing the same as they seek to meet the community’s increasing needs in an unpredictable and concerning environment. So is now the time for them to dip into the endowment? 

Savvy clients know the importance of saving for hard times. They put money aside when times are good so they have savings to tap into when an emergency arises. The same is true for nonprofits. Those organizations fortunate enough to have an endowment know how helpful it can be to stabilize their finances over the long-term. But it can be tempting to use those funds when annual fundraising goals may not be met. Is that a good idea? 

The cost of accessing savings, such as 10% for retirement account withdrawals before age 59.5, rightly give your clients pause. So does the prospect of selling devalued assets in a downturn, which can compromise or undermine clients’ long-term savings goals. Your instincts may be telling you that nonprofit organizations’ endowment funds, similar to clients’ stock portfolios and retirement funds, perhaps also ought not to be disturbed no matter how bad the cash crunch may get. Your instincts are correct: Endowments must be handled with care.  

For nonprofits, the penalties or complications that accompany accessing endowment funds are potentially harsh. As philanthropic advisors understand, this is because of restrictions that may be set by donors or by the board itself. That is why it is so important for a nonprofit organization to carefully craft and review gift instruments. That documentation can include both the solicitation (how the organization intends to use the funds) and also the restrictions spelled out by the donor in a gift agreement. 

A nonprofit that has established an endowment fund and its board of directors (which may include your clients) must remain aware of the risks associated with ignoring the all-important notion of “donor intent.” If a donor intends for a gift to be invested in an endowment, and that intention is well-documented, the organization must respect those wishes.  

So, during the giving season this year, suggest to your clients who sit on nonprofit boards to encourage those organizations to redouble efforts to obtain new, renewed or increased gifts from donors, instead of looking at endowments as a potential source of revenue.  

The Community Foundation for Greater Atlanta is always happy to brainstorm with your clients who serve on community organization boards about ways to support the missions that keep our region strong and thriving. Call on our team of experts at 404.688.5525 to guide you through these challenging times.