Section 16. Securing Endowments and Planned Giving Arrangements

Imagine that your community organization receives an unexpected call from an attorney, financial advisor, or prospective donor who is considering a gift much larger than the organization normally receives.

Before deciding how to use or structure the gift, the organization should ask several questions.

• What is the donor hoping to accomplish?
• Does the proposed gift support the organization's mission?
• Is the donor requesting restrictions?
• Can the organization honor those restrictions over the long term?
• Is the gift appropriate for current use, capital investment, reserves, an endowment, or another purpose?
• Does accepting the gift create legal, tax, investment, administrative, environmental, reputational, or other obligations?

Major and planned gifts can help community organizations strengthen long-term financial resilience, but they require thoughtful governance and stewardship.

This section provides general information about endowments and planned giving. Tax, trust, estate, investment, charitable-solicitation, insurance, and nonprofit laws can be complex and can vary by jurisdiction and type of gift.

Organizations considering significant endowment or planned-giving activity should work with qualified legal, accounting, tax, investment, development, and other professionals as appropriate.

Donors should also be encouraged to consult their own independent legal, tax, and financial advisors. The organization's advisors represent the organization and should not be treated as substitutes for the donor's personal advisors.

What are endowments and planned gifts?

Endowments

An endowment is a fund intended to support a charitable organization or purpose over an extended period.

Endowed assets are generally invested, and the organization makes distributions according to the applicable gift terms, spending policy, investment policy, and state law.

An endowment should not be understood simply as a bank account in which the original principal can never be touched while all interest may automatically be spent.

Modern endowment management often considers the total investment return of the fund rather than distinguishing rigidly between interest, dividends, and appreciation.

Applicable state law - often a version of the Uniform Prudent Management of Institutional Funds Act, or UPMIFA - may establish standards for prudent investment and expenditure of charitable institutional funds.

Donor-restricted endowments

A donor may make a gift with instructions that it be maintained as an endowment for a particular charitable purpose.

Examples might include:

• Support for a community health program
• Scholarships
• Maintenance of a facility
• Staff development
• General organizational operations

Donor restrictions can remain important for many years.

Before accepting a restricted endowment gift, determine whether the organization can realistically administer the restriction if programs, community needs, technology, terminology, or organizational structures change.

Gift agreements can sometimes include carefully drafted provisions addressing what should happen when the original purpose becomes impracticable, impossible, unlawful, or inconsistent with future community needs.

Modification or release of donor restrictions may require donor consent or compliance with applicable state-law procedures. Do not assume the board may simply redirect a restricted endowment when priorities change.

Board-designated funds

A board may also designate unrestricted organizational assets for long-term investment.

These funds are sometimes called board-designated endowments or quasi-endowments.

Because the restriction was created by the board rather than a donor, the board may generally have greater authority to change the designation, subject to governing documents, organizational policy, fiduciary duties, and applicable law.

Clearly distinguish donor-restricted endowment funds from board-designated reserves or quasi-endowments in organizational records and communications.

Planned giving

Planned giving is a broad term for charitable gifts that are coordinated with a donor's financial, tax, retirement, or estate planning.

A planned gift does not necessarily provide payments back to the donor.

Common planned-giving approaches can include:

• Bequests through a will or trust
• Beneficiary designations
• Retirement-plan assets
• Life-insurance gifts or beneficiary designations
• Charitable gift annuities
• Charitable remainder trusts
• Charitable lead trusts
• Other appropriately structured charitable gifts

Some planned gifts are completed during the donor's lifetime. Others become effective only after death.

Some provide payments to the donor or another beneficiary. Others do not.

Bequests and beneficiary designations

For many community organizations, the simplest planned-giving program begins with bequests and beneficiary designations rather than complex life-income arrangements.

Bequests

A donor may include an organization in a will or revocable trust.

The gift may be:

• A specific dollar amount
• Specific property
• A percentage of the estate
• All or part of the remaining estate after other distributions

Organizations may provide sample descriptive language identifying the organization's legal name and tax identification information, but should not draft a donor's estate-planning documents unless appropriately qualified and authorized to do so.

Beneficiary designations

Depending on the account or asset, a donor may be able to name a charitable organization as a beneficiary of:

• Retirement accounts
• Life-insurance policies
• Certain bank or investment accounts
• Other assets that permit beneficiary designations

The tax consequences vary according to the asset and structure.

Simply naming a charity as a beneficiary is not the same as transferring ownership of an asset to the charity during life and does not automatically create a current income-tax deduction.

Charitable gift annuities

A charitable gift annuity, or CGA, is generally a contract between a donor and a charitable organization.

The donor irrevocably transfers cash or other acceptable property to the organization. In return, the organization promises to make fixed payments to one or two annuitants for life.

Part of the value transferred is considered a charitable gift, with the amount determined under applicable federal tax and actuarial rules.

The organization assumes a continuing payment obligation. A CGA therefore should not be offered merely because a donor requests one.

State regulation matters

Charitable gift annuities are regulated differently across states.

Depending on the jurisdiction, requirements may address:

• How long the organization must have operated
• Minimum unrestricted assets
• Registration or notice
• Reserve funds
• Investment requirements
• Contract language
• Disclosure requirements
• Annual reporting

An organization with donors in several states should determine which jurisdictions' requirements apply rather than assuming compliance in one state satisfies every other state.

Payout rates and actuarial calculations

Do not create payout rates from general life-expectancy assumptions or from characteristics such as race, ethnicity, place of birth, or a fundraiser's estimate of a donor's health.

Calculations should use applicable federal actuarial rules and current professional guidance.

Organizations often consider suggested maximum charitable-gift-annuity rates published by the American Council on Gift Annuities, but must also consider applicable law and their own financial capacity.

Do not promise that a particular rate or tax result will apply until a properly prepared illustration has been completed using current information.

Charitable gift annuities require organizational capacity

Before establishing a CGA program, consider whether the organization can:

• Meet applicable state requirements
• Maintain appropriate reserves
• Administer contracts over potentially long periods
• Make payments reliably
• Produce required tax reporting
• Manage investments prudently
• Track beneficiaries and addresses
• Maintain records after staff turnover

Smaller organizations may find it more practical to work with a community foundation or another qualified partner rather than creating an internal CGA program.

Charitable remainder trusts

A charitable remainder trust, or CRT, is an irrevocable trust in which property is transferred to the trust, distributions are made to one or more noncharitable beneficiaries for a qualifying period, and the remaining assets eventually pass to one or more qualified charitable organizations.

Federal law establishes specific requirements for these trusts.

Charitable remainder annuity trust

A charitable remainder annuity trust, or CRAT, generally pays a fixed amount each year.

Charitable remainder unitrust

A charitable remainder unitrust, or CRUT, generally pays a specified percentage of the trust's value as recalculated under the governing rules.

Federal rules govern payout ranges, charitable-remainder requirements, allowable terms, taxation, reporting, and administration.

CRTs should be created and administered with qualified legal and tax counsel and appropriate trustees.

Do not market a CRT as a method to eliminate tax. Tax consequences depend on the trust, assets, distributions, beneficiaries, and applicable law.

Charitable lead trusts

A charitable lead trust generally makes payments to one or more charitable organizations for a specified period, after which the remaining property passes to noncharitable beneficiaries or otherwise as provided in the trust.

Charitable lead trusts can involve complex estate, gift, income-tax, investment, and trust issues and are generally donor-advised arrangements rather than programs that a small nonprofit should attempt to design independently.

Pooled income funds and other specialized arrangements

A pooled income fund is a specialized charitable trust governed by federal tax requirements.

It should not simply be described as a mutual fund operated by a nonprofit, and donors should not be told that their entire contribution automatically qualifies for a charitable deduction.

Many community organizations do not need to create or administer such arrangements themselves.

When a donor proposes a specialized split-interest gift, involve qualified legal, tax, and financial professionals.

Life-insurance gifts

Life insurance may be incorporated into charitable planning in several ways.

For example, a donor may:

• Name the organization as a beneficiary
• Transfer ownership of an existing policy
• Structure another permissible charitable arrangement involving insurance

These approaches can have very different tax consequences.

Do not tell a donor that naming the organization as beneficiary automatically creates a current deduction or that every future premium payment will automatically be deductible.

Review proposed insurance gifts under the organization's gift-acceptance policy and encourage the donor to obtain independent tax and legal advice.

Gifts of securities and other investments

Publicly traded securities can be useful charitable gifts because they are generally easier to value and liquidate than many other noncash assets.

Donating appreciated securities may provide tax advantages in some circumstances, but the result depends on factors such as:

• How long the donor has held the property
• The type of security
• The type of charitable organization
• Applicable deduction limitations
• The donor's individual tax circumstances

Do not promise a donor a particular deduction or capital-gains result.

Establish procedures for receiving securities, identifying the donor, acknowledging the gift, liquidating assets when appropriate, and recording the gift correctly.

Gifts of real estate and other complex property

Real estate, closely held business interests, artwork, collectibles, cryptocurrency, intellectual property, and other complex assets can produce significant charitable value, but can also create substantial risk.

Adopt a written gift-acceptance policy identifying which gifts require additional review.

Real estate review

Before accepting real estate, consider:

• Title
• Mortgages or other debt
• Liens
• Environmental conditions
• Zoning
• Property taxes
• Insurance
• Maintenance
• Marketability
• Carrying costs
• Whether the organization intends to use or sell the property

Obtain appropriate legal, environmental, financial, and property expertise before acceptance.

Valuation belongs to the donor

A nonprofit should not assign the tax value of a donor's noncash contribution.

The donor is responsible for substantiating the claimed deduction and, when required, obtaining a qualified appraisal.

The organization's acknowledgment generally describes the property received without stating its fair market value for the donor's tax deduction.

Certain noncash gifts may also require IRS forms or additional reporting by the donor or organization.

Tax considerations

Charitable tax rules change and depend heavily on the donor and the gift.

Avoid using planned-giving materials that promise:

• A specific tax deduction
• Elimination of capital-gains tax
• Guaranteed estate-tax savings
• A particular after-tax return

Instead, explain the structure of the charitable gift and encourage donors to determine the consequences with their own advisors.

Organizations should provide accurate acknowledgments and complete required tax and information reporting.

Why establish an endowment?

To provide long-term support

An appropriately sized endowment can provide recurring distributions that support programs, facilities, staffing, innovation, or general operations.

Endowment distributions should be incorporated into a realistic financial plan rather than treated as guaranteed income.

To diversify financial resources

An endowment can reduce dependence on annual fundraising, a single government contract, or a limited number of grants.

It does not eliminate financial risk.

Investment markets fluctuate, donor restrictions may limit spending, management costs reduce returns, and an endowment may lose purchasing power if spending and investment performance are not balanced over time.

To support long-range planning

A mature endowment may provide a degree of financial predictability that helps an organization plan beyond a single grant cycle.

To preserve a donor's long-term charitable purpose

Some donors want their contribution to support a mission or program for many years.

An endowment can provide a structure for accomplishing that purpose when the restrictions are appropriate and administratively sustainable.

When might an endowment not be the best choice?

An organization should not create or expand an endowment simply because endowments sound financially sophisticated.

Consider whether the organization first needs:

• Adequate operating cash
• Emergency reserves
• Debt reduction
• Essential facilities
• Technology
• Competitive staff compensation
• Other immediate organizational capacity

Locking scarce resources into long-term investment while the organization cannot meet current obligations may weaken rather than strengthen sustainability.

Boards should compare an endowment with other strategies such as operating reserves, board-designated long-term funds, capital investments, or community-foundation funds.

When should you consider establishing a planned-giving program?

Planned giving can be appropriate when the organization has:

• A stable mission
• Sound governance
• Consistent financial management
• A history of donor relationships
• Appropriate gift-acceptance procedures
• Capacity for long-term recordkeeping and stewardship

A small organization does not need to begin with charitable gift annuities or trusts.

A basic planned-giving program might simply:

• Explain how to include the organization in a will or trust
• Provide the organization's correct legal name and identifying information
• Explain beneficiary-designation options
• Establish a process for documenting known legacy intentions
• Build relationships with local estate-planning professionals

Consider partnering rather than administering everything internally

Smaller organizations may be able to establish an endowed fund or obtain planned-giving support through:

• A community foundation
• Another qualified public charity
• A financial institution with nonprofit expertise
• A professional planned-giving administrator

Outsourcing administration does not eliminate board responsibility.

Review fees, services, investment options, donor restrictions, access to distributions, reporting, termination provisions, and responsibility for legal and tax compliance.

Adopt a gift-acceptance policy

A written gift-acceptance policy can protect both the organization and prospective donors.

The policy should identify:

• Gifts staff may accept routinely
• Gifts requiring executive or board review
• Gifts requiring legal or tax review
• Unacceptable restrictions
• Procedures for real estate
• Closely held business interests
• Life insurance
• Cryptocurrency or other complex assets
• Tangible personal property
• Charitable gift annuities or trusts
• Naming opportunities
• Conflicts of interest

The policy should also make clear that the organization does not provide individualized legal, tax, or investment advice to donors.

Use written gift agreements for significant or restricted gifts

A written gift agreement can help both the donor and organization understand:

• The amount or property being given
• The charitable purpose
• Whether the gift is expendable or endowed
• Investment and spending expectations
• Recognition or naming
• Reporting
• What happens if the original purpose can no longer be carried out

Avoid restrictions so narrow that future leaders cannot responsibly use the funds.

Establish investment governance

The board retains responsibility for prudent stewardship even when investment management is delegated to professionals.

Adopt an investment policy

A written policy may address:

• Investment objectives
• Time horizon
• Risk tolerance
• Liquidity
• Asset allocation
• Diversification
• Investment-manager authority
• Performance benchmarks
• Fees
• Conflicts of interest
• Mission-aligned or responsible-investment considerations

Adopt an endowment spending policy

The organization should also determine how much may prudently be distributed from an endowment.

Consider:

• Donor restrictions
• Applicable state law
• Duration and preservation of the fund
• Purpose of the fund
• Inflation
• Expected total return
• Investment policy
• Organizational resources

Do not use a universal rule that a particular portion of annual interest or investment gains should always be spent.

Select and monitor investment professionals

When outside investment professionals are used, evaluate:

• Qualifications
• Fiduciary role
• Investment approach
• Fees
• Conflicts of interest
• Custody arrangements
• Reporting
• Performance against appropriate benchmarks

Do not judge investment performance solely by whether the fund gained or lost money in a single year.

Review performance over appropriate periods and in relation to the organization's objectives, risk tolerance, spending policy, fees, and relevant benchmarks.

Responsible and mission-aligned investment

Some organizations incorporate environmental, social, governance, community-investment, or other mission-related considerations into investment policy.

Decisions should reflect:

• Fiduciary responsibilities
• Applicable state law
• Donor restrictions
• Risk and return
• Liquidity
• Organizational mission and values

Avoid reducing the question to whether particular investments are simply "good" or "bad." Establish transparent criteria and a process the board can apply consistently.

Build the administrative systems

Endowments and planned gifts may require long-term administrative systems that survive leadership and staff turnover.

Systems should address:

• Gift agreements
• Donor restrictions
• Investment records
• Beneficiary information
• Annuity or trust payments where applicable
• Tax reporting
• State registration and reporting
• Donor acknowledgments
• Privacy
• Information security
• Records retention

Assign clear responsibility for each function and create calendars or automated systems for recurring deadlines.

Educate prospective donors ethically

Planned-giving conversations should be voluntary, accurate, and professional.

Explain:

• The organization's mission
• How gifts are used
• Available gift structures
• Restrictions the organization can or cannot accept
• Whether recognition is available
• Which parts of the arrangement require the donor's independent advisors

Do not present a charitable gift as though it were an ordinary commercial investment product.

For life-income gifts, distinguish clearly between the charitable purpose of the transfer and the payments the arrangement may provide.

Protect donor independence

Avoid pressure based on:

• Age
• Health
• Bereavement
• Family relationships
• Financial vulnerability
• Fear of tax consequences

Encourage donors to involve independent advisors and, where appropriate, family or other trusted people chosen by the donor.

Do not draft estate-planning instruments or give individualized tax advice unless the person providing that advice is appropriately licensed and acting in that professional capacity.

Respect donor privacy

Planned giving can involve especially sensitive personal information.

Collect and retain only information needed for legitimate fundraising, stewardship, administration, and compliance purposes.

Protect:

• Contact information
• Gift information
• Financial information
• Family information
• Estate intentions
• Beneficiary information

Do not assume that staff, board members, participants, alumni, or current donors may freely provide friends' and relatives' information for unrestricted fundraising use.

Communicate planned-giving opportunities

Appropriate communication channels may include:

• The organization's website
• Email
• Print publications
• Donor meetings
• Educational seminars
• Estate-planning professional networks
• Legacy-society communications

Communications should be educational rather than coercive.

Donor testimonials may be used with permission, but should not imply that another donor will receive identical income, investment performance, tax treatment, or other financial results.

Recognition and naming

Recognition can be appropriate for significant gifts, but it should be governed by policy.

Options may include:

• Recognition in publications
• Donor walls
• Legacy societies
• Naming of appropriate programs or facilities
• Invitations to organizational events

Respect donors who prefer anonymity.

Significant naming commitments should address duration, organizational changes, reputational concerns, and circumstances under which a name may be changed or removed.

Do not give donors operational authority, privileged access to participants, or governance power merely because of the size of a contribution.

Steward current donors

Long-term stewardship is particularly important for endowment and legacy donors because the relationship may extend for decades.

Provide:

• Prompt acknowledgment
• Accurate reporting
• Appropriate recognition
• Updates about the organization's work
• Information about significant changes affecting restricted gifts

Stewardship should not be treated primarily as a strategy for extracting additional gifts or referrals.

A donor's contribution does not create an obligation to give again or to identify other prospective donors.

Review the program regularly

Boards should periodically evaluate:

• Endowment investment performance
• Spending policy
• Fees
• Liquidity
• Purchasing power
• Donor restrictions
• Planned-giving liabilities
• State registrations
• Tax reporting
• Gift-acceptance policy
• Donor privacy and stewardship

Update policies when laws, organizational circumstances, donor expectations, technology, or professional standards change.

In Summary

Endowments and planned gifts can help community organizations build long-term financial resilience, but they are not simple sources of guaranteed income.

An endowment is a long-term charitable fund managed according to its governing gift terms, organizational policies, fiduciary responsibilities, and applicable state law. Organizations should distinguish donor-restricted endowments from board-designated long-term funds and should use prudent investment and spending policies rather than fixed assumptions about annual returns or investment income.

Planned giving is broader than life-income arrangements. It can include bequests, beneficiary designations, retirement assets, life-insurance gifts, charitable gift annuities, charitable remainder trusts, charitable lead trusts, and other appropriately structured gifts.

Complex planned gifts require current legal, tax, actuarial, investment, and administrative expertise. A nonprofit should provide accurate general information while encouraging donors to obtain advice from their own independent professionals.

Before accepting a large or unusual gift, use a written gift-acceptance policy and evaluate mission fit, restrictions, administrative capacity, tax and legal obligations, liquidity, risk, and long-term cost.

Noncash gifts also require careful handling. The donor is responsible for determining and substantiating the value claimed for tax purposes; the organization should not act as the donor's appraiser.

Smaller organizations do not need to create sophisticated planned-giving operations themselves. Bequests and beneficiary designations can provide a practical starting point, and community foundations or other qualified partners may offer endowment and planned-giving administration.

Finally, treat planned giving as stewardship rather than financial sales. Respect donor choice, privacy, independent advice, and restrictions; maintain strong board oversight; and make decisions according to the organization's mission and long-term responsibility to the community.