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Section 16. Securing Endowments and Planned Giving Arrangements

Learn about endowments and planned giving arrangements, two types of long-term funding that can benefit both donors and the organizations receiving gifts.


  • What are endowments and planned giving arrangements?

  • Why would you want to secure endowments or planned giving arrangements?

  • When should you try to secure endowments or planned giving arrangements?

  • How do you secure endowments and planned giving arrangements?

Let’s dream a little. You’re the director of a small or medium-sized community based organization. Like all such organizations, it’s strapped for money, and you’ve been spending most of your time looking for funding, both from state agencies and from the community. Then, one morning, you get a phone call.

It’s an attorney with a wealthy client who’s looking for an organization to which to donate a large amount of money...a large amount of money. What kinds of plans do you have to handle such a donation? If you can offer something attractive, his client would be inclined to give you a gift considerably larger than any you’ve imagined. Would you be ready with an answer? More to the point, what would you do with a very large donation?

Large non-profit organizations and institutions – nation-wide charities, universities, hospitals, large churches – look for and receive major donations, sometimes in the millions of dollars. They know exactly what to do with them:  Some of the gifts go to specific programs or needs, but more go into an endowment that supports the organization or institution over the long term, or into planned giving arrangements that allow donors to use their charitable contributions as investments.

Although universities and other large non-profits have the resources to maintain development offices to find and manage major contributions, smaller entities may still be able to provide major donors with some options – and in the process provide themselves with the resources to sustain their work despite the ups and downs of funding.

This section is about endowments and planned giving arrangements – two types of long-term funding that can benefit both donors and the organizations that receive their gifts. We’ll look at what they are, how to establish and administer them, and also consider how to persuade donors to contribute to them.

What are endowments and planned giving arrangements?

Before we begin, two disclaimers:

1. This section will help you understand what endowments and planned giving arrangements are, as well as some of the possibilities they may offer for your organization. Be aware, however, that federal and state tax laws and the state laws regulating (or not regulating) these arrangements are complex, and the Community Tool Box does not mean this section to be more than general information. If you want to set up an arrangement for large donations, we strongly advise you to do it with the help of someone who knows the territory – a development professional, an investment analyst, a lawyer, or an accountant who’s actually had experience creating and working with these kinds of plans.

Be aware also that in order for donors to benefit from the tax advantages that many of these plans offer, your organization or institution has to have 501(c)(3) or other appropriate non-profit tax status from the Internal Revenue Service. Not every non-profit status is eligible, and you should make sure that yours is one that allows tax deductions or credits for donors. (The IRS website, has information on which designations qualify for tax-deductible contributions.

2. In general, endowments and planned giving arrangements work best when there are major donors available, and when an organization has the resources of knowledge, personnel, and finances to set them up, manage, and maintain them. Those basic requirements usually eliminate small grass roots organizations...but not always.

Although most of the information in this section is more likely to be useful to large organizations with relatively sophisticated financial capabilities, there is at least one possibility here for small organizations as well. A community-based organization may only need two or three gifts that would be considered small by a university or museum in order to put together an endowment that will yield a few thousand dollars a year, and make the organization’s life a great deal easier. A few gifts of between $1,000.00 and $10,000.00 – not totally impossible for a small organization, although not easy, either – donated over time and left to grow for ten years or so, can produce enough income to make a real difference in the extent or quality of the work the organization can do.

That said, the amount of work involved in planned giving arrangements, the regulations governing them, the investment skills needed to make them profitable, and the fact that they need a considerable amount of capital to get them started usually make them more than a small organization can or should handle. Working to create an endowment, or persuading local donors to name the organization in their wills may well be worth the effort; trying to take on planned giving probably is not.

(A possible exception is an arrangement whereby a number of smaller organizations join forces to create a joint planned giving program. Such a group could hire a professional or a firm to set up and manage the fund, and could split the income from it according to some formula that they had worked out beforehand, or according to the wishes of donors. This is similar in some ways to a community foundation, which both solicits contributions and manages or receives large sums from small foundations or individuals, which it then distributes to local organizations. The difference is that the group that offers the planned giving program would reap all the benefit, rather than having to apply for funding, as it would with a community foundation.)

  • Endowments.  An endowment is, quite simply, a fund built up from donations (or sometimes from a single large donation) to a non-profit. The principal (the original sum) of the fund is invested, and the income is used to fund the activities of the organization or institution. Usually, some of the income is also reinvested, allowing the principal to grow, so that the endowment becomes larger over time, and produces more income.

An endowment may benefit the whole organization or institution, or it may be earmarked for a particular program or activity. In a university, for instance, particular professorships may have their own endowments (usually the gift of a single donor). In a hospital, the cancer clinic or research on diabetes treatment may be supported by an endowment intended only for that purpose.

Large institutions often offer donors the option of contributing to the general endowment or to one of several more narrowly focused ones. Major donors may have their own ideas about what they want to endow, and it is unusual (although not unknown) for an institution to turn away money that a donor earmarks for her own pet project. (It is not unusual, however, for a major donor to have the program or building or professorship that her gift made possible named after her or someone she designates.) Among the conditions that a donor might place on an endowment contribution are that the income should not be used until the principal reaches a certain amount, or that a certain percentage of income has to be spent (or, alternatively, reinvested) each year.

A gift to an endowment might take any one (or more) of several forms:

  • Cash
  • Securities (stocks and bonds.)
  • All, or a percentage of, the income from a property or concession (rent from a large office building, income from a producing oil well, etc. In such a case, the donor would retain ownership of the property or concession, and the donation might be time-limited – perhaps, for instance, going back to the donor’s heirs at her death.)
  • Real estate (buildings or land or both.)
  • Personal property (artwork, collections, antiques, or other valuable items.)

The timing of a gift can also take a number of forms:

  • A one-time lump sum.
  • Stretched out over several years for tax purposes (more about this later).
  • A bequest in a will, starting only at the donor’s death.
  • Time-limited (ending with the donor’s death, or after a specified number of years.)
  • Only available when the principal reaches a certain level
  • Different types and timing of gifts have different financial advantages or disadvantages for the donor, which is why most non-profits are at least somewhat flexible in what they will accept and how it can be used.

Endowments are not kept in savings banks. They’re invested for growth. Large endowment funds (that of Harvard University was over $34 billion at the beginning of 2008) employ many investment managers who constantly buy and sell stocks and bonds, and make other investments. If they’re well-managed, these endowments can grow by an average of 5-10% a year. (That means that some years they may not grow at all, or even shrink, and other years they may grow by much more than 10%.)

The growth of an endowment is partially determined by investment strategy, and partially by how much income is reinvested annually. Conservative funds – those that try to ensure that their funds grow safely, if slowly, despite changes in the market – typically spend about half their income and reinvest the other half.

  • Planned giving arrangements.  A planned giving arrangement is a way for a donor to have his cake and eat it, too – at least some of it.  It allows him to contribute to a non-profit organization or institution (for, according to the government definition, charitable, educational, scientific, literary – including the arts – or religious purposes) and receive from his donation, for himself and/or another designated person or people, an income for life or for a set period. The donor gets a tax break and ongoing tax advantages, as well as a reliable income. The charity gets to invest the money, and, usually, to keep whatever’s left after all the agreed-upon payments have been made.

There are several different kinds of planned giving arrangements:

  • Charitable gift annuities (CGAs). A donor’s irrevocable (non-returnable) gift to a non-profit, only part of which is a charitable donation, furnishes one or two people (usually the donor and her spouse, but it could be anyone the donor chooses) with an annuity (a fixed annual income) from the time of the gift or some agreed-upon later date until the death of the longer-lived person.  The amount of the annuity is a percentage of the original donation (minus the amount recorded as a purely charitable contribution), determined actuarially by the age(s) of the beneficiary(ies) at the start of payments.

Actuarial determination. An actuary is a mathematician who works with statistics, particularly the statistics having to do with lifespan and life insurance issues. Actuaries (or people who know how to use actuarial tables), using the records of average life expectancy for men and women of different ethnicities and races in different places and at different ages, can figure out, on the average, what percentage of a gift will yield a reasonable amount for the non-profit after the beneficiary’s death. Life expectancy is based on gender, place of birth, place of residence, ethnicity, race, age, and other factors. Women, at least in the U.S., live about two years longer than men, on the average; a person born in the 1980’s has a longer life expectancy than one born in the 1940’s; your chances of living to 85 increase after you reach 65. Using these kinds of statistics, actuaries are able to develop formulas for annuity payments, life and health insurance costs, and other similar arrangements.

At the death of the last beneficiary, what’s left of the principal (some states require that it be at least 50%) goes to the non-profit. The donor and the organization sign a contract with all the details of the CGA spelled out, and the document is legally binding on both parties.

To make this a little simpler, let’s look at a fictional older couple. Gus and Tillie Brown, who met while attending State University in the 1950’s, have a great fondness for their alma mater. Life has been good to them, and the considerable amount of money they’ve made has been increased by careful investment. Gus and Tillie, who are childless, would like to share their wealth with State U., but want to make sure that they have a guaranteed income as well. They decide on a charitable gift annuity of five million dollars: one million as a direct donation to the university, and the rest to fund an annuity for them. They’ll get a tax deduction for the donation, but not for the annuity fund.

Given their ages – 72 and 74 – their payout rate of 5.8% would yield them about $230,000.00 a year. (See the table of rates recommended by the American Council on Gift Annuities.) At the death of whichever of them lives longer, whatever’s left of the original four million dollar annuity fund goes to State U. They could decide later to add to the annuity fund, which would both increase their income from it and also probably increase the amount that State U. would receive after they were gone.

  • Charitable remainder trusts. With his gift, the donor sets up a trust that gives him an income for life, or for a set term. At the donor’s death or the end of the term (whichever comes first), the non-profit gets whatever is left in the trust. There are two types of charitable remainder trusts:
  • Charitable remainder annuity trusts (CRATs). The trust pays the donor a set amount per year (either a specific dollar amount, or a percentage of the original value of the trust, as with a CGA).  Because the payment is fixed, the trust can’t be added to.

Another possibility for Gus and Tillie would be to set up a charitable remainder trust. This could work for them in almost the same way as for a charitable gift annuity, except that they wouldn’t have to make any of the gift as a direct donation. All five million could be part of the annuity. The Browns’ payout would be a bit higher (because of the extra million dollars) if they received the same percentage of the trust’s value as with a CGA, but they couldn’t add to it later. Their tax consequences would be different from those of a CGA aswell

  • Charitable remainder unitrusts (CRUTs). The trust pays the donor a fixed percentage of the trust’s fair market value each year. If the value of the trust increases in a particular year, the payment to the donor increases also; the payment decreases if the trust’s value goes down.

If Gus and Tillie expect the value of their gift to increase over time, they might choose to put their five million dollars into a charitable remainder unitrust. If the five million dollar investment increases in value by 7% a year, for instance, they’ll be collecting nearly $600,000.00 annually by the time they’re in their mid-eighties. They could add to the principal later if they chose, and, of course, in addition to either a CRAT or a CRUT, they could still choose to make a direct donation to State U.

  • Charitable lead trusts. A charitable lead trust is similar to a charitable remainder trust, but works in exactly the opposite way, timewise. A donor’s gift funds a trust that makes annual payments to the non-profit for a specific term or for the donor’s lifetime, after which the balance goes to the donor or her heirs.

If Gus and Tillie wanted to leave a considerable amount to their nephew, Charlie, they might set up a charitable lead trust. This would pay State U. a specified amount for their lifetimes, making them major donors, but at the death of whichever of them lived longer, Charlie would receive whatever was left in the trust.

  • Pooled income funds. A pooled income fund is essentially a mutual fund run by a non-profit. Donors contribute to the fund, and receive payments out of the interest it generates, depending on how many shares they hold (based on the size of their gift). Since their income comes only from the interest, donors receive full tax credit for the amount they invest. They can continue investing (and thus increasing their shares and income) as much as they choose to. Whatever they invest remains the property of the non-profit.
  • Life insurance policies.  Donors can make a non-profit the beneficiary of their life insurance policies. That gives them tax deductions on both the buy-out value of the policy (what it’s worth if they sell it back to the insurance company) and on any premium payments they make after the donation.

Endowments, planned giving arrangements, and tax advantages for donors. As we’ve mentioned, various kinds of arrangements have various kinds of tax advantages for donors. We’ll talk about some of the less complex here, but for a complete understanding of how tax law affects charitable donations, you really need to confer with a CPA or a tax lawyer.

  • Charitable deductions. The least complex and confusing type of tax advantage is a simple charitable deduction. You give a tax-deductible contribution (say, $200.00) to a non-profit, and you can subtract the amount of the gift from the amount of income on which you have to pay taxes in the year you gave it. If your total income is $32,300.00 for that year, you only have to pay taxes on $32,100.00 of it.

You can only deduct up to a certain portion of your income for charitable contributions, but you can defer some of the deduction to future years. If you generously donate all of your inheritance from Grandma’s estate, and it adds up to more than half your income for this year, you’ll probably have to take some of the deduction this year and some next year in order to gain the full tax advantage from it.

If you donate cash (using bills, a check, or a credit card) as a straightforward contribution to a non-profit or its endowment, you get a simple charitable deduction for the amount donated. If, however, you donate something other than cash, things get more complicated.

  • Donating securities. There are solid financial reasons why large donors, in particular, often donate securities rather than cash. For one thing, good investments grow far faster than the inflation rate. The value of stock in a successful company (especially one that may just have been starting up when you bought shares) can increase enormously over several years...which leads to a problem. When you sell that stock (and you’re still selling it, even if you use the money to buy another stock in the next minute), you have to pay considerable taxes on your capital gains, the amount of its increase in value since you bought it.

A charitable donation of appreciated securities (stocks or bonds that have gained in value since you bought them, and that you’ve owned for over a year) gives you a double benefit: it allows you to donate a large amount for far less than you paid for it; and you not only pay no capital gains tax on it, but you can take a tax deduction for the full current value of the donation. So... you bought 100 shares of Bob’s Microprocessors at $3.00 a share ten years ago, and they are now worth $300.00 a share – $30,000.00 altogether. You can donate them to your local food bank, take a $30,000.00 deduction on your income tax, and save several thousand dollars in capital gains tax – all for an initial $300.00 investment. (And remember that the food bank can keep or sell those shares without worrying about capital gains, because it’s a tax-exempt organization.)

So far, we’re still keeping it fairly simple, even with the donation of appreciated securities. Donations to an endowment are still just charitable contributions, and donors get straight deductions for them, with perhaps some capital gains tax breaks thrown in. The situation develops another level of complexity, however, when we look at planned giving arrangements.

  • Donations of real estate and personal property. Donations of real estate and personal property can be complicated by the fact that their owners benefit if they are undervalued while they own them, and overvalued when they’re sold or donated. If they’re undervalued, they cost less to insure, and property taxes on them are lower. If they’re overvalued when they’re sold, the difference between their value and their sale price is less, thus reducing capital gains tax, and if they’re donated, the tax deduction is larger. For that reason, obtaining a definitive assessed value for tax purposes can be difficult.

The other issue with real estate and personal property is that, unlike securities, there is no way of assuring that the assessed value will be what it’s actually worth to the non-profit. Selling real estate is always tricky. The price depends on the housing market at a given time, the number of other properties on the market, and the actual usefulness of a given property. A huge house with lots of land may be worth a great deal on paper, but may be extremely difficult to sell at any price because of its need for upkeep, its location, its condition, or any number of other factors. Many organizations and institutions refuse to accept real estate at all, because it brings too much uncertainty with it.

Personal property – art collections or individual works, antiques, items of historical value, etc. – can carry some of the same uncertainty. Valuable artwork, for instance, is often sold by one of the big auction houses in New York or London (they get a commission on the amount of the sale). Sometimes, pieces that are expected to fetch enormous sums are sold for far less, and pieces that aren’t expected to go for much money nonetheless do. The assessed value of such items may mean very little until they’re actually sold.

  • Planned giving and taxes. Planned giving is designed to have direct benefits for the donor as well as the non-profit, as a result of which not all of the donor’s gift is considered a charitable contribution. With a CGA, for instance, a good part of the gift will go to produce the donor’s annuity. The maximum rate of return, by federal law, must be figured so that the charitable portion of the gift is at least 10% of the total, and a donor can choose to take less than the maximum rate, and thereby take a larger charitable deduction. If the gift is in the form of securities, the donor still doesn’t have to pay capital gains tax on any of it, even the part that isn’t considered deductible.

With a CGA, the whole gift can’t be considered a charitable contribution, because the amount that’s left for the non-profit depends on the lifespans of the beneficiaries, and is bound up in an annuity contract. With a pooled income fund, the whole gift is considered a charitable contribution, because only the interest from the fund is paid out.

Deferred payment adds another wrinkle to the tax advantage fabric. Donors may give their gifts several years before starting to collect their annuities or other payments. Some CGAs, for example, allow donors to begin contributing at age 50, but won’t pay out until the donor reaches at least 60. Depending on their tax situations, how soon they plan to retire, and other considerations, many donors don’t want to begin receiving annuities or other payouts till they’re 65, or even 70 or 75. The longer donors defer payment, the higher the payments, and the better the tax situation (more of the original donation is deductible).

Why would you want to secure endowments or planned giving arrangements?

  • As you can probably see already, administering an endowment or planned giving arrangement involves lots of legal and financial responsibilities, as well as endless recruitment of donors. (We’ll cover donor recruitment later in the section.) It means a large amount of work, requires expertise and nerves of steel to deal with the investment world, and entails some financial expense as well.  Why would you want to go to the trouble?
  • If you’re a small organization, or have no real need for large amounts of money, you may not want to. These arrangements aren’t for everyone, although an endowment, at least, can be a benefit to an organization of just about any size. You have to decide whether you can generate the resources to make such things work, and whether you can get enough large donations to make your effort worthwhile.

If you can make it work, however, endowments and planned giving arrangements can bring a number of advantages:

  • They’re attractive to donors. Among the extras you can offer to donors are:
    • Tax advantages, including the possibility of giving a large gift and getting a good part of it back in tax deductions.
    • Recognition. For very large gifts, donors might have a building or program named after them, but even smaller gifts can mean a name on a plaque or on a listing in a publication, being honored at a reception, or being granted “insider” privileges of some sort
    • The feeling of satisfaction that comes from knowing they’re doing something for the society.
    • A reason to give a large amount. The existence of an endowment and/or planned giving implies that their money will do some long-term good.
    • Some control over what their gift funds. The chance to contribute to – or set up – an endowment for a specific favorite program or activity or project is very attractive to many donors.
    • For planned giving arrangements, the chance to be recognized for giving a gift that they aren’t really giving away till they die.
    • For planned giving arrangements, a steady income for life.
    • The opportunity to give back for valuable experiences or services or benefits.

For example, a successful athlete might be particularly motivated to give to his school’s athletic teams. Someone who conquered a physical handicap might be especially motivated to help the health and human service organizations that once helped him.

The reasons for donating are many and varied.

 If you can learn more about a prospective donor, and what benefits she might want from giving, you can customize an appeal that will help the donor obtain those benefits, and thus be more likely to give to your organization. See also Tool #2 following this section.

  • They’re more likely to result in large donations. Major donors often look for these types of giving programs, both for their own benefit, and because they lend legitimacy to organizations that have them. They imply that the organization already handles large amounts of money, and that theirs will be well used.
  • You can use the good experiences of donors to attract other donors. You have to manage your arrangements well, but if donors are pleased with how they’re treated and with your work in other areas, they’ll let their friends know, and become marketers for you.
  • They give you investment opportunities, and the chance to develop a funding base that will continue to grow.  The old adage “It takes money to make money” is true in investment as it is in business. If you double $50.00, you have $100.00. If you double $50,000.00, you have enough to make an impact on your work.  With a large enough amount to invest, you can use income to fund operating costs, which are often difficult to fund otherwise, leaving you with enough grant money to actually fund programs and pay staff salaries.
  • They can make possible programs or opportunities that you wouldn’t otherwise be able to fund. The income you can gain from endowments and/or planned giving can allow you to go in directions that funders may not, and to try out new approaches.
  • They can give you the long-term financial security that makes long-range planning more than hope. Knowing that you have funding coming in regularly, and continually gaining more through new donations, can give you more freedom to make plans for long-term growth and organizational development.
  • They can free you from the restrictions of public and foundation funding. You probably will never be able to get along without outside funding unless you’re a major private university with many wealthy alumni – and even they depend on government and foundations to fund most faculty research. A healthy independent income, however, can make it possible to turn down funds that aren’t in accord with the vision and mission of your organization, and allow you some freedom from funders whose ideas may not mesh with your organizational culture or philosophy.

When should you try to secure endowments and planned giving arrangements?

The timing of setting up and securing endowments and/or planned giving arrangements is largely a matter of two factors: (a) the capacity of the organization, and (b) the needs of the organization.  If you don’t have, or can’t easily develop, the capacity to market your plans to donors, set up and manage plans properly, and invest the money appropriately, you shouldn’t be trying to go this route yet.  If, on the other hand, your organization has major needs, and outside funding prospects are dim or nonexistent, this may be a good time to look at these sorts of major funding plans.

The capacity to market, set up, and manage arrangements, and to invest the resultant funds, doesn’t mean that the people and mechanisms you need already have to be part of your organization. People can be hired as employees or consultants; work can be contracted out to firms that exist just to carry out these functions. What you will need, however, is a way to pay for these services – or to get them pro bono (i.e, free) – at least until your endowment and planned giving arrangements are well enough funded to be self-supporting. What you will also need is a plan for structuring your arrangements so they’ll fit smoothly into the organization, and systems for making sure that all parts of the organization that need to be are involved, understand what their roles in the fundraising picture are, and have the capacity to fulfill those roles

Here are some suggestions for times when it might be appropriate to set up an endowment or planned giving:

  • When you’ve grown to the point that you have, or can buy, the capacity to invest and administer the funds you want to set up.

In the case of an endowment, you may not need a great deal of capacity, depending on the nature of the organization and the size of the endowment. A small community arts organization received a $7,500.00 grant as an endowment for the repair and maintenance of its historic building. The interest couldn’t be used until the principal reached $10,000. The Treasurer of the organization invested the grant in a reliable mutual fund with check-writing privileges, and simply let it stay there. Once it reached the desired amount, the interest could be used for the building, as long as the principal remained above $10,000. That endowment needed only minimal management, and the same might be true for other relatively small endowments to small organizations.

  • When you have a base of donors and potential donors that can make it worthwhile to set up endowments and planned giving arrangements. Any non-profit that doesn’t already have a sizeable endowment generally depends on smaller donations to help pay operating and program costs. Large donations, on the other hand, may be more valuable over the long term as income generators than as ready cash.  And it’s the access to those large donations that you need in order to make endowments and planned giving worthwhile for your organization.

That kind of access can be a matter of location. Organizations in rural areas, for instance, know that it’s often difficult to get any number of people to contribute $25.00 a year, let alone $25,000.00, while in urban/suburban areas, where there are both more people and more money, larger donations may be easier to come by.

Access to large donations can also be a matter of connections. If you have someone on your board who can make large donations, or who knows others who can, that may lead to still more. Once again, those people are more common in urban metropolitan areas, where there’s a much greater concentration of business and finance.

Regardless of your specific location, there is always the possibility of attracting donors from a variety of areas. If your organization or institution serves a widespread population, as many educational institutions do, or has widespread appeal (child health, hunger eradication), you may be able to draw donors from many regions

  • When you have the capacity – either through volunteers or a development office – to market your program to potential donors. Potential donors won’t ordinarily come to you – you have to go to them.  Before they’ll contribute, they have to know about your giving programs – what they consist of, and how they’ll benefit donors. Marketing is an extremely important part of funding endowments and planned giving arrangements.  If you don’t have a way to do it, it might not be worth the effort.
  • When the reputation of your organization or institution is one that will make donors feel that their money is both well spent and well used. For security, donors have to be confident that:
    • The organization will be around for the long term, so that their contribution will indeed be used as they desire, whether or not they’re still alive;
    • They can trust both your management skills and your ethics; and
    • You’ll use their contribution for something they and their heirs can be proud of.

If your organization has an outstanding reputation, donors will feel more comfortable making major contributions.

  • When your organization has a need for something that requires a large capital investment. Typical needs of this kind include building programs or long-term expansion plans. Often, an endowment or other major source of investment capital is the best way to raise money for ambitious long-range goals.
  • When a specific donor can be identified who is motivated to give to a specific cause. Your free health clinic may need more staff, and a doctor who grew up in the neighborhood or a former patient who has since become financially successful may see this as an opportunity to fund something close to his heart.
  • When there is a special opportunity to act, in response to an immediate or unanticipated community need. A disaster like Hurricane Katrina in New Orleans or the 2004 Indian Ocean tsunami, for instance, or an increase in homelessness and hunger in the community can provide the opportunity to seek large donations.
  • When funding restrictions from public or private funders make it difficult or impossible to do work that is in the best interests of the community or the society.  Funders’ agendas may be different from yours.  Accumulating enough of your own funds can make possible work that otherwise couldn’t be supported.
  • When funding from public and private funders becomes scarce. 

These last two circumstances can result from a number of causes. Political considerations, government budget shortfalls, an economic downturn that reduces the income of foundations and government alike, or a change of government that brings with it reallocated funding priorities can all drastically affect the amount of money available for your work. Having your own sources of funds affords some protection from hard times and self-serving or politically expedient decisions on the part of funders.

Harvard University, for instance, has decided to take no government funding related to stem-cell research, because of ideologically-motivated government restrictions on the stem-cell lines that can be used. Harvard has an endowment large enough to take such a move without fear of the consequences.

How do you secure endowments and planned giving arrangements?

As we’ve discussed, setting up endowments and planned giving arrangements takes some work and some resources. The first step is to assess your organization and determine what’s possible for you. Then you have to set up your financial arrangements, market them to donors, and implement and institutionalize your plan.

Determine whether the arrangement you’re considering is possible for your organization in your community. First, you have to decide whether you have or can get the resources – the finances, the people who understand the process and can run it, the systems to manage it – to sustain what you want to do.  If you decide that the resources are available, you then have to assess the community to determine whether there are enough potential donors to make what you’re aiming at worthwhile.

If you’re trying to put together an endowment, you may only need one or two reasonably generous donors to get it started. If you want to institute a planned giving arrangement, you’ll need many people to participate, an unlikely possibility in a community that’s largely working class or low-income. You’ll have to make sure that the donors you need are out there, and might be willing to contribute. Unless you’re an organization with a proven track record of bringing in large donations, it will probably be worth the effort to do some market research to find out what you need to know. If that research tells you that the potential donors aren’t out there, then you’d probably be wasting your time on planned giving arrangements.

The point here is that setting up and administering planned giving takes far too much work and organization to be run for one or two contributors.  In order for such arrangements to yield good returns, they have to have a fairly large number of donors, each contributing a fairly large amount of money.

Set up your financial arrangements. Once you’ve decided that an endowment or planned giving is a good idea for your organization or institution, you have to create systems to handle the money you raise.

  • Find an advisor. At the beginning of this section, we made clear that it’s absolutely necessary to consult with a professional in the field if you’re setting up anything but a small endowment. This may be a board member or friend of the organization who’ll do it cheaply or pro bono (free, as a public service), or someone you hire. Many organizations try to find board members with specific skills to do specific jobs; this may be an instance where that will work for you.
  • Determine what level of investment you need. The first task of the advisor is to analyze what you want to do and help you devise an investment strategy that will best meet your needs. Endowments may call for different strategies than planned giving arrangements. Different amounts of money may call for different approaches. Some types of planned giving may demand strategies that maximize the growth of the fund; others may demand strategies that maximize yearly income. A good professional can help you decide what you need, and how best to go about getting it.

Past a certain, relatively low, point, an endowment needs management just as much as a planned giving fund. For a small endowment – again, like that supporting the arts organization’s building – you may not need anything more complicated than an on-line account with a single mutual fund. A larger amount – starting at about $50,000.00 – however, should be managed somewhat more aggressively (balanced among a number of mutual funds with different investment strategies, for instance), in order to ensure a good return. A still larger amount – in the millions – will need day-to-day management of a carefully chosen, balanced portfolio of securities.

Investments can also be high-risk or low-risk. High-risk investments carry the possibility of high returns, but they also carry the distinct possibility of heavy losses. Low-risk investments are more likely to be the tortoises of the market: slow but steady, and producing decent, but not flashy, returns over time. Most large investors – including many mutual funds – maintain a majority of low-risk securities, with a small percentage of higher-risk ones to allow for some high-profit potential.

Please see Tool #1 for some simple, generally accepted common-sense rules for investing.

  • If you need them, hire professionals to do your investing. If you’re only dealing with a small endowment, like that of the community organization responsible for the historic building, your board treasurer or the organization’s director may be able to handle it. If you hope or expect that the endowment will be large, or if you offer planned giving arrangements, you’ll almost undoubtedly need professional investment. That may come in the form of someone you hire as an employee (Harvard, with its huge endowment and numerous planned giving offerings, has a large investment office with many employees, some of whom make several million dollars a year as commission on the hundreds of millions in income they generate) or of farming out the job to an investment firm – perhaps one that specializes in just this type of institutional investment, and has systems set up to address some of the financial reporting and other issues surrounding it. Once again, your advisor can help you here.

One of many decisions you may want to make is whether you’ll try to do only ethical investing. Ethical investing, in the investment field, means investing only in entities that do no harm, or actively do good. This means different things to different people, but, in general, it means companies and municipalities (bonds) that are environmentally responsible, that don’t produce harmful or unhealthy products (tobacco, junk foods, etc.), that don’t mistreat or exploit labor in the U.S. or elsewhere, don’t support repressive governments, etc. Some (although not all – it’s wise to check carefully on any firm you consider) ethical investment firms do extremely well financially, allowing investors to prosper without feeling guilty. Some potential donors will find an ethical investing philosophy attractive; others might think it’s misguided or unnecessary. You’ll have to balance a number of factors – organizational philosophy, income needs, potential donor attitudes, etc. – in deciding whether you want to subscribe to such a philosophy or not.

  • Set up systems to administer your arrangements. You’ll need systems to track investments, keep the records required by state and federal laws, issue annuity payments on time, etc.  These systems should include red flags that automatically notify people when things have to be done, and also automatically notify the appropriate people if they haven’t been done.  Once again, depending on the size of your operation, you may have to hire one or more people to set up and implement these systems.

Administering these kinds of financial plans can be a major task. Planned giving arrangements, for example, are governed by state laws as well as federal, and state laws vary. In general, you have to go by the laws both of the state(s) in which your plan is located (i.e. your main office, as well as any subsidiary branches or offices that operate the plan) and the state(s) in which your donors live. Universities in particular may have donors from all over the country, and therefore may be subject to the laws of many states simultaneously. They are usually well advised to adhere to the laws of the state(s) that are strictest, so they’ll be in compliance with all the others.

In some states, there is a requirement or possibility of becoming certified as a planned giving provider. This is the time to look into and do that if it makes sense for you. Examine this possibility carefully: there are advantages and disadvantages to it, and you’ll have to decide what works for you.

Information on state regulations and statutes – as well as on practically everything else having to do with planned giving – can be found on the website of Planned Giving Resources, Inc.

  • Train everyone involved in investment and plan administration to understand and deal with the particulars of the plans you offer. Whether it’s simply the organization’s treasurer, an existing fiscal staff, or new people that you’re hiring that will be responsible, it goes without saying (but we’re saying it anyway) that they have to fully understand the ins and outs of your financial arrangements in order to do their jobs.

Reach out to and recruit potential donors. The best plans and coordination in the world will do you no good, however, if no one participates in them. You’ll need a recruitment plan to contact potential donors – ideally in person through someone they know – and convince them that your organization is exactly what they want to contribute to.

Universities usually start by recruiting a committee of alumni who are enthusiastic about the institution. This committee then acts as a champion of the fundraising effort, doing the work of reaching out to potential donors, with the support of the university development office.

You won’t get donors unless:

  • They know about the organization and what it does (and why they should want to contribute to, or take part in a planned giving plan from, your organization as opposed to another one).
  • They know about the giving programs you offer.
  • They understand how giving to your organization can benefit both you and themselves.
  • They have a positive feeling about the organization.

To inform donors, you have to market both your organization and your giving plans to those who might be inclined to contribute to you. That means using a number of channels and methods, including:

In order to use any of these methods, you have to start with a list of current and potential donors. It should include individuals and businesses that have regular contact with the organization; former participants, beneficiaries, or alumni; names of family, friends, and colleagues submitted by board members, staff, participants, and other friends of the organization; etc. Most organizations, even small ones, have such lists computerized, so they can easily keep track of contacts and update them as necessary.

  • Postal and/or e-mail. Use your network to expand your reach here. Sending an informational brochure or letter to this list is one way of reaching a pool of potential donors.
  • An organizational newsletter, e-newsletter, or magazine.
  • The organization’s website. You can post as much information as you want here, since you don’t have to pay postage or worry about page limits. You can include links by which donors can contribute on line, e-mail addresses of people in the development office who’d be happy to call and discuss giving arrangements, explanations of possible areas of sponsorship, etc. You can include a link to your website in e-mail solicitation.
  • Ads in targeted publications, such as alumni magazines, organizational newsletters, magazines covering particular fields, or professional journals. These often include profiles of current donors similar in some way to the readers of the publication.

For the three methods just described, it may be useful to recruit one or two donors who are willing to be used as examples for advertising the benefits of the programs offered. Universities often do this as a matter of course: “Gus Brown, class of ’58, and his wife, Tillie, are collecting a nice amount every year by donating to State U. They’ve purchased a charitable gift annuity from the university, and it’s providing them with a comfortable retirement income while it helps to finance the new Main Campus Science Center. Gus and Tillie have the security of a regular income, and the satisfaction of knowing that their investment is making the world a better place.”

  • Phone solicitation. This might be carried out in a small organization using volunteers – participants, board members, and friends of the organization – to call people on the organization’s current and potential donor list. A larger organization might use its own fundraising or development staff, or might hire a telemarketing company to make its calls
  • Word of mouth. Board and staff members and donors can be asked to contact directly – either face-to-face or by phone – those potential donors whom they know personally, or with whom they have something in common (college classmates, for example, or people who have jobs similar to theirs).

Volunteers who will be contacting potential donors directly should receive training for the task. Background information on the organization, establishing rapport, what and how to ask (many organizations provide a script for volunteers to use), how to accept refusals gracefully – training in these and a number of other areas will greatly improve your chances for success with potential donors, and leave even those who refuse with positive feelings about the organization.

To the extent possible, all potential donors should be approached in person, ideally by someone they know. If that’s not possible, make sure any personal approach is made by someone who is tactful, knowledgeable about the arrangements you’re offering, persistent (but not to the point of obnoxiousness), and personable. (If you’re using volunteers, here’s where training comes in.)  It’s important to leave people with a good feeling about the organization even if they decide not to donate – they may change their minds later.

An important part of recruiting donors is finding out what they want from their donation. After all, if all they wanted was a reliable income, they could invest their money directly, rather than putting it into a planned giving arrangement. They’re thinking about giving it to you for a reason – they want to support the organization’s goals, they need the tax advantages, they want to be remembered for more than making money, they feel affection for the organization. If you know their reasons, you can help them create a personal giving plan that addresses those reasons, making it more likely that they’ll want to donate.

See Tool #2 for some tips on recruiting and maintaining relationships with donors.

Implement your plan. Now that you have everything lined up – whatever state licenses or permissions you need, money management, administration, the first few donors – it’s time to put your plan into action. There are three essential elements to implementation:

  • Make sure your systems are working properly, and maintain them so they continue to do so. This includes ensuring that:
    • All payments are made on time, to the right people and in the right amounts.
    • All state and federal reporting requirements are being met.  You’ll need to keep up to date on any changes in regulations as well, so that you’re certain you’re following the current rules.
    • All state and federal regulations are being followed. This means that appropriate paperwork is turned in on time, and you maintain proper recordkeeping and storage, information security, etc.

As part of each of these last two requirements, it helps to have personal contacts at the appropriate state and federal agencies. Maintaining a friendly relationship with an individual allows you to get fast and accurate answers to questions, smooth over problems, and maintain good relations with the agency. Life is always easier if you can deal with a person rather than a bureaucracy.

  • Any restrictions or special arrangements that have been negotiated with donors are clearly spelled out, and are being properly implemented. Funds designated for particular purposes have to be used for those purposes, for instanc
  • Investment strategies are successful, with investments, over time, more than covering expenses.

Remember that the stock and bond markets go up and down, and even the best investments don’t make large amounts all the time. The test of an investment strategy is in both how it does in relation to the markets themselves (i.e., are you doing well when everyone else is?) and how it does over time. The fact that you have a bad year – especially if most investors are in the same boat – doesn’t mean your strategy’s not working, although it may call for some adjustment. If you’re doing noticeably worse than the markets over five or ten years, it’s probably time to rethink your approach.

The Community Tool Box is not in the business of giving investment advice, and you don’t have to be an expert – that’s why we urge that if there’s a reasonable amount of money involved, you should hire the expertise you need. It is important, however, that someone in the organization besides the hired expert have a basic understanding of markets and investment, so that if the expert isn’t doing a good job, someone will know enough to realize it.

There are at least two ways to make this happen. One is to make sure that the board includes – as treasurer or otherwise – at least one member with expertise in finances. Another is to take advantage of the many plain-English, common-sense guides to investing that are available in any bookstore. We don’t suggest that reading one or more of these books will equip you to manage a multi-million-dollar endowment or planned giving fund, but rather that it will allow you to communicate with investment experts with some degree of understanding, and help you to sort out the reasonable strategies from the unreasonable. Two of these books are listed in the “Resources” area of this section, and there are many others available.

 Cultivate current donors. Pay attention to your personal relationship with each of your donors. They may choose to donate more, but, equally important, they may suggest to others that they donate to your organization.  They can be your best ambassadors and salespeople.  In addition, they’re helping to make your organization flourish: you owe them a debt of gratitude. People need to know that their efforts are appreciated.

Offer agreed-upon donor benefits for gifts of certain sizes. These may include levels of giving identified in organization publications and media publicity; named programs or facilities;

  • Use the occasion of each payment to send a personal letter – from the director, the director of development, a board member who knows the donor, etc. – thanking the donor for his gift, updating him on the organization’s activities and progress, and letting him know what his donation is making possible.

Where there’s no payment involved – where the gift was to an endowment, for example, or where the planned giving arrangement pays to someone other than the donor – there should nonetheless be communication of the same sort at least once or twice a year. Personal relationships with donors are tremendously important, regardless of the amount of the donation. Part of the donor’s impression of the organization – probably the largest part – comes from the people she deals with; if she’s happy with them, she’s happy with the organization. And if she’s happy with the organization, it’s likely that there will be benefits of good publicity, as well as increased donations from the donor and her friends, down the road.

  • Hold donor meetings and forums, where you can learn more about donor needs and desires, and where donors have a chance to meet, talk, and form relationships with one another, and to build a community of support for your organization.
  • Hold donor events, or give donors special privileges at organizational events. A yearly dinner or party (not too fancy – donors don’t want you to waste their money), a private tour, a seminar, a special performance or private tour of an exhibition – there are many ways to make donors feel like insiders. These kinds of events and privileges both provide an ongoing thank-you to donors, and bind them to the organization.
  • Ask donors for their suggestions in areas where it’s appropriate.They may have ideas that are original and valuable, and they’ll appreciate being asked.
  • If and when it’s appropriate, ask donors for the names of other potential donors (or, depending on your relationship with them, ask them to approach other potential donors). You might also ask whether they’d be willing to be cited as examples in order to attract other donors.

Continue to search for and recruit new donors in every way possible. In order to keep your funds and your organization growing, you’ll need to continue to attract new donors, as well as keeping current donors happy and – in some cases – continuing to contribute. Once you’ve established an endowment or planned giving arrangement, you’re in it for the long haul.

In Summary

Endowments and planned giving arrangements of various kinds are ways of providing your organization with ongoing income and long-term financial stability. They’re not for everyone: while small organizations may be able to accumulate a modest endowment without adding any systems or personnel, larger endowments – in the hundreds of thousands or millions of dollars – and planned giving arrangements of any size take careful management and administration. If you have or can gain the capacity to deal with them, however, they can be great boons to your organization.

Endowments and planned giving offer attractive benefits to donors – tax advantages, recognition, guaranteed income, and a variety of ways to donate and to designate donations for specific programs, activities, or facilities. For non-profits, they offer investment capital, regular income, the chance to accumulate capital for special projects or programs, and a certain degree of independence from the uncertainty of public funding and the hard choices that funders of any stripe can impose.

If you’re willing to set up and maintain both the money management and administrative systems necessary to sustain them, and to take on donor relations in a serious way, endowments and planned giving arrangements can help your organization grow and flourish.

Online Resources

American Council on Gift Annuities. Everything you wanted to know on the subject.

National Committee on Planned Giving

MSU Development Office Planned giving answers online from Michigan State U.

Planned Giving Resources, Inc.  – a huge amount of information on planned giving arrangements, including information on state statutes.  The site appears to be current up to March of 2006, at which point Jim Potter, a planned giving expert who wrote and maintained the website, died suddenly of a heart attack.  The site is still maintained, but information may not be up-to-the-minute.

Print Resources

Barrett, R.  (2nd., ed.) (2002). Planned Giving Essentials: A Step by Step Guide to Success  Boston: Jones and Bartlett.

Bray, I. (2005).  Effective Fundraising for Nonprofits: Real-World Strategies that Work. Berkeley, CA: Nolo. Chapters 6 and 7 are especially useful on large gifts, bequests, and planned giving arrangements.

Jordan, R., & Katelyn, L. (2002). Planned Giving for Small Nonprofits.New York, NY: Wiley.

Lynch, P. (2000). One Up on Wall Street: How to Use What You Already Know to Make Money in the Market.  New York, NY: Simon and Schuster.

Mutz J., & Murray, K. (2000). Don’t let the “dummies” in the title dissuade you; Chapters 20 (on major gifts) and 21 (on planned gifts) contain basic but very useful information, of value even to professionals. Fundraising for Dummies. New York, NY: Wiley Publishing.

Sharpe, R. (2nd rev. ed.) (1998). Planned Giving Simplified: The Gift, the Giver, and the Gift Planner. New York, NY: Wiley.

Tobias, A. (updated, 2005). The Only Investment Guide You’ll Ever Need. San Diego: Harvest Books.