What are endowment funds?
You’ve probably heard about endowment funds, but you may not actually know what they are. Endowment funds are a key component of long-term charitable giving, offering a way for donors to create lasting impact. These funds provide nonprofits with steady financial support, helping them plan confidently for the future and continue their missions for generations. Some of the world’s largest nonprofit organizations, universities, and foundations rely on endowments to fund education, research, health care, and community programs that create lasting change.
Their continued success has inspired more individuals and organizations to explore endowment giving as a way to make their impact last.
Before contributing to or establishing an endowment, it’s important to understand exactly how these funds work. Our guide will reveal what an endowment fund is, how it operates, and who it benefits.
How do endowment funds work?
Endowment funds are investment accounts set up by nonprofits or other mission-driven organizations to generate sustainable, long-term income. The original donation, often referred to as the principal, is typically meant to last forever – only a small portion of the returns, like interest or investment income, is used to support the organization’s programs.
Charitable endowment funds are long-term investment vehicles designed to provide ongoing financial support to nonprofit organizations. They’re typically made up of the original donation, which is invested to generate income over time.
Only a portion of the investment returns (often around 4–5% annually) is spent, while the rest is reinvested to maintain or grow the fund. This ensures the endowment can support a nonprofit’s mission long-term.
Who contributes to endowment funds?
Endowment funds are generally established by individuals, families, corporations, or foundations that want to create a permanent, reliable source of funding for a cause they care deeply about.
Large institutional donors or legacy-focused individuals often initiate these funds, but corporations and community foundations also play a role – either by contributing directly or by managing the fund’s investment strategy.
Stakeholders, such as board members, trustees, and financial advisors, help ensure the fund’s growth and check that its pay-outs align with donor intent and legal requirements.
Read more in our useful guide to nonprofit funding sources
Who benefits from endowment funds?
Endowment funds are a lifeline for many nonprofit organizations, allowing them to plan for the future with confidence and consistency.
These funds have wide-reaching benefits. Academic institutions often rely on endowments to fund scholarships, research, and faculty positions, ensuring educational access for generations of students. Cultural institutions, like museums and theaters, also use endowment income to preserve art, maintain collections, and support creative programming. What’s more, hospitals and service-oriented nonprofits often depend on these funds to sustain patient care, community health initiatives, and essential outreach programs.
The result is a steady, predictable income that helps nonprofits consistently serve their mission and expand their reach rather than focus on constant fundraising. For donors, it’s a chance to create an enduring legacy, supporting people, projects, and progress long after the initial gift has been made.
Types of endowment funds
There are several types of endowment funds to know about, each with its own purpose and level of flexibility.
- Restricted Endowment: This type of fund is designated by the donor for a specific use, such as funding a scholarship, research area, or community program.
- Term Endowment: Holds funds for a specific period or until certain conditions are met, after which the principal can be spent.
- Quasi-Endowment: Also known as a ‘board-designated’ endowment fund, the use of the money in this type of fund is governed by a board decision rather than a donor’s directive.
- Unrestricted Endowment: Gives the nonprofit full discretion over how the money is used, giving the organization flexibility to respond to emerging needs.
Endowment funding: Policies and limitations
Endowment funds are guided by three key policies: investment, withdrawal, and usage. These help to ensure responsible management and long-term sustainability.
The investment policy defines how the fund’s assets are invested and how much risk can be taken to achieve growth. Large institutions often manage multiple endowments, each designed to meet specific long-term goals while preserving the principal.
The withdrawal policy sets the amount an organization can take out during each period. This may be based on the needs of the organization, but it is most often set in annual spending limits, usually around 4–5%, allowing the fund to provide consistent support without reducing its base.
The usage policy outlines how returns are used, whether for scholarships, research, faculty positions, or specific departments.
Together, these policies help make sure endowment funds remain stable, transparent, and aligned with both donor intentions and the organization’s mission.
In the US, most endowment funds are managed under state laws modeled after the Uniform Prudent Management of Institutional Funds Act (UPMIFA). These guidelines help nonprofits manage, invest, and spend their endowment assets responsibly – ensuring funds are used wisely and preserved for long-term impact (source).
How to set up an endowment
Creating an endowment fund involves careful planning and collaboration between donors and the receiving organization.
- Plan and define goals: Make your purpose clear – what cause or program will your endowment support, and for how long?
- Develop a policy: Work with advisors and the nonprofit to draft an investment and spending policy that aligns with your mission.
- Secure capital: Determine the funding size needed to generate sustainable annual income.
- Establish management: Choose financial stewards or trustees to oversee the fund, ensuring compliance and transparency.
- Maintain and grow: Review the fund’s performance every year and adjust your strategy as needed.
Make a difference with GoFundMe
An endowment fund is more than just a donation – it’s a promise of ongoing support that can help generations to come. Whether you want to fund education, healthcare, or cultural preservation, your contribution can build a legacy of hope and resilience.
At GoFundMe, we make giving simple, transparent, and impactful. You can support nonprofits today or start your own Giving Fund to help causes you care about grow sustainably.
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Endowment Funds: FAQ
What’s the difference between an endowment and a donation?
A traditional donation is typically used right away to meet a nonprofit’s current needs, while an endowment is designed to last. The original donation is invested and only a small portion of the returns is spent each year.
How are endowment funds structured?
Endowment funds typically consist of three key parts: the principal, which remains invested; the investment returns, which generate income; and the payout, which is the portion of earnings distributed annually to support the nonprofit.
Who manages an endowment fund?
Endowment funds are typically managed by a combination of financial professionals, nonprofit leadership, and board members.
What are some examples of famous endowment funds?
Harvard University’s endowment, valued at over $50 billion, supports scholarships, research, and faculty development. Meanwhile, the Bill & Melinda Gates Foundation Trust sustains global health and education initiatives. Cultural institutions like The Metropolitan Museum of Art and The Smithsonian also rely on endowment income (source).
Are endowment funds tax-exempt?
Yes, most endowment funds are tax-exempt, provided they are held by qualified nonprofit organizations recognized under IRS Section 501(c)(3). However, it’s always best to check with a tax professional or financial advisor when establishing or contributing to an endowment.
This content is for educational purposes only and does not constitute tax, legal, or investment advice. All financial and tax-related examples are for illustrative purposes. Individuals should consult with a qualified tax or financial advisor to receive personalized guidance. All information is intended for U.S. taxpayers and subject to U.S. tax laws and regulations.