What is an Endowment?

"Endowment" is not a term many of us use very often, so it can be difficult to understand and, therefore, to explain. Today's post from Elaine Bedel, Women's Fund Advisory Board member and Certified Financial Planner, provides an overview of what an endowment is. We thank Elaine for sharing her expertise with our readers.

By Elaine E. Bedel, CFP®
President
Bedel Financial Consulting, Inc.

Have you ever been asked to make a charitable contribution to the endowment of Women’s Fund of Central Indiana? There is often confusion with respect to giving to an endowment versus giving directly to a charitable organization. The one major difference is that when you make a gift to an endowment, you really are making "a gift that keeps on giving".

Anytime you make the decision to share your hard-earned money with a charity, you want to make sure your personal intent is being maximized. If your goal is to have 100% of your money used immediately to meet the goals of the charitable organization, then giving to the "annual fund" or the "operating fund" of the charity is very appropriate. In most cases, your contribution will be used as needed or as you have specifically directed to carry out the mission of the organization. The annual fund of Women’s Fund is used to provide donor programming throughout the year and to ensure that the organization’s operational needs are met.

If, on the other hand, you would like your money to make a long-term impact, you may want to consider a gift to the endowment fund. Many organizations, including academic, cultural, and religious institutions as well as significant community funding organizations, like Women’s Fund, all tend to have endowments. The largest endowment in the United States belongs to Harvard University. As of June 30, 2009, its value was $26 billion.

How Does an Endowment Work?

When you make a contribution to the Women’s Fund endowment, your money is not spent. Rather, it is invested. Each year thereafter, a specific percentage of the endowment fund is withdrawn and used to meet our mission.

The intent of an endowment is to have the fund grow over time through appreciation and earnings of the investment portfolio. The annual distribution percentage is limited to an amount that is less than the anticipated total investment return of the portfolio in order to allow the endowment fund to increase in value. Generally, a five percent distribution is considered prudent.

As an example, if the investment portfolio of the endowment fund earns a return of 9% and the charity takes a 5% withdrawal, the endowment fund will still increase in value by 4%. Each year, as the endowment continues to grow, the 5% distribution amount will also increase.

Women’s Fund uses five percent of its endowment each year to fund grant requests from various women and girl serving agencies in central Indiana. Our endowment is currently valued at approximately $12 million. The 5% distribution allows us to fund $600,000 in grants. Our goal is to grow the endowment to $20 million in the next five years. This will allow us to fund $1,000,000 of grants every year to improve the lives of families in our community.

The Gift that Keeps on Giving

Making a charitable gift to the endowment of Women’s Fund allows your money to continue to "make a difference" year after year. Since only a portion of the investment earnings and appreciation is spent each year, your gift remains intact into perpetuity.

When considering your gift, you cannot make a wrong choice. Both the annual fund and the endowment are important for the long-term sustainability of the Women’s Fund or any charitable organization.

Elaine E. Bedel, CFP®, is president of Bedel Financial Consulting, Inc., a wealth management firm providing fee-only financial planning and investment management services for individuals, consulting services for corporate retirement plans, and investment advisory for institutions and endowments. She is the author of "Advice You Never Asked For…But wished you had!" available on Amazon.com. For more information, visit their website at http://www.bedelfinancial.com/ or email to ebedel@bedelfinancial.com.

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