There are many options for charitable giving, including simple one-time gifts or annual checks to your favorite causes. But you might consider increasing your impact by setting up a structured, long-term philanthropic plan such as an endowment.
What Is an Endowment?
An endowment is a portfolio of assets that is invested to provide support for a cause. Endowments can be funded by cash, stocks, bonds, or real property and are typically organized as trusts or private foundations. They’re established to benefit charitable organizations, including educational or cultural institutions, community organizations, service organizations such as hospitals, and other nonprofits.
Reasons to Consider Establishing a Charitable Endowment
Charitable endowments are designed to provide benefits to you and your favorite causes. Donations to endowment funds are tax-deductible, giving them a place in your overall financial management and tax plan.
An endowment offers benefits that can extend beyond tax deductions and financial efficiency. It becomes a living reflection of your family’s values, a platform for family governance and next-generation engagement, and a tool for strategic philanthropy that adapts over time. You can specify that a certain (typically low) percentage of the assets are to be distributed and used by the specified charities each year. Or you can direct the endowment to keep the principal intact and distribute only the investment income, making the endowment virtually permanent. Your chosen organization(s) can then use distributed funds as a base for financial stability or to fund critical projects.
How to Create a Charitable Endowment Fund
It takes careful planning to establish an effective endowment fund. Following are four steps you should work through when setting up your own charitable endowment.
Step 1: Clarify Your Purpose and Choose the Right Type of Endowment
The type of endowment you create should align with both your philanthropic goals and how much control you want to retain. You have three basic types of endowments to choose from: true, term, and quasi. Let’s look at the differences between them:
- True Endowment – In this common type of endowment, the principal balance is intended to be left permanently intact and only the investment earnings are distributed to the charity. True endowments can either be restricted, meaning they can only be used for specific purposes determined by the donor, or unrestricted, in which the recipient can use the funds for any purpose.
- Term Endowment – In this type of endowment, all or part of the principal is made available for use after a certain timeframe or triggering event (such as the passing of a donor).
- Quasi-Endowment – Also known as a board-designated endowment, this type of endowment is managed by the governing board of the organization the fund serves, rather than by the donor.
The best fit depends on whether you want your gift to support annual operations, fund capital projects, or fuel innovation—and whether flexibility is important to you.
Step 2: Select Beneficiaries and Charitable Organizations
The next step is to carefully select the organizations you want to support. As you choose which nonprofits to include, you should carefully evaluate your interests, define your goals for giving, and do your due diligence on any organization you’re considering.
Step 3: Establish Clear Policies—With Flexibility in Mind
Endowments are governed by three policies:
- The investment policy sets the timeframe, return objective, liquidity objective, and risk tolerance for the endowment portfolio and specifies what types of investments can be made. For example, the portfolio might aim for an annual return of 5%, or it may or may not allow investment in crypto or private equity.
- The withdrawal policy outlines how much is distributed annually—often a percentage of assets, adjusted for inflation and market conditions.
- The usage policy establishes the purposes for which the charity can use the fund distributions.
Step 4: Work with Professionals to Set up the Endowment Fund
Now it’s time to pick an appropriate legal structure (trust or foundation), help ensure that all the tax regulations are met, and establish an investment strategy. This is a long-term proposition, and you want to get it right from the start. It can be beneficial to work with professionals in the legal, tax, and investment fields to optimize the impact of your giving.
Managing a Charitable Endowment Fund
Once an endowment is established, it must be maintained. Someone needs to make daily investment decisions, review the fund’s performance, keep records, monitor distributions, and communicate with stakeholders.
Investment Strategies for Long-Term Growth and Mission Alignment
Since an endowment is designed to last for many years, if not in perpetuity, the timeline for the investment strategy is long. Focus should be placed on steady growth rather than quick wins. A successful strategy should generate consistent long-term income and protect the principal investment against inflation and market risk through diversification and asset allocation.
You may also want to consider mission-aligned investment practices. Mission alignment is the process of incorporating objectives from an institution’s mission into investment decision making. There are many ways to align investments with mission. You can avoid investments that go against your charity’s mission, seek out investments that support it, and/or incorporate social responsibility or ESG factors into choosing companies in which to invest. (ESG factors are environmental, social, and governance factors used to gauge overall sustainability of an organization.)
Oversight and Governance
It’s not enough to set up the right policies; you need to make sure the policies are followed. One of the most important governance responsibilities is hiring professional investment management. Depending on the endowment’s needs, management resources could range from a single financial advisor to a fully staffed investment office.
In overseeing investment policies, you want to ensure that immediate needs and long-term sustainability are balanced. You’ll also need to make certain that your portfolio investment practices are adjusted to changing conditions—considering that an endowment may need to deal with inflation, rapid growth, shifting market dynamics, periods of greater volatility, or major global events (such as a military invasion or a pandemic) over the course of its lifetime.
The goal is to blend professional management with the personal, values-driven touch that makes your endowment a meaningful expression of your family’s story.
Common Pitfalls and How to Avoid Them
Managing an endowment can be complicated. Here are some of the common pitfalls and how to avoid them:
- Focusing on preserving the dollar amount of the original donation. Unfortunately, simply maintaining the dollar amount of principal isn’t enough in a true endowment. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is the guiding framework for managing endowment funds, and it requires that the purchasing power of the original donation—not the dollar amount—must be preserved. This means that the preserved principal base must keep pace with inflation.
- Withdrawing too much or too little in a single year. When investments are doing well, it’s tempting to increase spending. But remember that an endowment must be managed for the long term. The goal of a sound spending formula should be to provide stability by limiting spending in up markets and sustaining endowment purchasing power in down markets.
- Conflicts between donor intent and spending. It’s important to be clear and specific when recording your intentions for your endowment. Vague language can lead to your money being spent in ways that may not be consistent with your goals.
- Being too conservative with investments. It might feel safe to invest the entire portfolio in fixed-income products, but you’re not just trying to preserve principal. The return on your investment is what fuels your charitable activities, so you want to optimize it. Endowments have historically favored the cookie-cutter allocation of 60% stocks, 30% bonds, and 10% cash, but many successful endowments today are also adding alternative products like private equity, REITs, oil, hedge funds, etc.
- Poor investment returns. This is a governance issue as well as a management issue. Be sure to set realistic performance benchmarks and keep an eye on them. This will make it easier to quickly recognize when you need to change course with your investments.
Working with an Advisor
For families whose wealth creates opportunities to leave a lasting mark on the world, a charitable endowment offers a powerful way to amplify your impact. Beyond the dollars and cents, it’s a statement about what matters most to you—a chance to weave your values, vision, and voice into the fabric of future generations.
If you’re considering an endowment as part of your legacy plan, working with advisors who understand both the technical complexities and the deeply personal nature of philanthropy is key. At Carson Wealth, we specialize in helping families design endowment strategies that reflect their values, support the causes they love, and create lasting legacies. To be custom-matched with a financial advisor you can trust to support your goals with customized planning, take advantage of our advisor matching program today.
Alex Jensen is not affiliate with Cetera Advisor Networks, LLC.
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