Special Report-Planned Giving 2

January 1, 2001       Bridget Rosenberg      

Endowments mean endurance for the long-distance runners of the nonprofit world, a planned giving expert explained. "Slow and steady wins the race," said Philip M. Purcell, director of the Planned Giving Resource Center for the Central Indiana Community Foundation in Indianapolis. "In the nonprofit world, it’s a marathon."

Purcell made his comments during a session of the recent National Conference on Planned Giving in Orlando, Fla. Endowments, he explained, can be used to subsidize on-going support, program expansion and support, salaries for faculty and staff, scholarships, and maintenance of buildings and equipment. The funds can also be used as leverage for bond-rating capacity and to secure mortgages or loans for new buildings he told conference participants.

Equally important are some of the more abstract benefits that endowments provide. Holding an endowment can help a nonprofit create an image that is appealing to potential donors.

"The existence of an endowment creates a sense of permanence, of stability, and strength," said Purcell. "While many donors are attracted to giving to causes that do struggle and need help, other donors want to see a charity that is stable and will be there for the long haul. When you think about fundraising for endowments, we are thinking about tomorrow. That institutional prestige or permanence is very important."

Donor advised funds, where a donor makes a gift and retains the right to recommend which group receives the annual usage of the income of that fund, are becoming more popular. Sometimes, donors can also stipulate that their heirs will have the right. These types of funds are getting a lot of attention from the Internal Revenue Service (IRS).

"One key concern highlighted in the IRS Continuing Professional Education and Technical Instruction Program for Exempt Organizations for Fiscal 2000 was aggressive control over grant decisions, investment of the assets, return benefit to the donor or donor’s family. Overly aggressive use of the funds is a problem and something the IRS is taking a look at," said Purcell.

The main legislation that pertains to endowments is the Uniform Management of Institutional Funds Act (UMIFA). It has been adopted by 39 states and can prove to be quite useful to organizations that adopt it. "In most statutes, it requires an action of your governing board to adopt and act under it," said Purcell. He recommended that most organizations do so.

UMIFA provides some alternatives for giving the donor and the organization influence in defining the future uses of an endowment.

"If the donor signs a gift instrument and specifically states that the charity can expand net appreciation, that then has the protection of the statute. Fifty years from now, if you want to tap all that growth on your stock and spend it for current use, it’s not going to be a problem with the heirs of the donor," said Purcell.

UMIFA allows that with the exception of states that restrict expenditure of net appreciation, all growth in the fair value of the assets over the historic dollar value of a fund is available for use. "UMIFA defines that if a donor wants to restrict expenditure to only income and allow net appreciation to only be on principal and never touched, the donor has to explicitly say so," said Purcell.

The act also provides a process for releasing restrictions that are no longer appropriate by mutual agreement between the organization and the donor.

Organizations should take the time to develop a policy that defines their philosophy with regard to endowment. When doing so, advisors should consider The Uniform Prudent Investor Act that implements Modern Portfolio Theory in relation to trust investments, he said.

"The emphasis is on investing for total return, not just income, but growth as well. And, in fact, we need to diversify our assets among various classes. We’ve got to have some risky assets in addition to safe and secure ones so that we have a total return that is maximized over the long haul," said Purcell.

The policy, which should be board-approved, ought to define objectives, asset class allocations, and benchmarks for performance. Evaluation should match the philosophy of the nonprofit. The organization’s investing policy will shape its spending policy.

"The key is that you try to blend. You try to match your spending policy to your philosophy with regard to investment," said Purcell. The spending policy should also provide a clear process for the organization to be able to alter its policy so that the charity can respond to the changing external environment.

Additional policies should also be put in place to deal with endowments. A charity should develop gift protocol that defines what staff may negotiate endowment fund agreements, what information will be shared with donors, who authorizes gift restrictions, signs agreements, facilitates transfer of assets, reviews planned gift documentation, and how donors are recognized.

Charities also need to define minimum funding levels and allowable restrictions. Purcell recommended encouraging "preference" statements rather than donor restrictions to maintain their right to make appropriate changes in the future.

Once these decisions are made, organizations should make an effort to create a fund agreement that is thorough, but not overwhelming for potential donors. "Endowment fund documentation is very significant," said Purcell. The format should be one that is common in the specific charity and is written in straightforward, simple language.

The charity can also encourage endowment giving and make the process simpler by creating a planned giving template. Donors can be provided with sample language to include a gift to a pre-existing fund or to start a new fund by beneficiary designation.

To market endowments successfully, charities should start by educating donors. "First and foremost explain that endowments are forever and that forever is a very long time," said Purcell.

According to Purcell, nonprofits should emphasize key concepts in marketing:

• Naming opportunities. They may be named for donors, loved ones, favorite faculty or staff.

• Fulfillment of mission. One of the most important reasons a donor establishes a planned gift.

• Permanence. Endowments allow permanent support for future longevity of the charity.

• Challenge. Endowment minimums offer an attractive challenge to those who understand the value of such thresholds.

• Participation. Families, friends, and associates may contribute to a fund in honor of an individual.

• Living Memorial. The idea of supporting functioning programs can be as appealing as a name on a building.

• Purpose. Endowments may be established for specific purposes including scholarships, program support, etc.

• Target Market. Endowment gift opportunities can be specifically targeted to current or prospective major and planned gift donors.

• Funding Flexibility. An endowment can be funded by various combinations of outright gifts and planned gifts.

One of the most effective tools to market endowments is to use the voice of those who have contributed to and those who have benefited from the organization’s endowments. "Test-imonials are worth their weight in gold," said Purcell.

In addition to traditional means of publicizing and encouraging endowment giving, organizations should take advantage of current technology.

"Cyberspace is a great place to market for any kind of gift. On your Web site you can have giving options, a regular endowment report, updates on your endowment, sample language, your sample agreement format. You can define your terms and protocol; explain some of your investment and spending policies. You can offer some donor testimonials with photographs. Of course, have email response that is quick and easy," said Purcell.

All of this should seek to shift the perspective of potential donors, to help them see a bigger picture and to look toward the future.

"The concept is trying to key your donors to think about tomorrow, leaving a legacy," said Purcell.

Bridget Rosenberg is a reporter for the Denver News Bureau.