One of the biggest challenges facing nonprofits with large individual donations, is losing an annual stream of income when the donor dies. While most nonprofits rely heavily on their annual fundraising campaigns, it is important, and sometimes vital, for nonprofit organizations to encourage such donors to endow their gifts – distinct from annual contributions – to establish a solid financial foundation that will help build sustainability for the future.
There are multiple ways of creating an endowment, though doing so may not be right for every nonprofit organization. There are administrative and fiduciary requirements to properly maintain an endowment and having committed staff with knowledge of different endowment fundraising avenues is a must. These avenues could include designated gifts, bequests, working with a brokerage house to handle the donations of investments, and much more.
Regardless of how donations are made, an endowment can be crucial to establish and maintain the financial security of a nonprofit. One organization I know recently had a million-dollar annual donor pass away unexpectedly, resulting in a huge loss to their annual campaign. If this donor had endowed their gift, the financial future of the nonprofit wouldn’t be in question.
Fostering a sense of connection and ownership between a donor and an organization is key to growing an endowment. Every interaction with a donor should be viewed as an investment in a long-term relationship. Successful endowments require personal connection between individuals and the cause or mission of the nonprofit. Often, creating a level of exclusivity and access for important donors through appreciation events can provide incentive to be part of a unique community of similarly minded people leading to a long and stable flow of financial support. Forming a Giving Society of tiered donations also builds communal buy-in and promotes the graduation of donor amounts over time with a growing sense of belonging for vital donor participants.
Large endowments can also be accomplished through a charitable Bequest of part of a donor’s estate to the nonprofit. All a donor has to do is write it as a provision in their will. This method can be used to gift assets at the time of a donor’s death, but there is no guarantee that a donor won’t change their mind and will beforehand and decide to give the endowment elsewhere. Bequests can also be given as a simple transfer of assets or with complex structures and conditions regarding when and how the gift can be used. If a donor has made the charity aware of their intention, it is crucial for someone to steward that relationship to ensure it stays relevant to the donor, however the bequest might be structured.
Another way to create an endowment is by using Life Insurance. A life insurance policy taken out on the life of a donor can be purchased by or gifted to a nonprofit. Typically, the nonprofit becomes the owner and beneficiary of the policy, and if the donor gifts the premiums to the nonprofit, the premiums will be tax deductible. The nonprofit can even split the cost of a policy with the donor and still benefit greatly when that donor dies, allowing the organization to maintain the gift in perpetuity.
There are, of course, numerous options and complexities for funding endowments and talking through the benefits and drawbacks of different approaches to sustainable giving with a financial advisor is suggested. If you have interest or questions around setting up an endowment for your organization or your own impactful charitable giving, do not hesitate to reach out directly.