An endowment is a donation of money or property to a non-profit organization for the ongoing support of the organization. It may be structured that the organization leaves the principal amount intact and is only permitted to spend the income from the investments in the endowment funds. Less commonly, the gift may be structured allowing the organization to spend the principal amount. If this is the case, there may be restrictions placed upon the amount of principal that may be spent annually. Many non-profit organizations, most notably colleges and universities may have endowments of millions of dollars. It is less common for a church to have endowment funds, although it is not unheard of.
Not everyone favors a church having endowment funds. Some feel that any funds in possession of the church should be spent on a timely basis to further the mission of the church today, not for some future time. Endowment funds are seen as idle funds and should be used in ministry today, as tomorrow may be too late. Although there is some merit to this argument, it can be countered with the argument that an endowment will help assure the ongoing mission of the church for many years to come. Endowments will allow the organization to focus on today and worry less about long-term funding for the organization’s mission.
Misconceptions About Endowments
Before discussing the benefits of a successful endowment program, let’s look at a few misconceptions about endowments.
1. Endowments are only for large churches. This is simply not true. Most churches have at least one individual who is capable of funding an endowment. It has been said that death is universal, and most people have the capability of leaving some amount to the church as endowment funds.
2. Endowments discourage annual stewardship. There are two aspects of this. First, those who create endowments are not likely to refrain from giving during their lifetimes, so there should be no effect on the annual contributions in this regard. Secondly, others will not give as they do not see a need when the church can rely on its endowment funds. This is a possibility. I have seen churches that were somewhat in this situation. When ever the church had a need, it could turn to the endowment or one of a few wealthy members. As a result, the church never developed a strong giving program among the membership. However, the fault does not lie in the existence of the endowment, but in the failure of church leadership to develop a giving culture in the church, where all are encouraged to tithe and beyond.
3. Endowments are hard to manage. If there are no financial professionals in the church, there are professional money managers who can and will manage the funds in a cost-effective manner that can maximize the return on investment of the funds.
Endowments usually don’t just happen. Granted, there are occasional situations where a church member dies, leaving the church a substantial bequest in his or her will, specifying that it be placed in an endowment with directions on how the funds are to be used. However, a successful endowment program is more likely when it is affirmed by church leadership and the congregation. If this issue is made a matter of discussion and education by the church, there is more likely to be an understanding of what an endowment is, and how it can benefit the church. Bruce Weaver Treasurer of The Presbyterian Endowment Education and Resource Network has identified three areas that should be addressed in the church’s approach toward endowments.*
First is the theology of endowments. What is the belief system of the church toward these funds? Attitudes of the leaders and congregation about endowments and how the church uses the endowment funds is critical. There are blessings and responsibilities that comes with endowments. However, if the church is not a good steward of the funds, the blessing can become a curse. The church should believe that endowments are good for the church.
Second is the management of the resources. The church should specify how the funds are to be invested in terms of social and fiduciary responsibilities. The church, obviously, would want to have a policy against investments in certain companies whose products or services conflict with the belief system of the church. In terms of the fiduciary responsibility, the funds should be invested in a responsible manner and not exposed to undue risk.
Third is development of the endowment. Churches frequently take a haphazard approach to endowments, sitting back and reacting only when a bequest comes their way through the death of someone who has remembered the church in their will. Estate planning seminars are a start, but continuous development programs should be conducted over a period of time. Not to the point where it becomes wearisome, but enough to make the membership aware that the church has an endowment, how the endowment is used, and encourages gifts to it.
Income from an endowment will not normally create unrelated business taxable income (UBTI) or put the organization at risk of losing its non-profit status. UBTI is tax on business income unrelated to the exempt function of the organization. Income from investments such as stocks and bonds is not business income.
An endowment program can help perpetuate the life of a church or other organization. It can free the organization from concerns about having enough funds to finance the operational side of the organization, from concerns about the impact of a major repair to a building, or other matters. On the other hand, funds sitting in an endowment could be used today to help the church further its mission activities today, rather than at some point in the future. Another point to be made is that churches, as with other organizations, have a life cycle. The existence of endowment funds may serve to perpetuate a church or organization that has completed its life cycle and is on life support made possible by the endowment funds.
* See http://www.presbyterianendowment.org/sites/presbyterianendowment.org/files/lib/Elements%20Successful%20Program.pdf