On this page:
- What Is an Endowment Fund?
- How Does an Endowment Fund Work?
- Why Do Donors and Nonprofits Use Endowments?
- Three Common Types of Endowment Funds
- Endowment Fund Policies
- Endowment Funds vs. Other Charitable Funds
- University vs. Nonprofit Endowments
- What Can Be Donated to an Endowment?
- Tax Considerations for Endowment Gifts
- Endowment Funds at San Diego Foundations
- Frequently Asked Questions
Endowment Funds: Key Takeaways
- An endowment fund holds charitable assets that are generally invested for long-term support.
- Distributions from the fund are used for the charitable purpose described in the fund agreement or governing documents.
- Endowments may support an entire nonprofit, a specific program, scholarships or another defined purpose.
- Donor-restricted endowments, term endowments and board-designated endowments operate differently.
- Endowment gifts may qualify for charitable tax deductions when made to an eligible charitable organization, subject to applicable tax rules.
- Endowments are designed for long-term support, while non-endowment funds generally allow more of the contributed assets to be spent in the near term.
What Is an Endowment Fund?
An endowment fund is a charitable fund created to provide financial support over an extended period.
The assets are typically invested. The nonprofit or charitable sponsor then makes distributions according to the fund’s governing documents, spending policy and applicable law.
Many endowments are intended to continue permanently. Others operate for a specified term or until a particular event occurs.
The purpose of an endowment can be broad or specific. An endowment might support:
- A nonprofit’s overall mission
- Scholarships for students
- Medical research
- Arts and cultural programs
- Scholarships
- Environmental conservation
- Housing or food assistance
- A particular geographic community
- Another charitable purpose selected by the donor
Donations to endowment funds are tax-deductible. San Diego Foundation (SDF) donors often set up endowment funds so they can receive charitable tax benefits immediately upon making their donation, while maintaining the social-good grantmaking power for the long-term.
How Does an Endowment Fund Work?
An endowment generally follows five steps:
- A donor or organization establishes the fund.
The governing documents identify the fund’s charitable purpose and any restrictions on its use. - Assets are contributed.
Gifts may include cash, publicly traded securities or other assets accepted by the charitable organization. - The assets are invested.
The fund is managed according to an investment policy intended to balance long-term growth, risk and distributions. - A portion is made available for charitable use.
The amount distributed is usually determined by the organization’s spending policy and the terms governing the fund. - The remaining assets continue to be invested.
This structure is designed to support charitable work over time, although investment performance and future distributions are not guaranteed.
A Simple Endowment Example
Suppose a donor establishes an endowment to support youth education programs.
The contributed assets are invested. Each year, an amount may be distributed in accordance with the fund’s spending policy to support eligible programs. The remaining assets stay invested for future years.
The actual distribution would depend on the fund agreement, investment results, applicable law and the organization’s spending policy. It should not be assumed that an endowment will earn or distribute a fixed amount every year.
Why Do Donors and Nonprofits Use Endowments?
Endowments can serve several long-term charitable goals.
Create lasting support
A donor may use an endowment to continue supporting a cause for many years or across generations.
Provide a more predictable source of funding
Annual distributions can help a nonprofit plan programs and services alongside fundraising, grants and other revenue.
Honor a person or family
Named endowment funds are sometimes established in memory or recognition of an individual, family or organization.
Protect a defined charitable purpose
A donor-restricted endowment can direct distributions toward a particular cause, program or group of beneficiaries.
Strengthen long-term financial planning
For nonprofits, an endowment may form one part of a broader financial strategy. It is not a substitute for operating reserves, annual fundraising or sound financial management.
Three Common Types of Endowment Funds
Endowment terminology varies among organizations, but three categories are commonly discussed.
- Donor-Restricted Endowment
A donor-restricted endowment is created through a gift agreement or other governing document that limits how or when the assets may be spent. The restriction might require the fund to be maintained permanently or direct distributions to a specific charitable purpose. For example, a donor could establish an endowment whose distributions support scholarships for students from a particular community. - Term Endowment
A term endowment is subject to restrictions for a defined period or until a specified event occurs. After the term ends or the event takes place, some or all of the assets may become available for another permitted use, depending on the governing documents. - Board-Designated Endowment
A board-designated endowment, sometimes called a quasi-endowment, is created when a nonprofit’s governing board designates organizational assets for long-term investment. Unlike a donor-restricted endowment, the restriction is imposed internally rather than by a donor. The board may generally modify or remove that designation, subject to the organization’s policies and legal obligations.
Endowment Fund Policies
An endowment is usually governed by several related policies and documents.
Gift agreement or fund agreement
This document describes the fund’s purpose, the donor’s restrictions and how the fund will be administered.
Investment policy
The investment policy establishes objectives, risk guidelines, asset-allocation principles and responsibilities for managing the fund.
Spending policy
The spending policy determines how much may be made available for charitable use. Organizations often use a formula intended to balance current distributions with long-term preservation of the fund’s purchasing power.
Use or grantmaking policy
This policy explains how distributions may be used and how eligible grants, programs or expenses will be selected.
Gift acceptance policy
A gift acceptance policy identifies which assets the charitable organization can accept and what review may be required for non-cash or complex assets.
Endowment management and spending may also be governed by state law. The Uniform Prudent Management of Institutional Funds Act provides a framework for the prudent investment and expenditure of charitable institutional funds in jurisdictions that have adopted it.
Endowment Funds vs. Other Charitable Funds
An endowment is one of several structures that donors and nonprofits may use.
| Feature | Endowment Fund | Non-Endowment Fund | Donor-Advised Fund |
|---|---|---|---|
| Primary purpose | Long-term charitable support | Current or shorter-term charitable use | Organized grantmaking over time |
| Investment horizon | Usually long term | Varies | Varies by sponsor and donor plans |
| Access to contributed assets | Governed by restrictions and the spending policy | Principal may generally be available for charitable use | Assets are owned and controlled by the sponsoring charity |
| Donor role | Defined by the fund agreement | Defined by the fund structure | Donor may recommend grants |
| Typical use | Perpetual or long-term support | Immediate grants, programs or operating needs | Flexible charitable giving and grant recommendations |
A fund may combine certain characteristics. For example, a charitable sponsor may offer an endowed fund that also provides advisory privileges. Donors should review the specific agreement rather than relying on the fund’s name alone.
Endowment Fund vs. Non-Endowment Fund
The main distinction is how the assets may be used.
An endowment is structured for long-term support, with distributions governed by restrictions or a spending policy. A non-endowment fund generally permits both contributed assets and investment returns to be used for charitable purposes without an expectation that the fund will continue permanently.
Endowment Fund vs. Donor-Advised Fund
An endowment describes how charitable assets are held, invested and spent over time.
A donor-advised fund (DAF) describes a charitable account in which donors may recommend grants to qualified nonprofit organizations. Once assets are contributed to a donor-advised fund, the sponsoring charity has legal control over them.
A donor-advised fund may be invested for long-term giving, but it is not automatically an endowment. Some charitable organizations may also offer endowed funds with donor advisory features.
University Endowment Funds vs. Nonprofit Endowment Funds
University endowments and nonprofit endowments share the goal of supporting charitable or educational work over time. Their scale, purposes and administration may differ.
University Endowments
Colleges and universities may use endowment distributions to support:
- Scholarships and financial aid
- Faculty positions
- Academic departments
- Research
- Libraries
- Student services
- Campus facilities
- General operations
A university endowment is often composed of many individual funds, each with its own purpose or donor restriction.
Nonprofit Endowments
Other nonprofit organizations may establish endowments to support:
- General operations
- A specific program
- Services for a particular population
- A geographic community
- Staff positions
- Facilities
- Long-term organizational stability
Community foundations may also administer endowment funds for individuals, families, nonprofit organizations and regional initiatives.
What Can Be Donated to an Endowment?
Depending on the receiving organization’s gift acceptance policy, donors may be able to contribute:
- Cash
- Publicly traded stock
- Mutual fund shares
- Real estate
- Privately held business interests
- Other non-cash assets
Non-cash gifts may require additional review, documentation, valuation or time to complete. Not every charitable organization accepts every asset type.
A donor considering a complex asset should begin the conversation before a sale or other binding transaction occurs and coordinate with qualified legal, tax and financial advisors.
Tax Considerations for Endowment Gifts
A gift to an endowment maintained by a qualified charitable organization may qualify for a charitable tax deduction. The available deduction depends on factors that may include:
- Whether the recipient is an eligible charitable organization
- The type of asset contributed
- The asset’s value and cost basis
- The donor’s adjusted gross income
- Applicable deduction limits
- Whether the donor receives anything of value in return
- Documentation and appraisal requirements
The IRS provides detailed charitable-contribution rules in Publication 526. Donors should consult their tax, legal and financial advisors about their individual circumstances.
San Diego Foundation does not provide legal or tax advice.
Endowment Funds at San Diego Foundation
As a community foundation, San Diego Foundation (SDF) works with individuals, families and nonprofit organizations that want to create long-term charitable support in San Diego County and beyond.
SDF helps donors explore how an endowment fits alongside other charitable options, including non-endowment funds, donor-advised funds and legacy gifts.
- SDF endowment assets under management: $1 billion+
- Number of SDF endowment funds: 1,400+
- SDF minimum opening gift: $25,000
SDF assets, including endowments, are professionally invested based on specific fund type to maximize return, strengthen grantmaking and create sustainable growth.
Frequently Asked Questions
What is an endowment fund?
An endowment fund is a pool of charitable assets that is generally invested to provide ongoing support for a nonprofit organization or charitable purpose.
How does an endowment fund work?
Assets are contributed to the fund and invested. Distributions are then made for the fund’s charitable purpose according to its governing documents, spending policy and applicable law.
Is an endowment fund permanent?
Many endowments are intended to continue permanently, but not all are. A term endowment may continue only until a specified date or event.
Can an endowment lose money?
Yes. Endowment assets are invested and are subject to market risk. Investment returns and annual distributions are not guaranteed.
Can money be withdrawn from an endowment?
It depends on the fund’s governing documents, applicable law and spending policy. Donor-restricted endowments generally limit how assets may be spent. Term and board-designated endowments may permit greater access under specified conditions.
What is the difference between an endowment and a donation?
A donation is a charitable gift. An endowment is a structure for holding, investing and distributing charitable assets over time. A donor can make a donation to an existing endowment or establish a new one.
What is the difference between an endowment and a donor-advised fund?
An endowment is designed to provide long-term charitable support under specified spending rules. A donor-advised fund allows a donor to recommend grants from assets owned and controlled by a sponsoring charity. A donor-advised fund is not automatically an endowment.
What is a board-designated endowment?
A board-designated endowment is created when a nonprofit board sets aside organizational assets for long-term investment. Because the designation comes from the board rather than a donor, the board may generally modify it in accordance with its policies and legal duties.
Are endowment contributions tax-deductible?
Contributions to an endowment held by a qualified charitable organization may be tax-deductible, subject to federal and state tax rules and the donor’s individual circumstances.
What assets can be used to fund an endowment?
Organizations commonly accept cash and publicly traded securities. Some may also accept real estate, private business interests or other assets after review.
How much money is needed to start an endowment?
Minimums vary by organization and fund type. Donors should confirm the required opening gift, fees and ongoing terms directly with the organization that will administer the fund. The minimum to start an endowment fund at San Diego Foundation is $25,000.
Who manages an endowment fund?
The charitable organization, foundation or institution that holds the fund is responsible for its administration. Investment professionals, staff, governing boards and investment committees may participate in oversight.
What is the purpose of an endowment spending policy?
A spending policy determines how much of an endowment may be distributed for charitable use. It is generally designed to balance current support with the fund’s long-term objectives.
Can an endowment support a specific San Diego nonprofit or cause?
Yes. An endowment may be established to support an eligible nonprofit, program or charitable purpose in San Diego, subject to the receiving organization’s policies and the fund agreement.
Learn More
Our assets, including endowments, are professionally invested based on specific fund types to maximize return, strengthen grantmaking and create sustainable growth.
If you want to learn more about endowment funds or how donor-advised funds (DAFs) can boost your philanthropy in San Diego and beyond, contact our Development & Stewardship team at (619) 814-1332 or DonorServices@sdfoundation.org.
