As the year draws to a close, many of our client conversations are about gifts—not so much about Christmas presents, but gifting to charities and other philanthropic organizations. The subject arises as we discuss year-end deadlines and planning. Considering the strong stock market performance of 2021, most of my clients are dealing with capital gains and how to plan around them, which is where gift-giving conversations begin.
Donating is one of the few options to decrease your tax responsibilities. Giving money to a charity also corresponds nicely with the season and the spirit of doing good for others. However, when I ask customers about their favorite organizations and programs to support, I discover that many of them have reservations. They are concerned about how some charities use their donations, particularly put off by the seven-figure salaries of some nonprofit organization executives. My interactions with my nonprofit foundation and charity clients, on the other hand, frequently revolve around annual receipts that fall short of income predictions and strategies to increase their donation receivables.
This is where taxpayers looking for deductions and nonprofits looking for donations can come together for their mutual benefit. An endowment can be the solution to both concerns.
The endowment double solution
For the donor, an endowment can perpetuate their gift by producing gifts for many years. In addition, an endowment can provide assurance the donated funds are used for programs they specify. For example, a donor might endow a certain position within an organization, like a chaplain in an assisted living facility who helped the donor’s mother adjust to her new way of life. Or an endowment could be used to fund educational scholarships for the donor’s field of study that allowed him to earn money during his career that he can now use to help others.
As an endowment is a way to ensure the funds gifted will be used only as the donor intends, it is also a powerful tool for charitable organizations looking to increase their donation receivables. The endowment is a permanently invested pool of money that provides a reliable source of income in perpetuity. The organization can count on the distributions annually to support its charitable work. The value of endowments was particularly evident in 2020 when making donations and supporting local charities was challenged by local lockdowns and the COVID- 19-related financial uncertainties, when the pandemic prevented charities from staging events and gathering people together to raise money. As the needs served by charitable organizations didn’t diminish with the pandemic—in fact, they increased—endowment income was for many organizations a lifesaver.
The endowment can hedge inflation and increase future spending power by implementing sound investment and spending practices. An endowment can generate a pipeline of gifts. Many endowment gifts are intended to be used at a later date, usually after the donor’s death. We frequently use life insurance to make small gifts during a donor’s lifetime and a substantial gift after they pass away. As a result, the endowment provides long-term financial security to the organization through delayed gifts. It can also position the organization for larger gifts in the future, as endowments frequently attract new contributors who want to support the endowment’s mission. Because of their long-term and future focus, endowments can attract committed visionaries, which can add to the endowment other assets, like real estate and cash. Their commitment to the project’s future often makes them annual donors.
In summary, the endowment is a powerful, donor-centered fundraising tool for givers and charitable organizations:
- As the gift is controlled by the donor and limits the use of the assets, the endowment solves concerns over the mishandling of donations.
- By assuring donors that their gifts will be used as they designate, an endowment can attract new donors and donations by specifically targeting projects or programs as well as by giving them the opportunity to designate the use of the funds.
- An endowment can provide perpetual income to help flatten gifting curves during economic downturns by reliably providing ongoing income.
An endowment can solve many concerns for both givers and receiving organizations this time of year when gift-giving and helping others is top of mind.
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.
The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.