Endowment funds play a crucial role in helping nonprofits build long-term financial stability. Yet many organizations still struggle to understand how these funds work, how they’re governed, and how to report them properly. Whether you’re new to endowments or looking to refresh your knowledge, this overview breaks down the essentials.
What Are Endowment Funds?
Endowment funds are donor-restricted funds that nonprofits invest to generate ongoing financial support for their mission. The goal is to preserve the principal while using investment earnings to sustain programs, operations, and long-term priorities.
Who Governs Endowment Funds?
Endowment funds must follow rules set by two primary authorities:
- Uniform Prudent Management of Institutional Funds Act (UPMIFA)
UPMIFA applies to most U.S. charitable organizations and provides guidance on:
- Prudent investment decision-making
- Spending rules
- Modifying donor restrictions
Its purpose is to protect nonprofit assets and promote responsible long-term stewardship.
- Generally Accepted Accounting Principles (GAAP)
GAAP establishes the accounting and financial reporting standards nonprofits must follow. Key nonprofit-related standards include:
- ASC 958 — Not-for-Profit Entities
- ASC 606 — Revenue from Contracts with Customers
- ASC 840 — Fair Value Measurement
- ASC 842 — Leases
These standards help ensure transparency and consistency in financial statements.
Types of Endowment Funds
There are three main types of endowments, each with its own restrictions and purpose:
- Perpetual Endowments
The principal must be maintained in perpetuity. Only investment earnings may be spent, and only in accordance with the donor’s specified purpose—such as scholarships, research, or program support.
- Term Endowments
These funds can be spent after a specific period or once a designated event occurs. Unlike perpetual endowments, the principal is not required to remain intact forever.
- Quasi-Endowments (Board-Designated Endowments)
Created by a nonprofit’s board—often using unrestricted funds—these resemble endowments but are not donor-restricted. The board can decide whether or not to spend the principal, though many organizations treat these as long-term investment funds.
How Do Endowment Funds Work?
Investment Strategy
Endowment funds are typically invested in diversified portfolios—ranging from money market funds to stocks, bonds, and mutual funds—to promote long-term growth.
Income Generation
Nonprofits generally spend a portion of the annual investment return while reinvesting the rest. This approach helps preserve purchasing power over time and ensures sustainable funding for future operations.
How Are Endowment Funds Used?
Endowment earnings support a wide range of mission-driven activities, including:
- Student financial aid and scholarship programs
- Academic and research initiatives
- Faculty and staff support, including endowed positions
- Operational stability and budget support
- Core mission activities across the organization
Endowments provide a critical financial cushion that allows nonprofits to plan ahead, weather economic uncertainty, and invest in long-term goals.
What’s Next?
In our upcoming blog series, we’ll take a deeper dive into:
- How to properly account for endowment funds
- How to manage and report underwater endowments
Have questions about how to classify, track, or report your endowment funds? Want a second look at your current processes? Feel free to leave a comment or contact me directly—we’re here to help!
