Preparing for the future: It’s easier with an endowment
The gold standard for many nonprofits whose missions are critical to our society is the ability to provide reliable services to the people who are counting on them, regardless of economic ups and downs. This is especially true in the wake of weather-related and other natural disasters, and even man-made tragedies, that create community upheaval. In the face of the sheer unpredictability of when community needs might escalate, it’s often hard for a nonprofit organization’s board and staff to balance fundraising for long-term security on one hand, with generating enough funding to support the organization’s operating budget from year to year on the other hand.
To protect against economic ups and downs, and also to be prepared in the event that a disaster or tragedy hits their community, many nonprofits build and maintain a financial cushion. Sometimes this takes the form of a rainy day fund or reserve fund, which can be accessed by the nonprofit’s board and staff to fill the gaps in budget shortfalls. Many organizations, in addition to building reserve funds, establish formal endowments to help ensure that the organization can meet its mission for years to come. Endowments are designed so that the corpus is preserved and increases in value over the years. Interest earned is used by the nonprofit only according to the stated purpose of the endowment.
Donors are often interested in learning the best ways to structure their gifts to a favorite nonprofit’s endowment to leave a community legacy that will live on for generations. Known as “donor-permanently-restricted gifts” under the Uniform Prudent Management of Institutional Funds Act, or UPMIFA, these donations are subject to specific record-keeping and investment requirements by the nonprofit to preserve the donor intent of these gifts.
Donors may not always realize the flexibility they have in structuring gifts to nonprofit endowments, even with the heavy requirements. A prime example of a key donor decision is whether to make a lifetime gift to an endowment or leave a gift to an endowment through a bequest. In either case, the funds flowing to the endowment will be restricted and used only according to endowment rules and the policies set by the nonprofit’s board. Keep these factors in mind when evaluating the timing of an endowment gift:
A lifetime gift to an endowment allows the donor to enjoy recognition for making the gift, including naming rights opportunities, and perhaps even participate in the nonprofit’s fundraising committees to encourage other donors to follow suit.
Giving to an endowment during a donor’s lifetime means that the donor can take advantage of giving highly-appreciated assets and benefiting from possible income tax deductions. And of course, the gifted assets are removed from the donor’s estate for estate tax purposes if that is projected to be an issue down the line.
A bequest to a nonprofit endowment, on the other hand, gives the donor the flexibility to fund the gift through beneficiary designations of life insurance policies, or, better yet, qualified retirement plans that would be subject to both estate tax and income tax following the donor’s death. All taxes are avoided on retirement assets that flow directly to a qualified charity through a beneficiary designation.
Even donors who are financially secure sometimes worry about running out of money. Leaving a bequest to an endowment may give them peace of mind that they will own their assets until they die, and they can change the bequest any time they want while they are living if charitable or family priorities shift along the way.
Please reach out to the team at the community foundation with your endowment-related questions. We are dedicated to honoring donor intent and doing everything we can to help nonprofits stay strong for the people who count on them.
Fundraising checklist: Many assets make great gifts
The Qualified Charitable Distribution (QCD) is creating quite the buzz in the nonprofit sector! Through a QCD, a donor who has reached the age of 70 ½ may be eligible to make annual distributions of up to $100,000 from IRAs directly to a qualifying public charity. As you no doubt are aware, in December 2022, Congress passed new laws that codified the much-anticipated Legacy IRA. The Legacy IRA expands the QCD to allow a donor to make a one-time, $50,000 QCD to a split-interest vehicle such as a charitable gift annuity or charitable remainder trust. The new law also indexes the QCD cap for inflation in future years.
With the QCD now top of mind for many of your donors, now is a great time to review the various assets that your donors can give to support your mission–especially your endowment and reserve funds. The community foundation can help you facilitate complex gifts and meet your donors’ desire to both support your mission and maximize their own tax and estate planning goals.
For example, highly-appreciated, publicly-traded securities are tax-effective gifts to your organization, especially because the donor’s capital gains tax can be avoided.
In addition to giving through an IRA via a QCD, giving via a bequest of an IRA or other qualified retirement plan using a beneficiary designation is an excellent charitable giving technique because the donor avoids both income and estate tax on the retirement plan assets flowing to charity.
In addition, real estate, closely-held business interests, collectibles, and other nontraditional assets can frequently come with strong tax benefits when given to a public charity such as your organization or to a fund at the community foundation. The proceeds from the sale can support your nonprofit, or, when the donor uses a fund at the community foundation, the proceeds can even support several organizations, including yours, if that’s what the donor intends.
And of course, donors can give cash. For donors who itemize deductions on their tax returns, dollars given to public charities are deductible up to 60% of adjusted gross income and excess deductions can be carried over and deducted in five future tax years. Related, a donor-advised fund at the community foundation can help a donor maximize an up-front charitable tax deduction, with the dollars flowing to your organization and other charities over a period of years.
Forever changed? Why hybrid fundraisers may be here to stay
Though the pandemic and its accompanying restrictions have eased, many innovations from that time have a bright and beneficial future. This is especially true when considering ways to build your endowment at the community foundation.
Take hybrid-style fundraisers, for example. Though mail and digital campaigns had long been used to complement or even substitute for in-person events, the simultaneous execution of online and offline events was hardly a pre-pandemic consideration. Yet, first virtual, and then hybrid events, soon became a necessity.
What’s more, many donors enjoyed the hybrid setup. It alleviated fears about in-person attendance while providing a sense of belonging through participation. This was especially true for legacy and well-intentioned donors with limited mobility or other means to attend a traditional-style event, not to mention the near-infinite reach of digital. And while “annual” events make for nice one-time gifts, hybrid events with their digital capabilities offer donors new opportunities to make automatically recurring gifts.
For these and other reasons, hybrid-style events quickly gained speed as a way to capture or maintain anticipated revenue. Just 12 months into the pandemic—in April 2021—studies showed that more than twice the number of surveyed respondents who’d planned to hold a hybrid event in 2020 anticipated doing so in 2021. A year later, in April 2022—and amidst a slow-growing return to in-person events—21% of respondents were planning for a hybrid option, evidencing its staying power and relevance.
The hybrid option has new importance as high inflation pushes up the price, and potentially compresses the margins, of in-person events. These same price pressures are increasing the burden on those in need. Fortunately, many donors recognize this confluence of circumstances and remain willing to help.
As you consider the ways your organization can accomplish its 2023 goals, keep these tips in mind when speaking to donors or prospects:
First, stay in touch with the community foundation team. We speak daily with donors who have their own goals, and they appreciate creatively delivered solutions. For donors expressing concerns in light of the current economy, planned giving commitments like bequests and charitable remainder trusts may be the answer. The community foundation can collaborate with your team to structure and facilitate those gifts.
Second, gifts of highly appreciated stock, whether in public or privately-held companies, remain tax-efficient for the donor and beneficial to your organization’s endowment fund. Not all stocks are down (with January 2023 indices up!) and we can help you structure these gifts.
Third, speak to both your short-term and long-term needs. If anything, the economy is cyclical. While quick and hoped-for relief is on the minds of many, longer-term needs will always be on the horizon. Thus, there is a the need for ample reserves so as not to turn away people in need. Accordingly, the community foundation can facilitate gift-making directly to your endowment fund by donors.
Lastly, re-focus on high-net-worth donors. Despite the economy’s strong recovery from the Great Recession of 2008-2010, research points to fewer donors, but larger donations. Taking advantage of this “new normal” will require nurturing and building relationships with the most impactful donors.
And by layering in hybrid events, your endowment fund can benefit from both high-touch and high-reach fundraising efforts.
This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.