By Jayme F. Moore, CPA,
Vice President & Director
Often times, discussions about endowments may result when a nonprofit organization is approached by a donor who wants to contribute a large gift. Essentially, endowments are donor restricted contributions that are permanent in nature, whereby the principal is invested indefinitely, and the income is restricted for the purpose specified by the donor.
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An endowment helps to support the long-term financial stability of the organization, and donors may prefer this type of restricted donation due to the long-lasting effect and ability to support the organization year after year with the earnings.
Every conversation with a donor should include the question – What is the donor’s intent? Not every donor may want to make such a donation that is permanent in nature. And not every donor may fully understand the legal and accounting requirements and implications of an endowment. If the organization needs the money for immediate or short-term needs, it might be more prudent to work with the donor on a one-time or multi-year unrestricted gift for its general mission, which would allow for budget stability.
It is important to have the donor’s intent in writing whenever possible, so the organization can demonstrate that the donor’s wishes were abided by.
Alternative to a Donor-Restricted Endowment
As an alternative, if large gifts are received without donor restrictions, some governing bodies may designate the funds as quasi-endowments, with the intent to operate like an endowment. This allows for the same impact and long-term financial stability but is more flexible, as the board may un-designate these funds and use the principal if ever needed.
While a board-designated endowment allows for more flexibility, including the ability to invade the principal, organizations should consider following a spending policy. Setting a consistently applied formula and method for draws from the quasi-endowment promotes financial stability. Funding is more predictable, while preserving the principal, so that it functions similarly to a restricted endowment.
Practice Proper Bookkeeping and Reporting
Donor management software can help organizations practice proper bookkeeping and reporting of contributions. There are robust products available that centralize the stored donor data as well as the details for each contribution, including the classification.
This can support the accounting and finance team for regular, timely reconcilement between the development software and the accounting software. Regardless of the size of donation, the accounting for restricted contributions must be in line with the donor’s intention and be tracked in detail to ensure the appropriate use and spending in accordance with the donor’s intentions.
Receipt of large gifts is an exciting opportunity to further your organization’s mission. Understand intent and proper use of the gift. Implement accurate budgeting and reporting requirements and ensure clear communication and understanding with donors. These steps can promote long-term loyalty and support from donors while supporting accurate financial reporting.
If you have any questions about endowment options or how to manage large gifts, speak to your attorney and reach out to the team here at GT Reilly. Ask us about our audit services for nonprofits.
