The endowment definition clarifies its purpose and importance to make investment decisions. You might have heard of major funds like Harvard endowment, USC investment office or Duke too. Grasping the multiple facets of endowment becomes easier with its definition. To be more specific, endowment is a sum of money or a property that donors provide. In several cases, the fund supports the philanthropic goals of business organizations. Additionally, it can be set up to financially benefit the recipient too.
Endowment is often mistaken as money safely put aside in bank accounts to earn interest. In reality, the capital invested in an endowment fund is permanently restricted. This restriction ensures that the endowment is perpetually invested to earn interest. This post discusses endowment definition in detail, simplifying the term for anyone who is interested in endowments.
What Exactly Is Endowment?
Endowment is a financial asset assigned to a non-profit organization, institution or individual, as a means of ongoing assistance. The endowment definition further describes it as a permanently restricted fund. According to endowment laws, the original investment in the endowment fund is kept intact. This norm allows the fundraisers earn a steady income through continual use of the principal amount. However, the donors can only restrict the use of the gift or endowment, determining how the income will be utilized.
Improve Business Operations
Many business organizations use earnings from endowment funds to improve business operations, launching new programs or fulfilling other organizational needs. In few cases, a percentage of the original investment is permitted to be used too. In that case, the recipients use the interest income as well as the principal capital. Depending on the market rate, the principal to interest ratio changes every year. Of course, understanding endowment definition helps business owners use it appropriately.
The Different Types Of Endowment
The endowment definition specifies the presence of four main types of endowments known as restricted, term, unrestricted and quasi:
- Restricted Endowment: The principal or original investment in restricted endowments must be maintained perpetually. This type of endowment generates income to fulfill the donor specified purposes.
- Term Endowment: The principal can be disbursed only after a specific period of time or at the occurrence of a particular event.
- Unrestricted Endowment: The principal can be used, saved, invested or distributed according to the will of the recipients.
- Quasi Endowment: The quasi endowments are donations, assigned to non-profitable organizations by individuals or institutions. Often, a board designs the terms of the quasi endowment. The principle sum is maintained while the earnings are spent on particular purposes specified by donors. Moreover, the board, which designs its terms, may remove the restrictions if necessary.
Should You Establish An Endowment?
Several reasons influence businesses to establish an endowment. The endowment definition suggests that it allows donors contribute to philanthropic causes. On the contrary, many business owners enhance their public reputation by establishing an endowment. The more obvious reason of setting up endowment is creating an emergency fund to draw from in times of severe financial crisis. Certainly, establishing an endowment can be beneficial to your business in many ways.
Things To Keep In Mind For Endowment
Endowments should be established as a part of your long term financial goals. At the same time, they should support your organizational plans. Additionally, you have to be sure about the purpose of the endowment. The types and terms of an endowment will depend on these considerations. Also, remember that it takes time and effort to set up an endowment.
Endowment For Universities
The most common form of endowment that you are probably familiar with are those that are allotted for universities or colleges. Many wealthy business owners and professionals choose to endow their alma maters with a large sum donation in order to help maintain the school’s education quality and facilities. This often helps secure a spot at the school for future generations interested in obtaining a degree at the institution. These endowments typically fall into one of three categories:
- Financial health endowments
The interest and dividends accrued from these funds pays for a professor’s salary, an individual student’s, or group of students’ tuition. Otherwise, they can be used as the university deems fit. It is up to the individual who endows the university to decide how they would like the money distributed.
The endowment definition can guide in its set up and governance. The donors, recipients and fundraisers all benefit from establishing an endowment. However, strategic planning is required to fully enjoy the benefits of an endowment.