When Is the Time to Start an Endowment?

endowmentBy Deborah K. Polivy, Ph.D.

I was leading a workshop entitled, “Are You and Your Donors Ready to Talk About Endowment? Understanding Annual, Capital and Endowment Gifts,” when one of the participants asked, “How do we know when we are ready to start an endowment program?”

That question was followed up with, “How do we begin” and later in the evening someone asked, “How do we set a goal? How much can we project to raise in one or two years?” These were all excellent questions, and if you, too, are thinking about them, my replies were as follows.

When Is the Time to Start an Endowment?

It is time to start an endowment development effort when you have lots of donors who have donated to your organization in an ongoing way for at least 10 years and preferably more. Endowment readiness is measured by a population of committed donors who have demonstrated their loyalty by their continuous support of the organization. Gift size is not an important variable which probably is counterintuitive since the subject is money and fundraising.

For those of you who have read my articles and even my book, Donor Cultivation and the Donor Lifecycle Map: A New Framework for Fundraising (Wiley, 2014), you will recollect that I use the Donor Lifecycle Map as my primary framework for creating a strategic plan for resource development. Using that model, then readiness would be measured by the size of the sector entitled “multi-year active” or those people who have been donating 3 years or more. In other words, if after an analysis of donors, 50% are multi-year active, as illustrated below, then that is the primary indicator that an organization is ready to address endowment building.

A second factor required to begin is board commitment to the process and willingness to dedicate resources to it. So the first step in determining readiness is donor analysis and once a potential pool of donors is identified, then a mandate from the board to move forward is next.

The Donor Lifecycle Map

How Do We Start an Endowment Program?

The first step is by crafting a strategic plan for endowment development. While a draft is created by development and maybe even executive staff, depending on how an organization is managed, the development committee and board must be involved in the process and ultimately approve it in order that they be thoroughly invested in it.

What are the topics that must be addressed in the strategic plan? The first is target population, and while we have identified a quantity of multi-year active donors, these need to be narrowed down to those who are veritable prospects measured by their constancy of giving. For example, some kind of cutoff has to be determined, e.g. how many people do we actually have in terms of ongoing donors over “x” amount of years, for example 10, 15 or maybe 25?

Using the Donor Lifecycle Map it is clear that major and stretch gift donors (those who have stated that they are “stretching” to make their annual gift) are also potential donors for “ultimate gifts” or endowment contributions. As a matter of fact, the specific challenge for any organization is “moving” those contributors in the major/stretch gift segment into the ultimate gift sector.

So once the target population is identified, then the question becomes, what tools do we have or need to develop in order to move multi-year active and major/stretch gift donors to ultimate or endowment contributors? The question also has to be asked – are the tools the same for each of those two segments of the target population?

In order to obtain ultimate gift donors, I recommend that a series of personal and nonpersonal tools need to be identified and deployed in relation to the target population. Personal tools are used to communicate with the donor and learn about him or her. Such tools include anything that requires person to person communication and especially conversation – a telephone call and/or visit to a home or place of business or a meeting at the nonprofit itself. Of course it goes without saying that all written exchanges are personalized.

The second set of tools that can be used to move potential endowment or ultimate gift donors are nonpersonal and directed to all prospects – not particular individuals. These include marketing pieces describing the endowment program, reminders in all written materials to include a bequest in a will or trust, and specific articles in newsletters, brochures and annual reports about donors, the form of their gift (outright, restricted, current or deferred) and the reasons for it. Individual stories recounting how and why a gift is made are nonpersonal tools because they are distributed to all potential donors and used as a model to inspire others to participate in the endowment building effort. On the other hand the process for obtaining the personal accounts, usually interviews, as well as the recognition awarded to the individual makes these same stories personal tools.

Endowment policies have to be proposed and agreed upon by a development committee and board. Is the organization capable of managing an endowment program, especially deferred gifts that require some kind annuity payment to an individual, or should a third-party such as a community foundation be used? And conversations have to be held with the latter in order to determine its policies and procedures for managing agency funds and whether these are acceptable to the organization launching the new program.

A major policy that needs to be addressed is how will unrestricted bequests, those estate gifts that are not directed for any particular use, be handled? Will these be put into an endowment fund or will they be used to defer deficits or to address other current issues facing an organization? If an organization is serious about building an endowment, then it must wrestle very seriously with the issue of unrestricted bequests. If they are not going to be put into a permanent endowment, then the organization is probably not ready to launch a full fledged program.

Recognition and payment policies must be established before any endowment effort begins. How will individuals be publicly acknowledged for their gifts? And what about minimum gift size for creating a named endowment fund? Many organizations maintain a $10,000 minimum to put a name on a fund, e.g. the Deborah Kaplan Polivy Endowment Fund, but the amount does not necessarily have to be paid in one year. So timetable requirements must be put in place. In a similar vein, a policy has to be created in relation to designations. Is there a minimum amount for restricting the use of a fund especially since the primary goal of any endowment is to ensure that there are unrestricted monies available for the future of the organization however it evolves.

If an organization is going to manage its own deferred gifts, especially Charitable Gift Annuities (CGAs), which require a payout to a donor no matter the return on the investment of the donated funds, will there be limits to the size of such gifts or the number allowed from each donor/beneficiary in order to control risk? Remember, unlike a Charitable Remainder Trust, a Charitable Gift Annuity is a contract between the organization and the donor and if the investment goes “belly up,” the annuity payment still must be paid. This is a serious issue for those organizations just starting out on a deferred giving program. I have worked with organizations that have limited CGA size to $50,000 and not more than 2 or 3 per beneficiary all in order to control risk. But I am aware of organizations that will contract for $1,000,000 CGAs.

The timeline for launching the program must be included in the strategic plan. Responsibilities of board and staff for ensuring the success of the program must be outlined and the question of resources has to be addressed. What will be the budget for the program including staffing and marketing materials? Training the board and staff on endowment development – what is it, what are the different gifting mechanisms, who is the appropriate population for each kind of gift, etc. – has to be included in the strategic plan and budget.

Once the strategic plan is drafted and the target population is identified, it may be decided that in order to maximize resources, especially those related to personal tools, priorities and a timeline should be included. Thus, it might be necessary to determine which prospects are addressed and in what order. For example, data have proven that women are the most likely deferred gift donors while men are more likely to make outright gifts and so the strategy may be different for each of these populations.

Of course older people are a natural priority for endowment cultivation because they are less likely to change the beneficiaries of an estate plan while younger prospects, unless they make an outright gift, could change their interests and allegiances over time. However, it is also important to maintain attention on the entire target population and thus special nonpersonal cultivation tools may be used such as recognition programs for long term donors, e.g. honorary societies for cumulative giving or years of giving as opposed to gift size, with events for these particular contributors.

And what is the final component of the strategic planning process? Identifying the resources to get it started once a budget is completed. Often there is a major donor who believes in the organization and understands the necessity of endowment building. Sometimes such individuals can be convinced to make a three or five year gift to launch the effort. In this example, part of a contribution could be used to pay initial expenses while the remaining amount could be deposited in the endowment and used for the initial challenge. Or if one donor cannot be identified, maybe a group could be persuaded to come together and support the initial effort. Such models have been frequently and successfully used in the nonprofit arena.

What should our initial goal be?

There was a persistent question at the workshop? How much money can we tell our board that we shall raise in the first year or two of operation?

Endowment development is interesting. Unlike other forms of fundraising, there is really no answer to this question. For example, if the organization is successful in persuading individuals to include the organization as a beneficiary of a bequest, it could be years until these commitments are realized. If deferred gifts such as Charitable Remainder Trusts and Charitable Gift Annuities are incorporated into the program, then the principal from these contributions might not be available to the organization until some time in the future.

The “key” to the response to this question is the success of the organization in obtaining outright endowment funds – those which are donated and paid for while the donor is alive. The organization does not have to wait until death of a beneficiary/contributor to realize the gift. Success in obtaining such gifts is dependent upon board and staff training as well as commitment to the process. In addition, the training must concentrate on what is called the “integrated” ask – a request for ongoing annual commitments as well as endowment support. And as anyone will advise, it starts with the board.

In other words, projecting or establishing a financial goal is just not appropriate in relation to endowment fundraising. Some people like to think in terms of endowment campaigns or challenge grants. These could inspire support of a new effort, but remember that endowment development has no end in its timeframe like a multi-year capital campaign does. The very nature or concept of endowment building is ongoing. At the same time, with a little personal cultivation, an organization could be surprised to find itself as a beneficiary of multi-million dollar estate!

In sum, launching an endowment program is not a quick decision. There is a great deal of analysis and planning that must be completed before any such effort is begun. The board must be involved in the process right from the very beginning so that the program is ensured of success over time and quick results do not become either the measure of success or in case of the opposite, a reason for “pulling the plug.” The board has to understand that this is a long term effort that will achieve success and benefit the organization over time. It is not a quick process; patience is the action word! At the same time, it is the role of every board to address its fiduciary responsibilities, and endowment development is an important element for ensuring a viable future for any organization.

Deborah Kaplan Polivy, Ph.D., is a fund development consultant and the author of Donor Cultivation and the Donor Lifecycle Map: A New Framework for Fundraising, (Wiley, 2014). Her next book, The Donor Lifecycle Map: A Model for Fundraising Success will be published this winter by Charity Channel Press. Her website is www.deborahpolivy.com.