Charitable Endowments and How They Work
Most people first hear the word in a news story about a university sitting on billions of dollars, which makes an endowment sound like something that belongs to other people somewhere else. The truth is that endowments can play an important role in supporting specific causes and the terms of their use can be flexible.
An endowment is a charitable fund that gets invested and is never completely spent down so that the funds and returns can support specific charities, churches, programs, or even specific geographies.
Some endowments are permanent and some may exist for a specific number of years. Most endowments are established to provide consistent support over a defined period of time or in perpetuity. They are designed to follow a specific spending policy, establishing a fixed rate of distribution. Each year, a set share of its value, often 4% to 5%, is paid out to the cause it was created for. Everything else stays invested and keeps growing.
Since 1998, the Community Foundation of Northwest Georgia has helped churches, scholarships, food pantries, and other causes sustain their impact and mission through this powerful charitable tool. Today, those funds are still supporting local entities who planned for tomorrow, today.
They set money aside for their mission, often inviting supporters to add to the endowment, and then invested it for the long term so that each year a portion funds their mission but the funds continue growing. Endowments are a way to multiply your impact and sustain your mission.
What is an endowment?
An endowment is a charitable fund that is invested for the long term, with a portion used each year to support a specific purpose or field of interest.
The easiest way to picture it is a piece of farmland. You don't sell the land to cover this year's bills. You work it, take the harvest, and the land is still there next season. An endowment works the same way, with investments instead of acreage.
What gets spent is the annual distribution, a slice of the fund's value handed to whatever purpose the fund was built to serve: a church's roof, a nursing scholarship, a shelter's operational budget.
How are endowments structured?
The way in which the endowment is structured can vary based on needs and donor interests.
| The decision | Your options |
|---|---|
| How long the fund lasts | Permanently, or for a set period such as 10 or 20 years |
| How the annual payout is figured | Earnings only, or a fixed percentage (usually 4% to 5%) under a spending policy |
| What the payout supports | A field of interest, or a specific church, nonprofit, or program |
Field of Interest Endowments: These endowments are able to devote their distributions to specific areas of interest, like children's programming, or parks, or programs that work with the arts, or the elderly. Further guidance can align annual distributions with specific objectives within the identified category.
Charity or Project-Specific Endowments: These endowments can provide recurring support to specific nonprofits, or other tax qualified organizations like churches. This type of endowment can also support programs like scholarships and educational grants.
In nearly all cases, endowments can provide consistent and recurring income to causes and projects that align with the specific interests of the donor.
How does an endowment work, year to year?
Each year, the fund pays out a portion of its value under a written spending policy, and the remainder stays invested.
As gifts come in, they are invested in a way that aligns with the specific objectives of the donor. In some cases that could include investments that seek maximum growth for Funds that exist to make annual distributions in perpetuity, or in other cases, invested in a way that assures preservation of the original gift and distribution of the earnings only. Other endowments can be structured so they distribute all of their assets over a certain period, like 10 years or 20 years. The portfolio earns dividends, interest, and gains.
Two ways to figure the annual payout
All endowments have a spending policy which provides guidance related to annual distributions. Permanent Endowments distribute a portion of their assets annually. The manner in which this is calculated can differ depending on the project.
Some endowments distribute only earnings, with the original gift being preserved. This is wonderful during years when investment returns are positive, but can be challenging when market returns are negative.
Some endowments rely on a specific Spending Policy (usually 4%-5% of the Fund's value) and make distributions annually whether investment returns are positive or negative.
The written endowment spending policy sets the payout. Whatever the fund earns above that amount stays in and compounds over time. Prudent investment maintains the Fund's charitable capacity and often protects the assets from inflation.
At a 4.5% distribution rate, here is what that looks like in dollars:
| Fund size | Approximate annual distribution |
|---|---|
| $25,000 | $1,125 |
| $50,000 | $2,250 |
| $100,000 | $4,500 |
| $250,000 | $11,250 |
A $25,000 endowed gift does not buy a building. It starts by consistently buying $1,125 a year. Then, as the invested funds grow, the future distribution grows as well.
Historically, given prudent investment, most endowments can sustain annual distributions of 4%-5% in perpetuity, even when investment returns are down. The 4% to 5% range reflects long practice across the sector. In fiscal year 2025, the 657 colleges and universities in the NACUBO-Commonfund Study of Endowments reported an average effective spending rate of 4.9%. Small church endowments and billion-dollar college and university endowments run on the same math.
Endowments are also governed by legal requirements. Georgia adopted the Uniform Prudent Management of Institutional Funds Act, effective July 1, 2008. UPMIFA requires the people managing a charitable fund to spend prudently, weigh inflation and the fund's specific purpose, and honor what the donor originally asked for.
Endowment or outright gift: what is the difference?
An outright gift is spent now. An endowed gift is invested and spent a little at a time, over many years or permanently.
| Outright gift | Endowed gift | |
|---|---|---|
| When the money is used | Right away | A portion each year, permanently or over a specific time period |
| Best for | An urgent need, a building project, this year's budget | Long-term financial stability, a named legacy |
| Impact of $50,000 | $50,000 once | Roughly $2,250 a year, indefinitely or a larger amount over a specific number of years |
| Tax treatment | Charitable deduction in the year of the gift | Charitable deduction in the year of the gift |
| Who benefits | The organization or cause, today | The organization or cause, today and in the future |
A church that needs a new HVAC unit this fall may want to accept the outright gift. A church that wants to fund its youth ministry in 2046 could use an endowment for a more sustainable source of income.
How much money does it take to create an endowment?
At the Community Foundation of Northwest Georgia, we can help you establish an endowment fund with $25,000 or more. In contemplating whether an endowment is the best vehicle, a rule of thumb is that an endowment will typically generate 4%-5% a year.
A great example would be a scholarship fund. If the goal is to distribute approximately $1,125 a year, a typical endowment would need $25,000. If the goal is to distribute approximately $5,000 a year, a typical endowment would need $100,000.
A fund can grow over several years, be built through gifts from multiple families, or be funded through a will or estate plan.
You don't need millions to leave a legacy. You need a purpose worth funding and a plan for getting there.
Can a ministry have a church endowment fund?
Yes, and many churches and small nonprofits already do. Several churches across Northwest Georgia partner with the Community Foundation of Northwest Georgia to administer all or part of their endowments.
For most small and mid-sized organizations, the hard part starts after the money arrives. Suddenly, there are separate accounts to manage, investment policies to follow, restricted gifts to track, receipts and donor records to maintain, and reports to prepare for the board. That can be a heavy load for a congregation, especially when you want your pastors and leaders focused on the ministry.
Partnering with us allows your organization to have an endowment without having to manage all of the details on your own. We provide the administrative support and manage the charitable assets, giving churches and nonprofits a low-cost, one-stop place to handle the financial side of an endowment.
Your board sets the purpose of the endowment. We handle oversight and strategy in a framework open enough to customize for each organization, rather than forcing it into one mold.
Some pastors argue that a large endowment lets a congregation stop giving. J. Clif Christopher, founder and CEO of Horizons Stewardship, put it well in Leading Ideas: endowments can be your master or your servant. The critical difference is the policy you adopt before the first gift arrives.
So write the policy first. Name an endowment committee. And decide in advance what the money is for, so the decision is never made in a panic.
We can help during all phases of endowment development and management.
Who invests the money, and who decides how much gets given away?
An endowment isn't controlled by any one person, including the donor. It operates within a structure designed to protect the money and the donor's intended purpose over time.
Endowed assets held at our Foundation are invested for the long term under the oversight of our Investment Committee and our Board of Directors. We work with outside experts to assure appropriate protections and stewardship. We are not an investment manager. Instead, our role is administration, oversight, legal compliance, and strategy for the charitable assets in our care.
The spending policy sets the payout, not anyone's judgment in a given year. That protects the fund from a board that wants to raid it in a hard year or from a board that wants to over-distribute in a good one. Some states even adopted an optional UPMIFA provision presuming that spending above 7% in a year is imprudent.
The donors decide what the endowment is created to support and that purpose stays with the fund for the long term, and we make sure it is honored.
What happens to the fund after I am gone?
Nothing changes, which is one of the greatest advantages of an endowment. An endowment provides a durable set of instructions for the use of endowment proceeds, now and in the future.
The endowed fund agreement you sign is what governs the fund after your death, which is why the language in it matters more than almost anything else you will decide. Your fund agreement names the purpose, who may advise the fund next, and what happens if that purpose ever becomes impossible to carry out. Families often name children or grandchildren as successor advisors, which turns a fund into a standing reason for the next generation to talk about what the family cares about.
And if the purpose does become impossible, say a program named in a 1998 gift no longer exists, the fund is not stranded. Under these circumstances, we will make sure that the use of any distributions adheres to the original intent of the donor or donors.
Can I add to it over time, or leave money to it in my will?
Many people do both.
An existing endowment fund can receive additional gifts at any time, in any amount, including appreciated stock. If you have held the shares for more than a year, you can generally deduct the full fair market value and skip capital gains tax on the appreciation. Small gifts add up here in a way they rarely do elsewhere, because each additional dollar raises the distribution permanently.
Planned gifts can also benefit an endowment. Naming a fund in your will, or naming it as a beneficiary of an IRA or a life insurance policy, costs you nothing during your lifetime and is frequently the largest single gift a person ever makes. Giving USA 2026 reported that charitable bequests reached $62.19 billion in 2025, up 19.7% over the prior year and the fastest-growing source of charitable giving in the country.
We can work alongside your estate planning attorney and CPA to help you understand your unique situation.
Build something that lasts
An outright gift changes what's possible now. An endowed gift helps shape what's possible for generations.
Maybe you're an individual or family thinking about the legacy you want to leave. Or maybe you're a pastor or board member who wants to build long-term support for a church or nonprofit without taking on the work of managing an endowment alone. We can help with both.
If you'd like to start a conversation about your charitable vision, schedule a conversation with our team today.
Frequently asked questions
Are gifts to an endowment fund tax deductible? Generally yes. A gift to an endowed fund at a public charity is deductible in the year you make it, even though the money goes out over decades. Stock held more than a year lets you deduct fair market value and avoid capital gains tax on the appreciation. Confirm your specific situation with your CPA.
Can an endowment lose money? Yes. An endowment is invested, so its value moves with the markets and can drop below the amount originally contributed during a downturn. That's why spending policies may use a multi-year rolling average and why endowments have a long-term horizon. A down year does not immediately cut the distribution.
What is the difference between an endowment and a donor advised fund? A donor advised fund is flexible and spendable. People contribute, take the deduction, and recommend grants on whatever timeline they like, including the whole balance. An endowment is permanent and distributes only a set percentage each year. Some families use both: a donor advised fund for the impact they want to make today, and an endowment for the legacy they want to leave.
Can a church move an endowment it already manages itself? Yes. A congregation that has outgrown a volunteer-managed fund can move the administration to a community foundation without breaking the endowment or losing the donor restrictions attached to it. The fund keeps its name, its purpose, and its permanence. What changes is who handles the paperwork.
Further reading
The NACUBO-Commonfund Study of Endowments publishes annual spending rates and returns, the sector's benchmark for what endowments earn and distribute.
The Council on Foundations' guidance on accounting for agency endowment funds held at community foundations is the document your treasurer and auditor will want.