Introduction
A thoughtfully constructed endowment or strategic reserve is one of the most powerful tools a nonprofit can have. It serves as a permanent financial foundation, offering ongoing support for operations, programs, or capital needs, and demonstrating long-term fiscal responsibility to donors and stakeholders.
But building and sustaining an endowment doesn’t happen overnight. It requires deliberate strategy, disciplined investment management, and a strong partnership between the board, staff, and advisors.
While endowments, reserves and foundations are all long term strategic pools of capital, they have important differences
What is an Endowment?
An endowment is a pool of assets held by a nonprofit organization that is invested for the long term to support the organization’s mission in a sustainable and ongoing way. Typically, endowment funds are donor-restricted, meaning the original principal is intended to be maintained in perpetuity while a portion of investment earnings is appropriated annually to support programs, operations, scholarships, or other designated purposes.
What is a Reserve?
A reserve is a portion of a nonprofit’s designated unrestricted funds set aside to support financial stability, manage risk, and address unexpected expenses or revenue disruptions. Unlike an endowment, reserves are not intended to be permanent and are typically more liquid and accessible.
They may be used for:
- Cash-flow management
- Economic downturns or emergencies
- Timing gaps in grants or fundraising
- Planned capital or strategic initiatives
Best practice guidance from the Council on Nonprofits emphasizes that reserves are a key component of responsible financial management and should be governed by a board-approved reserve policy that defines:
- Target reserve levels
- Appropriate uses
- Replenishment strategies
Reserves support resilience and operational continuity, while endowments support long-term mission sustainability.
What is a Foundation?
A public foundation is a legally organized charitable entity established to support charitable purposes, either by operating programs directly or indirectly.
Many nonprofits create affiliated foundations to:
- Accept and manage endowments, major gifts and planned gifts
- Provide long-term stewardship of restricted assets in a separate legal entity, insulating them from legal risk.
- Separate fundraising and investment activities from daily operations
Foundations are commonly governed by separate boards, which may overlap with the affiliated nonprofit board and must comply with applicable tax, reporting, and payout requirements, as outlined by the Council on Foundations and the IRS.
Why Endowments, Foundations and Reserves Matter
A well structured Foundation, Reserve or Endowment can:
- Provide financial stability in times of uncertainty
- Allow for strategic long-term planning
- Support program expansion or innovation
- Reduce dependence on unpredictable fundraising or grant cycles
- Encourage legacy giving from donors who want their impact to endure
Endowments also signal organizational maturity and permanence, attracting confidence from major donors and institutions. To ensure sustainability, endowments should be supported by sound governance policies, like endowment policies, gift acceptance policies and investment policy statements.
Key Components of a Sustainable Endowment Strategy
1. Clear Purpose and Use
Define the mission of the endowment: is it for general operating support, specific programs, or scholarships? This clarity helps guide investment policy and spending decisions.
2. Donor Education and Engagement
Communicate the importance of the endowment to donors. Let them know how their legacy gifts will benefit future generations. Tools like planned giving campaigns and named fund opportunities can be especially effective.
3. Robust Investment Policy
Your endowment should be governed by a formal Investment Policy Statement (IPS) that includes:
- Spending policy
- Risk tolerance
- Asset allocation targets
- Rebalancing and manager selection criteria
Farther's IPS guide outlines these components in detail.
4. Prudent Spending Rules
A sustainable endowment requires careful balance between current use and future preservation. Common spending models include:
- Fixed Spending Policy (3%-5% annually)
- Hybrid models that blend inflation adjustments and fixed percentages
UPMIFA and Spending Limits
(a) Subject to the intent of a donor expressed in the gift instrument [and to subsection (d)], an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established. Unless stated otherwise in the gift instrument, the assets in an endowment fund are donor-restricted assets until appropriated for expenditure by the institution. In making a determination to appropriate or accumulate, the institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and shall consider, if relevant, the following seven factors (the “7 Spending Factors”):
- the duration and preservation of the endowment fund;
- the purposes of the institution and the endowment fund;
- general economic conditions;
- the possible effect of inflation or deflation;
- the expected total return from income and the appreciation of investments;
- other resources of the institution; and
- the investment policy of the institution.
(b) To limit the authority to appropriate for expenditure or accumulate under subsection (a), a gift instrument must specifically state the limitation.
(c) Terms in a gift instrument designating a gift as an endowment, or a direction or authorization in the gift instrument to use only “income”, “interest”, “dividends”, or “rents, issues, or profits”, or “to preserve the principal intact”, or words of similar import:
- create an endowment fund of permanent duration unless other language in the gift instrument limits the duration or purpose of the fund; and
- do not otherwise limit the authority to appropriate for expenditure or accumulate.
[(d) The appropriation for expenditure in any year of an amount greater than seven percent of the fair market value of an endowment fund, calculated on the basis of market values determined at least quarterly and averaged over a period of not less than three years immediately preceding the year in which the appropriation for expenditure is made, creates a rebuttable presumption of imprudence. For an endowment fund in existence for fewer than three years, the fair market value of the endowment fund must be calculated for the period the endowment fund has been in existence.]
5. Transparent Governance
Establish an investment committee with fiduciary responsibility for oversight. Include internal and external experts, and ensure regular performance reporting to the board.
The Board maintains ultimate fiduciary responsibility for oversight of the endowment.
6. How Long Term Structures Can Work Together
While the terms are sometimes used interchangeably, they serve distinct but complementary roles:
- Reserves provide short- to intermediate-term financial stability
- Endowments provide permanent, long-term mission support
- Foundations provide legal and governance structures to steward charitable assets
Together or separately, they form the financial backbone of a mature, resilient nonprofit organization.
7. Planned Giving Infrastructure
Most endowments grow through major and legacy gifts, not operating surplus. It takes time to build out a major gifts program, but can be transformative to an organization's donor development strategies. As you build out your planned giving program there are a number of considerations that can help the organization and the donor find an intersection between purpose, faith and capacity to give.
- Bequests can be transformational. Create and offer bequest language and make legacy giving part of donor conversations
- Bequests can be hard to track and maintain. Consider developing a Legacy Society to drive and track bequests, this helps donors stay involved, and leads to more consistent and increasing gifts.
- Involve the next generation in bequest conversations for awareness, consistency and transparency and to avoid potential conflicts (that can occur in probate).
- Leverage your CRM to track and understand your donors’ values, capacities to give and history of past gifts
- Educate donors on Qualified Charitable Distributions (QCDs), Donor Advised Funds (DAFs), Stock and Crypto
- Consider adopting software like Every.org, Chariot or GivingBlock to facilitate non-cash asset donations digitally through your website
- Partner with advisors and wealth managers like Farther to facilitate constructive conversations around non-cash gifts, charitable gift annuities and trust structures with larger donors.
📌 According to Giving USA, over 9% of all giving comes through bequests, a critical source of endowment capital. (source)
Case Example: Building for Generations
Midland Youth Services, a regional nonprofit in the Midwest, began with a $200,000 donor-restricted scholarship endowment. With a structured fundraising campaign and proper IPS governance and spending policy, they grew it to over $3 million in ten years. This endowment now funds full scholarships for 12 youth annually, while continuing to grow at a modest 5% net return.
The Role of Your Advisor
At Farther, we help nonprofits:
- Draft and review governance policies like endowment, gift acceptance and investment policy statements
- Start and grow sustainable endowments, foundations and reserves.
- Model different cash flow and spending strategies
- Manage and report on performance transparently
- Partner with fundraising teams to integrate planned giving strategies
- Educate boards, development staff and donors on the “why” behind endowments, reserves and foundations
Conclusion
A sustainable endowment is more than a financial asset, it’s a legacy. With the right structure and support, your endowment can fuel your mission not just this year, but for decades to come.
If you’re ready to build or grow your endowment. Foundation or Reserve, Farther can help you turn vision into value, responsibly, transparently, and in alignment with your mission.
Sources & Additional Reading
- Council on Foundations: Endowment and Foundation FAQs
- Giving USA 2023 Report: Legacy Giving Trends
- National Association of College and University Business Officers (NACUBO): Endowment Spending Policies
- NEO Law Group: NonProfit Law Blog: Spending From an Endowment
- Farther: Investment Policy Statement Guide (2025)
