Nonprofit Endowments: What They Are and How to Set One Up

An endowment is a fund a nonprofit invests and keeps, spending only part of the return each year, typically 4% to 5%, so that the fund supports the organization indefinitely. To set one up, the board adopts an endowment policy covering what the fund is for, how it is invested and how much may be spent each year, opens a separate investment account (or an agency fund at a community foundation), and then raises gifts specifically for it, often through bequests. Endowments are less common than people assume: in IRS Form 990 data, only 22% of charities spending under $1 million a year hold any invested assets at all. This page explains the three kinds of endowment, the law that governs spending, what an endowment actually produces, and the steps to start one.

The three kinds of endowment

The distinction is who imposed the restriction. A permanent or term endowment is created by a donor, and the organization cannot simply decide to spend the principal. A board-designated or quasi-endowment is the board’s own decision about money it was free to spend, which it can reverse. Accounting standards since FASB’s ASU 2016-14 report donor-restricted endowments as net assets with donor restrictions and board-designated funds as net assets without donor restrictions; our net assets explainer covers the two classes.

How many charities have the money for one

Form 990 asks whether an organization holds donor-restricted endowments, but in the IRS Statistics of Income extract that answer is almost never recorded, so we measured what can be measured: who holds invested assets at all, how large they are, and who reports donor-restricted net assets, which include endowments along with other restricted gifts.

Most charities under $5 million in spending hold no investments, and the median investments of those that do are around half a million to a million dollars. Fewer than one in five holds investments worth a year of its spending. An endowment is a long-term structure for organizations that have their reserves in order first; the cash reserves data shows most do not.

What an endowment produces

The 2025 NACUBO-Commonfund Study of Endowments, covering 657 colleges and universities for the year to June 2025, found an average effective spending rate of 4.9% and an average one-year return of 10.9%. Those are large institutional endowments with professional investment staff, and a median size of $253.6 million, so treat them as the upper end. For a community organization, the useful number is the table above: a $500,000 endowment produces roughly $20,000 to $25,000 a year. That is valuable, permanent money, and it is also why an endowment campaign rarely solves a current operating gap.

The law: UPMIFA

Donor-restricted endowments are governed in most states by the Uniform Prudent Management of Institutional Funds Act. According to the Uniform Law Commission, it has been enacted in 49 states, the District of Columbia and the US Virgin Islands; Pennsylvania and Puerto Rico have not enacted it. UPMIFA lets the board spend what is prudent from an endowment fund, considering factors including the fund’s duration and preservation, the purposes of the organization and the fund, economic conditions, inflation, expected returns, other resources and the investment policy, rather than requiring it to preserve a fixed historic value. A few states, including California, also adopted an optional provision under which spending more than 7% of a fund’s value in a year creates a rebuttable presumption of imprudence. Check your state’s version, and the gift instrument, which overrides the default rules.

How to set up an endowment fund

1. Get reserves in place first. An organization without three to six months of operating reserves should build those before asking donors for permanent gifts.
2. Decide the route. Your own fund, an agency fund at a community foundation, or a board-designated fund first, compared below.
3. Adopt an endowment policy. Purpose, which gifts go into the endowment, the spending rule, the investment policy, who oversees it, and how donor restrictions are recorded.
4. Set the spending rule. Most use a percentage, commonly 4% to 5%, of the fund’s average value over the previous twelve quarters, which smooths out market swings.
5. Open the account and keep it separate. A dedicated investment account, with gift agreements filed for every restricted gift; banks for nonprofits covers operating accounts, and an investment adviser or the community foundation handles the rest.
6. Write gift agreements. Every endowed gift needs a written agreement stating its purpose, that it is to be held as an endowment, and what happens if the purpose becomes impossible.
7. Raise for it deliberately. Bequests and other planned gifts are the most common source; outright gifts of appreciated stock are another. Our planned giving guide covers the first and accepting stock donations the second.
8. Report it. Organizations filing Form 990 that hold endowments complete Schedule D, Part V.

Your own fund or a community foundation

For most organizations below a few million dollars in spending, an agency fund at a local community foundation is the sensible first endowment. The foundation invests the money with its own pooled assets, handles the accounting and pays out an annual distribution, and donors can give to it with the foundation’s credibility behind them. The trade-off is control and fees, and money you transfer to the foundation may be shown on your books differently from an investment you hold yourself; ask your auditor how it will be reported. Call your community foundation and ask for its agency fund minimum, fee schedule and fund agreement.

What Schedule D, Part V asks

Schedule D, Part V, which applies when Form 990 Part IV line 10 is answered yes, asks for a five-year roll-forward of endowment funds: beginning balance, contributions, net investment earnings and gains or losses, grants or scholarships, other expenditures, administrative expenses and ending balance. It asks what share of the year-end balance is board-designated, permanent and term, whether endowment funds are held by related or unrelated organizations (which is where a community foundation agency fund appears), and the intended uses. If your records cannot produce those lines, the endowment is not yet set up properly. Your auditor will expect the same detail.

A sample endowment policy outline

• Purpose. “The endowment exists to provide permanent support for [mission], beyond the reach of any single year’s budget.”
• Gifts accepted. Which gifts are added to the endowment: donor-designated gifts, bequests unless otherwise directed, and board transfers.
• Spending rule. “Annual distributions will not exceed [4]% of the fund’s average market value over the previous twelve quarters, calculated at [date].”
• Investment objective. “To preserve the purchasing power of the fund after spending and fees, over rolling ten-year periods,” with an asset allocation range.
• Oversight. The finance or investment committee, how often it reviews the fund, and who may move money.
• Donor restrictions. How each restricted fund is tracked, and how purposes are reviewed if they become impossible.
• Review. The board reviews the policy every [two] years.

Keep the policy with your other governance documents; the nonprofit policies templates include the internal controls that sit alongside it.

Finding the endowment gifts already in your file

Endowment money usually arrives as bequests from long-standing donors, and the signals that someone is considering one are often already in your records: a donor who has given every year for a decade, a note from a conversation mentioning a will, a request for your legal name and EIN. Those signals sit in notes and correspondence where nobody looks.

Gratefully, an AI donor intelligence and stewardship platform built for nonprofits, reads your CRM, notes and uploaded documents and flags these as part of what it calls hidden revenue, including planned gift signals and lapsed major donors with strong affinity, with the record each signal came from. It is free for one person and $79 a month billed annually for Essential. It is wrong for anything to do with managing the endowment itself, such as investments, spending calculations or Schedule D, which belong with your accountant and investment adviser; for organizations without years of donor history and notes for it to read; and for anyone who needs an issued SOC 2 Type II report, which the company expects in the fourth quarter of 2026.

How this page was put together

The charity figures are our analysis of the IRS Statistics of Income Form 990 extract, 256,539 501(c)(3) organizations with at least $25,000 in expenses; invested assets are Part X lines 11 and 12, and donor-restricted net assets Part X line 28. Script: bin/analyse_soi_endowment.py. UPMIFA enactment is from the Uniform Law Commission’s enactment map; definitions from FASB ASU 2016-14; Schedule D from the current form and instructions; spending and returns from the 2025 NACUBO-Commonfund Study of Endowments; all read on 13 October 2026. This page explains general rules and is not legal, investment or accounting advice.

This is reference information, not legal or tax advice. Rules vary by state and change over time. For a decision that carries real consequences, check the current text at irs.gov or your state registry, and talk to a nonprofit attorney or CPA.