Understanding Endowments: Purpose, Protection, and Stewardship

Endowments are a vital part of how many organizations and universities thrive, yet they’re often misunderstood.

Like many financial instruments meant to identify specific purposes for pools of funds—401ks and 529 plans—endowments have specific ways they can be used. Your retirement account isn’t a giant piggy bank that can be broken open whenever financial needs arise—unless you want to pay significant fees and taxes.

Similarly, endowed funds aren’t a simple savings account for the organization. These funds are built from donor gifts, often given with specific intentions and restrictions and meant to be held in perpetuity. Respecting those intentions is both a legal and ethical obligation.

In this blog post, you’ll get a breakdown of what endowments are and why it’s important for your financial team to understand those obligations to your donors and to your organization’s long-term financial stability.

What Is an Endowment?

An endowment is a financial gift made to an organization where the original donation—the principal—is preserved and invested. The earnings from those investments are then used to support the purpose for which the gift was given, such as scholarships, research, or community programs.

This structure allows the gift to have a lasting impact, supporting the organization not just once, but year after year. At the University of Detroit Jesuit High School and Academy, for example, one donor started an endowed scholarship in his late wife’s name. After sharing the news with his business contacts and friends, the school received more than $400,000 in donations to make sure the scholarship continued for many years.

Why Endowments Matter: Three Core Benefits

Endowments are more than just financial assets—they are cornerstones of sustainability, mission fulfillment, and trust.

1. Financial Stability

Endowments provide a steady, reliable source of income through investment returns. This helps organizations plan for the long term and remain resilient during economic downturns, reducing dependence on unpredictable funding sources like grants or unrestricted donations.

2. Support for Mission-Critical Programs

Earnings from endowments can fund scholarships, research, community outreach, or staff positions that are aligned with the donor’s intent and the organization’s mission. This enables growth and innovation without sacrificing essential services.

3. Donor Confidence and Legacy

A well-managed endowment signals that an organization is financially responsible and future focused. It builds trust with donors, offering them a way to leave a lasting legacy, knowing their gift will continue to make a difference for generations.

The Role of Spending Policies

Organizations establish spending policies to ensure that endowment funds are used wisely. These policies determine how much of the endowment’s earnings can be used each year and are designed to balance current needs with long-term sustainability. Spending policies must be thoughtfully evaluated by the organization’s leadership and board and reviewed each year. They are not just financial tools—they are expressions of institutional values and responsibility.

For example, an organization’s spending policy might say they can only spend 4.5% of the total market value each year—the endowment plus earnings. If the organization spends all of the earnings each year, it risks having nothing left when the market faces a downturn. During such periods, the organization may be forced to dip into the corpus due to the absence of prior savings.

Using the spending policies as a guide, administrators must see themselves as current trustees of these funds. Endowments are meant to be held in perpetuity, serving not just today’s needs but those of future generations. This long-term perspective is essential to preserving the trust of donors and the integrity of the institution.

Legal Protections: UPMIFA

In the United States, endowments are protected primarily under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which has been adopted in some form by all 50 states.

Here are a few key provisions of UPMIFA that apply to organizations with endowments:

• Governance: UPMIFA sets standards for how nonprofits manage and spend endowment funds
• Prudent Spending: Organizations may spend from both the income and, in some cases, the principal—but only if it is prudent, meaning it must support the long-term health of the organization and align with its mission
• Donor Intent: If a donor specifies that the principal must be preserved, that instruction must be strictly followed
• Total Return Approach: UPMIFA encourages a focus on the overall growth of the fund, not just income like interest or dividends

UPMIFA also outlines the consequences of improper spending, including:

• Legal action from state attorneys general or donors
• Loss of donor trust, which can affect future fundraising
• Obligations to repay or restore the misused funds

As an administrator of an endowment, understanding UPMIFA’s legal protections can help you explain the restrictions your organization must follow when using the endowed funds.

Endowments: Stewardship for the Future

Endowments are expressions of trust, vehicles for impact, and investments in the future. Each gift represents a donor’s belief in the mission of an organization and their hope that their contribution will make a lasting difference.

Managing these funds requires more than financial expertise. Proper endowment management demands integrity, foresight, and stewardship. Today’s administrators are caretakers of a legacy that must endure far beyond their tenure. Through prudent spending policies, legal safeguards, and a deep respect for donor intent, organizations can ensure that endowments continue to serve their purpose—not just for today, but for generations to come.

By honoring the past and planning wisely for the future, the true spirit of endowments is upheld: sustainable support for meaningful, mission-driven work.

Looking for a way to simplify your endowment management? Learn how fund accounting software can help you streamline the day-to-day endowment tasks with sub-fund accounting and detailed reporting.