So What Exactly is an Endowment?

by Phil Hanson, President and CEOTruman Heartland Community Foundation

Our annual Community Grants Luncheon for the Foundation is coming up this month on Friday November 16 th . At this luncheon we will be awarding 63 grants to local nonprofits totaling more than $340,000.

These grants where made possible in part by 16 endowed funds at the Foundation that have been entrusted to our board of directors and grants committee to oversee. Many of them where created by generous individuals in our community who made provisions in their estate plan to leave a portion of their assets for charitable purposes utilizing a fund they created at the Foundation.

So, it is very appropriate at this luncheon that we honor our new members of our Heartland Legacy Society who are including a fund at the foundation in their estate plans. This year we will honor 9 new members and now have 141 Heartland Legacy Society Members.

Many people ask “Exactly what is an endowed fund and how does it work”? An endowed fund is designed to last forever. The plan is for the balance in the endowed fund to continue to grow over time even as it is making grants to charities.

Let’s take a simple example of an endowed fund created with $100,000. With a 5% spending policy this fund would grant out $5,000 in the first year. So, assuming the fund has an 8% annual rate of return, it will be able to grant out more than $5,000 in succeeding years since the balance in the fund will continue to grow.

By the 25th year of the fund it will be making annual grants of $9,500 and will have made cumulative grants since year one of $186,000. And the balance in the fund at year 25 will have grown to $190,000. That’s a big impact from a $100,000 charitable investment.

Most spending policies compute the amount using an average balance over several years to factor in the ups and downs of the investment market. So for example, our current spending policy is 5% of the average balance of the fund at year end over the last 3 years.

One objective is to even out the grants from the fund so they are not dramatically cut if we have a down year in the market. And then if there is a large increase in the following year, the 3 year average calculation enables the fund to recover growth lost the

previous year. Again the goal is to enable the endowed fund to last forever and provide stable support for the charitable purposes established by the donor. When properly managed, endowments can be a very powerful charitable giving tool. At our Community Grants luncheon in November, that power will be on display and we are thankful for the generous individuals in our community who made these grants possible.

Phil Hanson is the President and CEO of Truman Heartland Community Foundation. Truman Heartland Community Foundation (THCF) is a 501 (c)(3) public charity committed to improving the communities in and around Eastern Jackson County through cooperation with community members and donors. THCF serves the region with assets of more than $47 million and annual grants surpassing $3 million.