Part 3:

Endowment Funds

Chapter 8

Deohaeko Support Network
(The Beginning)

The Deohaeko Support Network is a group of 7 families with adult children who have disabilities. They began meeting in each of their homes over meals to discuss alternative living arrangements for their children other than the typical group home or institutional options more commonly available in their communities. Over time, they decided to create their own charitable organization with the purpose of (a) organizing the day-to-day support planning (formal and informal) for their daughters and sons, and (b) securing funds from the federal and provincial governments to build a co-op housing project. They were one of the last groups in Ontario to secure those kinds of funds and they built a 105-unit housing co-op apartment building in Pickering, Ontario in 1994, called the Rougemount Co-Operative.

They have successfully secured some annualised support dollars for their daughters and sons from their provincial government and they commissioned a book (1996) about their hard-fought successes, We Come Bearing Gifts, by Janet Klees, to help other families in similar circumstances. Deohaeko families have come up with a unique way of sharing support dollars among all families, based on varying individual requirements each year. They pool the government funds and decide, as a group, which portion each family will get to meet the projected support needs of each daughter and son. The families then use those dollars to hire support staff as needed. Supporters are generally not shared between families.

At various times throughout the year, a family may request a few more dollars to meet unexpected needs, or they may return unused dollars to the common pot to be used by another individual. Through this give-and-take approach, Deohaeko has a good idea of how many support dollars may be required in the future.

Aside from planning and helping to meet the day-to-day needs of their children, the group turned their attention, in 1998, to the financial future of their children. At that time, the parents were (a) providing countless hours in direct support for their children on principle but also because they only had about 50% of the annual funding they needed for support, (b) constantly lobbying to maintain their current funding, and (c) trying to discover ways to ensure the financial security of their children in the future after the parents are no longer physically able to provide direct support or after the parents die. They estimated that they would need an endowment fund of approximately $5,000,000 to provide annual support dollars of about $300,000 to $350,000.

The families recognized that they must rely on two pre-conditions to prepare for the long-term security of their children:

Financial security that would supplement the ongoing funds their children were receiving through government benefits but never to the point where paid support represented the total care provided (i.e., informal support and care were still of primary importance).

A supportive network of committed people who would be there voluntarily for each son and daughter through support circles of family, friends, neighbours, work colleagues and, of course, members of each other’s support circles.

In researching alternative ways of ensuring their children’s financial stability, they were immensely frustrated by the lack of information available to families in similar circumstances. Banks, trust companies, credit unions and investment firms were either ill equipped or ill informed to advise them. To get even the simplest banking or investment information seemed an exercise in frustration. Using their experience in building the co-op apartment building as a guidepost, they decided to do the research and share their knowledge with other families through the production of this book.

Deohaeko families understand that the endowment is just addressing direct support funding for their children. Each family is also looking at setting up trust funds for their son or daughter to assist them with other aspects of daily living or unexpected support needs.

Chapter 13 provides an update on their efforts.


Chapter 9

What Are Endowment Funds and Are They for Us?

Endowment funds are simply a financial product available through banks, trust companies, credit unions, community foundations and investment firms to allow an organization to contribute cash and other assets into a fund as principle. The principle earns interest and part or all of that interest can be given out while the principle is usually left untouched. The endowment fund is completely separate from operational funds.

Endowment funds appeal to organizations that struggle with yearly fund-raising to have enough funds to continue their mission. Creating an endowment fund for a specific program or for the operations of an organization may minimize or avoid the amount of bake sales, annual fund-raising drives and special events that an organization must participate in each year. These fund raising efforts eat up their pool of volunteers and staff who could be using that time to actually fulfil the mission of the organization. An organization must consider, however, if it has enough time and energy to raise an endowment fund without taking too many resources away from fund-raising that is needed to secure enough money for this and next year’s operations.

Endowment funds are different than the reserve funds that every organization should have when it occasionally has more revenues than expenses. Reserve funds have both the principal and the interest available for any use decided upon by the Board of Directors. Endowment funds usually have only the income (interest on the principle) available to the Board.

Endowment funds make long-term planning possible. They provide a predictable amount of interest income each year.

Before determining if an endowment fund is right for you, it is useful to look at the difference between not-for-profit and charitable organizations. The differences between them may affect your decision to create a fund or not.

Not-For-Profit and Charitable Organizations

The not-for-profit and charitable organizations of Canada have almost 12 million members, and represents about 12% of Canada’s Gross Domestic Product since almost nine percent of the labour force is involved. The organizations we think most of when we think of charities are the hospitals, universities, school boards, churches and disease-specific groups that try to find cures. There are nearly 180,000 not-for-profit and charitable organizations in Canada and we donate over a billion hours of our time to these culture and heritage, professional, recreational, spiritual, trade, volunteer associations, and advocacy organizations.

About 100,000 organizations are considered not-for-profit. The other 80,000 are considered both not-for-profit and charitable organizations. They both must be incorporated and operate under the leadership of a board of directors with no intent to earn a profit. They do not pay income tax but must file special returns and financial statements to Canada Customs and Revenue Agency (formerly Revenue Canada). Not-for-profit organizations do pay taxes on investment income while registered charities do not. Not-for-profit organizations have less accountability to government since they cannot issue income tax receipts to donors and, therefore, can provide non-profit products and services with less administrative and bureaucratic record keeping. For example, where a charity may have to do a means test to see if a client is ‘poor’ enough to receive their charitable service, a not-for-profit organization does not.

Registered charities are able to offer tax credits, through income tax receipts, to their donors. There are basically three types of charities: (1) charitable organizations that carry on specific charitable tasks, (2) public foundations that raise funds and distribute them to one or more other registered charities (e.g., a hospital’s foundation that raises funds for specific programs within the hospital, community foundations), and (3) private foundations set up by families and public community foundations to distribute grants to other registered charities.

Charitable status in Canada is based on an antiquated view of what charity is as defined by the 1601 English law called the Statute of Elizabeth and updated in 1891 by the House of Lords. The latter version categorized charity under four categories, which are still used in Canada today: the relief of poverty; advancement of education; advancement of religion; and a restrictive category of purposes seen as beneficial to the community.

Charities must fulfil their mission through the appropriate use of its resources. They must spend 80% of the amount of funds raised in the previous year for which they issued tax receipts (called the Disbursement Quota. This helps to ensure that most of their funds are used for charitable purposes, that expenses are kept to a reasonable level and that excessive funds are not accumulated. Exceptions to this rule include bequests from wills, gifts from a registered charity, and donors that require the charity to hold the gift for at least 10 years (e.g., money put into an endowment fund).

An extensive, two-year study of the entire volunteer sector was completed by Ed Broadbent’s cross-country panel with the resulting report, Panel on Accountability and Governance recommending an expansion of our definition of what constitutes ‘charity’ with increased accountability through an impartial, arms-length government agency to investigate and deal with fraud and misuse of charitable funds, similar to what is done in Great Britain. The recommendations have yet to result in changes to the registration and investigation of charities.

Pros and Cons of Establishing an Endowment Fund

Endowment funds for not-for-profit and charitable organizations can be an effective way to ensure the long-term financial security of your work. As with all financial decisions, however, there are pros and cons to establishing such a fund.

Pros

The main attraction for small not-for-profit and charitable organizations to create an endowment fund is financial security or even independence. At some point, an endowment fund might have enough accumulated principle and interest to provide an organization with annual operational funding without further fund-raising. This is particularly possible for small organizations that need less than $500,000 in annual funding.

An endowment fund can be sub-divided into several ‘named’ funds so that families, organizations and foundations could contribute a portion of the fund in their name or in honour of someone. Minimum amounts may be set to minimize the administrative costs of tracking many small funds. However, minimum standards might be waved for children and adults with low incomes who have an interest in donating to a fund as a beginning step to life-long contributions to not-for-profit and charitable organizations. (See Chapter 1 for further information on ‘named funds’.)

Cons

The main drawback for small not-for-profit and charitable organizations in creating a fund is that money being raised for the fund might be better spent on fulfilling your mission. For example, if your organization is struggling to have enough operational dollars to help people who are poor meet their daily needs, then putting aside valuable resources to be used in 10 years from now may be inconsistent with your mission to relieve poverty.

Donors may restrict the use of their donation within an endowment fund that may make it more difficult to use the income from the fund for sudden changes in the organization’s mission based on current needs. For example, a donor may contribute to a fund with the restriction that it be used for research. At some future date, however, the Board may decide that pressing current needs will require a diminished amount of research work.

Organizations should accept restricted donations if: (a) the restrictions fit within the organization’s mission, (b) they are non-discriminatory, and (c) include a power-to-vary clauses that permits the Board to reallocate the income from the donation for pressing current needs or if the original restriction of the donation no longer applies (e.g., a donation made to maintain a new support program but that program is later paid for by other, ongoing operational funds).

Many banks and trust companies will only open up an endowment fund if an organization has a minimum of $500,000. Some banks will not open up an endowment fund unless it is larger than $10,000,000.

If you find an institution that will house your fund, you must still determine if the income you can earn outweighs the financial and time costs to create, maintain, manage and fund raise for your endowment fund. The costs may outweigh the benefits for smaller not-for-profit or charitable groups.


Chapter 10

Present and Future Needs

If endowments are a useful tool for your organization, you must begin with an analysis of your present and future financial needs. Using your mission statement, strategic plan (if any), program descriptions, past 3 years accounting statements and future cost projections:

What are your present and projected assets and liabilities?

What are your present and projected yearly financial needs? (Divide this figure by the approximate annual interest rate expected to get the approximate size of the endowment fund you will need. For example, if your annual operational budget is about $100,000 and the expected rate of return on the fund is 5%, after expenses, your will need about a $2,000,000 endowment.)

Are your present needs being met consistently? If so, how are present needs being met?

How will an endowment fund campaign affect present fundraising, if at all?

Check with similarly sized organizations that have done this process successfully. Most organizations are keen to help similar, non-competitive organizations achieve success modifying their own strategies.

Get the help of experts in this field through books, videos, library resources, and interviews with endowment fund experts and sales representatives. Collect the information in ways that make it more likely that you will make the right decisions. Compare apples with apples by creating forms that help you compare the advantages and disadvantages of each institution’s products. (See Appendix A: Comparing Trust or Endowment Funds form for an example.)

In Deohaeko’s research, community foundations provided the most economical method of creating and maintaining an endowment fund for small charitable groups. Community foundations are charities established across Canada and the U.S. through which families and smaller charities can establish an endowment fund. By pooling these endowments into one large fund (like a mutual fund), community foundations are able to provide expert management and investment skills at reduced fees. They also provide the administrative structure to send out income tax receipts, file income tax forms, send statements to their contributors as well as raise funds for their own operating costs. Lastly, community foundation provide the mechanism to disburse the interest income from the endowment funds either to pre-determined charities as chosen by the fund creators and contributors or through an application process similar to the United Ways where groups apply for undeclared funds.

Not-for-profit groups would have to partner themselves with a registered charity to create a fund and have income from the community foundation fund channelled through the charity because community foundations only distribute income from their fund to registered charities. (Community foundations are explained more fully in the next chapter.)


Chapter 11

Beginning, Maintaining and Closing an Endowment Fund

If you have chosen to begin an endowment fund and you have an idea, from the previous chapter, of how much principle you need to raise, you can begin the paper work!

An endowment fund is like an organization’s long-term savings account. It is a way of developing your financial asset rather than just another fund-raising tool. It is your way of securing and providing future services to your fund’s recipients.

Beginning Steps

Discuss the possibilities of an endowment fund at the Board.

Assign staff and/or volunteers to do some preliminary research into creating a fund for your organization by checking with community foundations (described later in this chapter), banks, and investment groups. Present this research to the board.

The Board of Directors must make a firm commitment to the development of an endowment fund. Creating a fund will take up their time as well as other resources within the organization. The Board may select a working committee of members, staff and outside volunteers to help with the following tasks.

The Board recruits or assigns Board members and Advisory Members with a special expertise or interest in endowment funds to help them with decision-making.

The Board, or its committee, must determine if any of its operational dollars from government, public or private foundations, or major donors are at risk if they establish an endowment fund. For example, if endowment-fund dollars are used to provide support to people labelled poor or disabled, will those benefiting from your services have any of their government or disability pensions or payments ‘clawed back’ or withdrawn?

The Board needs a policy statement outlining the purpose of the fund, how funds will be distributed and when, and what should happen if the original purpose of the fund is fulfilled (i.e., how to close the fund). Like an organization’s mission statement, this step can be the most time consuming. However, once a policy statement is in place, the rest of the steps have the necessary direction to make the process move more smoothly.

The policy should include:

The overall and specific purposes of the endowment fund.

The name of the fund.

The type of fund the Board approves (i.e., mixed portfolio or only fixed income).

Financial objectives of the fund meaning that the investments appreciate over time to cover the revenue needs of the fund, its administrative and investment expenses and a value equal or greater than the Consumer Price Index (CPI) to cover inflationary costs. Although this return will not happen every year because of the market and economy’s ups and downs, it should be expected over the long term.

Spending rules including that the principal shall not be touched for at least 10 years, except when income is insufficient to meet the 4.5% disbursement rule (more information on this later in this chapter). All other interests and dividends can be given to the charity or its specific programs, reinvested in the endowment fund and/or put into the organization’s reserve fund to be used as needed. If the Board wants to be able to use the principle in the endowment after 10 years, it should clearly identify circumstances when that would be appropriate.

How the fund will be structured (e.g., a general endowment with specific named endowments) and how units of the fund will be determined and valued, and when donations can be made to the fund.

How the fund will be managed within the charity (i.e., by the Board or by the finance or special committee reporting to the board) including what decisions can be made by whom:

Investment and management policies, and their revisions.

Choosing and changing investment managers as required, upon evaluation of fund returns.

How the fund will be invested (i.e., % invested in equities, fixed income and cash equivalents).

How income is given out.

Minimum amounts for named endowments within the fund, if any.

How contributions can be made including a sample of an agreement between the donor and the organization.

How individual funds and/or the entire fund can be closed and where the proceeds of the fund(s) would go.

The Board might also consider a policy statement that all, or a major portion of, unexpected gifts to the organization be put into the endowment fund. Such a policy encourages a quick decision about what to do with unexpected gifts rather than the common back-and-forth arguing between members, staff and/or volunteers of what to do with such gifts.

The Board must decide whether it is advantageous to create a separate foundation to create and manage the endowment. Such a foundation, with its separate charitable registration, can ensure that staff/volunteers within the present organization concentrate on your organization’s mission while staff/volunteers of the foundation can concentrate on the endowment’s creation, development and ultimate funding of your organization. Such a separate body can provide donors with an added sense of comfort and accountability and sense of longevity.

Such a separate foundation, however, has major drawbacks for small charities since it requires a separate board, separate registration (and all those costs), separate meetings and minutes, separate records and the potential of conflict between the two boards in how the money should be used.

More on this later in this chapter.

The Board should develop an action plan for the following steps including who will do what, by when with sufficient follow-up procedures to ensure the work is done appropriately.

The Board needs to research and choose the advisors it will use to create a fund. These advisors may include a combination of: a financial planner, a lawyer with expertise in financial products, and an accountant familiar with the tax implications of such a fund.

The Board needs to research and choose the institution where you will house your fund. If you are a registered charity you may choose a community foundation to pool your fund with those of other organizations and individuals. (See Part 4 of the Appendices for a complete list of community foundations nearest to you.)

If you have sufficient funds, open up your fund using the documentation required by the institution.

If you do not have sufficient funds or after you have opened up an endowment fund, prepare your marketing material including brochures, pledge/donor cards, donor agreement forms, etc. The fundamental tenet of fundraising is: “It is easier to ask if you first give”, so give prospective donors the necessary information they need on planned giving, benefits to donations, mission of your organization, etc. before you try to secure their donation.

Identify potential donors from your present donor list including those who have included you in their will, follow up with past donors, and identify new donors through personal and professional contacts and through referrals. Also become known to the estate and financial planners in your various communities as the better informed they are, the more likely they will recommend your work to others. Provide a free ‘wills clinic’ to encourage people to prepare a will and, perhaps, include your organization in it. Prepare a script to use in approaching new donors to help them understand the purpose of your fund. Endowment funds are built through long-term relationships with current and potential donors. It will take time. Review this process each year, set new targets, revise procedures as needed and re-energize your group to ensure the long-term success of your fund.

Annually, do an evaluation of the above process, your assets, future planning cycle and changes necessary to achieve your goal.

Community Foundations

Community foundations are geographically based foundations that pool named funds of families, community organizations and charities into one endowment that helps fund local community charities. There are 97 community foundation across Canada with total assets of $1.2 billion in 2000.

Capital is owned by the foundation and held in perpetuity. The foundation is run by a Board of Directors as a registered charitable organization which is tax-exempt, incorporated, organizationally autonomous, and cannot be controlled directly or indirectly by any level of government, or by corporations, associations, members or individuals.

The foundation provides donors with a professionally managed endowment fund and donors can have their own portion of the fund named after themselves or in honour of someone. The foundation does all the administrative work including some or all of the following: giving out income tax receipts to other donors who wish to contribute to your fund, prepare audits and tax returnes as required, and issue reports. One usually needs $10,000 to open an endowment but methods are available to help people and individuals start with less.

There are different forms of endowments within the one Community Foundation Fund. Each community foundation across Canada defines them slightly differently but generally they are:

Designated funds are created by a person to support a particular charitable agency or organization (i.e., the Smith family creates an endowment to support a charity that assists local families with children who have disabilities).

Donor advised funds enable donors to participate in the distribution of income from their fund but the final decision is left to the Board of Directors of the foundation.

Agency endowed funds enable charitable organizations to create their own endowment fund but have the Community Foundation do all the administrative work and the donation is not an asset on your financial statement. As the creator of the fund, you designate how the income from the fund is disbursed -- usually to yourselves as the designated charity.

General and thematic dispursements funds allows donors to contribute to the general endowment fund or to a specific field of interest undertaken by the foundation such as: arts and culture, childrens’ groups, education or environment. Donors can specify the type of cause they wish to contribute to (e.g., services to seniors) or leave it up to foundation to choose which charity will receive the income. In the latter case, the Board of Directors, similar to the United Way, asks for grant proposals and decides which local charities will receive funds. Some community foundations have chosen specific areas of concentration for such grants (e.g., local arts and recreations, social service agencies).

The foundation may have opened up an endowment of their own within the general endowment fund in the expectation that donors will want to assist the foundation in its work and, thereby, reduce adminsitrative costs charged to each fund.

Since the fund is a pooled endowment, the fund is usually large which allows for a more diversified portfolio of assets and, therefore, better returns with lower administrative costs. There are no legal fees in setting up a fund with the foundation.

A ‘variance’ clause directs the foundation’s board to find “the nearest similar purpose” should the intended purpose of your fund become irrelevant (e.g., a fund to sponsor research in breast cancer becomes irrelevant as soon as a cure is found) or the designated charity stops operations. This clause ensures donor confidence that their long-term investment in your work will continue in perpetuity.


Check your local telephone book for the community foundation nearest to you or check the list in Part 4 of the Appendices. These foundations are geographically based within communities although some have a wider reach (e.g., The Vancouver Community Foundation provides grants province wide in British Columbia).

By opening an endowment with a community foundation, a charity may contribute to it regularly, raise funds specifically for the endowment and build the fund to a point where the interest income can fulfil its goals (i.e., either for the cost of a specific program or for the operational expenses of the charity). In Deohaeko’s case, the families have determined that a fund would need about $5,000,000 to provide the families with annual operating dollars of about $350,000.

Creating a Separate Foundation

Should charities set up separate foundation to take over their fundraising? Such a foundation, with its separate charitable registration, can ensure that staff/volunteers within the present organization concentrate on your organization’s mission while staff/volunteers of the foundation can concentrate on the endowment’s creation, development and ultimate funding of your organization. Such a separate body can provide donors with an added sense of comfort and accountability and sense of longevity.

Such a separate foundation, however, has major drawbacks for small charities since it requires a separate board, separate registration (and all those costs), separate meetings and minutes, separate records and the potential of conflict between the two boards in how the money should be used.

Pros

If your charity is asset rich, (e.g., owns property, investments, a large endowment fund) and is at risk of being sued by clients, then a separate foundation can be an advantage in that it can hold the property and lease it to the charity to prevent creditors access to these assets. For example, if a small charity provides services to clients in a building it owns and a client sues the charity for staff negligence, then all the charity’s assets are at risk. However, if the endowment fund, building and other assets are held by a separate foundation, those assets are safe.

A separate foundation permits a charity to have two separate boards of directors with different skill sets. The fundraising and money management skills required by a foundation board are different than the policy and program decisions made by a charity board. The boards can be smaller, more manageable and more focused on their own skills sets. Some members would be on both boards. The foundation’s direction comes from the charity’s board and all the funds raised by the foundation go to the charity.

A separate foundation can benefit charities that receive a lot of government funding. Since the charity’s assets are separate from donations to the foundation, government funding to the charity (up till now) cannot be cut because of assets held by the foundation.

Cons

Separate foundations require a separate board (recruited and trained), separate registration and bylaws (and all those costs), separate meetings and minutes, and separate records.

Initially, a separate foundation’s board will be highly compatible with the charity’s parent board. However, over time, there is likelihood that the foundation’s board (responsible to both donors and the charity) will suggest or require the charity to change its focus and programs to meet donor demand. The foundation may begin to require the charity to submit funding requests for specific programs rather than for general operations as programs are easier to raise funds for than general expenses. The charity’s board may be more finely attuned to the needs of their clients than the foundation’s board even with a cross over of several board members on both boards. As each organization is legally separate, the opportunity for conflict increases over time and the foundation may come to a point where it changes its mandate to allow it to fund other charities consistent with donor wishes. This has happened in the case of hospital foundations where the hospital has been merged, acquired or closed but the foundation continues.

A separate foundation’s priority is raising funds, especially for the long term. This priority may be in conflict with the parent charity’s mandate to provide short-term relief of poverty or short-term care to clients in need.

Conflicts are possible in promoting the charity and foundation’s work through the media and other promotional avenues. Who speaks for the work of the charity? Who speaks for the clients served? Who speaks for the donors? The answers may seem obvious that fundraising questions be answered by the foundation, but in real life, distinctions blur especially when reporters are in a hurry and don’t have time to ask some questions of the charity and some of the foundation.

Separate foundations have more stringent disbursement rules than a charitable organization. While regular charities must disburse 80% of receipted donations from the year before, foundations must additionally dispense with 4.5% of the value of the investment assets each year. As well, 100% of donations made by charities to private foundations must be spent in the following year. For example, if a charity received $50,000 last year it must use $40,000 of that this year. If a separate foundation received that $50,000 last year and added it to its $100,000 of assets, it would have to use $40,000 of that this year (80% of $50,000) + $6,750 (4.5% of $150,000). However, if that $50,000 came from another charity, the foundation would have to spend all of it + 4.5% of its assets.

In 1995-96, The Office of the Public Trustee in Ontario made it very difficult to establish foundations whose principal object is to raise funds.

New accounting standards may require accountants to disclose the foundation’s assets and income on the financial statement of the parent charity, thereby, preventing a parent charity from keeping endowment funds held by the foundation from government view.

To minimize some of the negative aspects of separate foundations, small charities must consult with both legal and tax experts with specific experience in this field. The charities should also talk with small charities who have similar programs to their own and which have separate foundations to discuss the pros and cons. After these discussions, and with samples of by-laws from foundations set up for small charities, a charity can determine if a separate foundation makes sense in their specific circumstance. If a separate foundation is established, its by-laws should be reviewed every few years to ensure that both the foundation and parent charity continue to work toward the same goals.


Maintaining

The endowment fund may be divided into one or more separate endowments depending on your circumstances. Rather than creating different funds for different purposes, it is best to create one fund (better purchasing power). Administratively, this is easier than keeping track of various separate sub-funds. To track the individual worth within a single fund of the separate endowments is similar to how mutual funds assign units to each individual member of the fund. See chapter 1 for an example.

You will require a semi-annual or annual review of your fund’s performance and ongoing communication with the people you have entrusted to manage your fund. You will need to maintain or revise the authority structure within your Board or Committees to ensure that you truly are on top of the fund’s performance, and any irregularities or difficulties that occur. It is important that your Board be aware of any changes in the laws and regulations regarding these funds and taxes.

Disbursement Rules and Endowments

If a charity receives a gift or bequest with the donor’s written instructions to hold the donations for at least 10 years, the 80% disbursement rule will not apply. If the charity receives an unrestricted bequest and decides to invest the funds in its endowment, it will also not be subject to the 80% rule. However, in both cases, the charity will be required to distribute 4.5% of its capital every year, which will normally come out of the income, earned on the investment.

Investing the Fund

Boards should choose investment managers that reflect their style and long-term needs. Typically, an endowment fund should have a total return, less expenses, that permits sufficient income to meet both the 4.5% distribution requirement of endowment funds as set by the Canada Custom and Revenue Agency and its own current revenue needs.

Agreements with Donors

When a donor makes a large contribution to your endowment fund through an outright gift or irrevocable deferred gift (e.g., such as a life insurance policy), the donor and organization should have a signed agreement that will:

Identify and gratefully acknowledge the contribution and wishes of the donor (including, perhaps, a bit of biographical information about the donor for future members of the organization to better understand the donor, the heirs and the circumstances of the gift).

Clearly state the purpose and administration of the endowment fund.

Contain legal language that satisfies Canada Customs and Revenue Agency’s 10-year distribution quota rule.

Allow donors to pledge future or ongoing gifts (e.g., monthly) for a determined or undetermined period.

Provide clauses that permit the organization to change restrictions if the original intent of the donor can no longer be met or if the organization’s mission changes to meet current needs unforeseen at the time of the donation.

Provide an opportunity to amend the agreement at any time with the signed consent of both the donor and organization.

Explain what will happen with the donation should the fund be closed.

If an agreement cannot be mutually signed, a letter or a person’s will signed by the donor and containing the necessary instructions can be enough.

Reporting Back to Donors

Donors, especially ones to endowment funds, deserve regular (semi-annual to annual) reports of how the fund is doing and how the income is being spent to meet the purposes of the fund. When significant events or information is available, that should be sent to donors as well. Whenever possible, write a personal note to the donor to help them recognize how valuable you feel they are to your work and mission.

Donor Recognition

Many donors would prefer to remain anonymous and that should be respected although a regular personal note to them will always be welcome. Others prefer some public acknowledgement of their efforts on your behalf. This can be through a listing in your annual report, description in your newsletter, special announcements or special events recognizing regular or endowment donors, acknowledgement in publications produced by the group and other creative ways.

Closing

The process of closing an endowment fund must be included in the design of the fund. Most small not-for-profit or charitable organizations will not continue forever. Either their mission has been met (e.g., another program takes over the needs within a community) or the volunteer commitment to continue the organization is no longer there. Whatever the reasons, endowments must have a clearly defined closing policy so donors will be aware of what happens to their contributions should the organization close the fund. For many such endowments, the simplest solution would be to have the fund either converted into the fund of another charity or not-for-profit with similar goals or to have the principle and income dispersed to a variety of other similarly minded organizations. The Board of Directors at the time of closing the fund should have sufficient discretionary powers to make the best decision possible consistent with the overall goals of the fund and its contributors and to report on their decision to their donors.


Chapter 12

Non-Financial Considerations

It is easy to get caught up in the excitement of creating an endowment fund that will answer all of your financial needs sometime in the future. What is less exciting, yet more important, is to look at the non-financial considerations of your organization and whether the endowment fund will foster or hinder those considerations.

This process is best done from the perspective of the people you serve and the people from whom you hope to get donations. They can best evaluate if your organization should exist in the long-term. No matter the desire of the founders or present leaders of organizations, there are many small organizations that have either outlived their usefulness and are only there to provide staff with a job or they are duplicating the work of others.

Answer the following questions, to ensure that an endowment fund is really what you need now or in the future. The answers will tell you, as objectively as possible, whether the non-financial considerations will work with, or against, an endowment fund campaign.

What is your purpose as an organization? Are you achieving your purpose now and/or do you foresee yourself achieving your purpose in the future? Are you remaining true to your mission or are you moving from one activity to another just to get government or foundation funds? Does everyone in your organization understand and work consistently to meet your purpose? Can everyone articulate what you do and why you do it? If there is a lack of clarity of what you do and why, then funders and the people you serve may well hesitate to provide you long-term donations for an endowment fund.

How long do you expect your organization to stay active (many organizations have a shorter life span by design or by circumstance)? For example, an organization established to relieve poverty among single parents living in an urban centre probably has a long-term need given our collective human failure to end poverty. However, another organization’s short-term purpose may be to provide poverty relief in a small community undergoing dramatic changes due to a short-term economic downturn. Only long-term organizations should consider endowment funds.

Will an endowment fund campaign take away more financial and human resources than you can afford? If your organization is struggling to meet its program demands and fulfil its obligations to its members, then you should not start an endowment fund campaign. If your small organization is starting and wants a secure funding base before offering services and support, then an endowment fund may be appropriate, although hard to raise funds for as it has no track record. If you have a successful program running with some financial stability but are unsure of whether that funding will continue in the years ahead, you may well consider an endowment fund.

Once you have answered these questions as honestly and completely as possible with leaders within your organization, you will have an idea of whether an endowment fund fits in with the crucial non-financial considerations.


Chapter 13

Deohaeko Support Network
(The Sequel)

Throughout 1999 and 2000 the 7 families that make up Deohaeko Support Network hired, on contract, a part-time staff person to research what their alternatives were and what type of agreement the families would have to reach to create a fund. Deb Thivierge helped them decide how income from the fund would be used, what would happen as families left and joined Deohaeko, and more. They used several weekend retreats to thoughtfully analyze their best options. Combined with the research done on this book and the information they received from several lawyers, family groups and financial institutions, they determined that:

Their target of a $5,000,000 endowment was correct.

A community foundation was the most economical and well-managed institution in which to place their fund.

At the start of this process, however, the families established an interim investment account to house the money they had being raising for the fund until they could decide where to put their endowment fund. They had not yet heard of community foundations and had assumed that a bank or trust company was the likely place for their endowment fund. Although several banks and an investment firm provided bits of information, the advice was slow in coming and incomplete. Through sheer frustration, the families looked at other options.

Before a specific institution could be picked to hold their endowment fund, the families had other decisions to make. To open an endowment fund required an agreement among the 7 families of how the fund's money would be used, what would happen if a family left Deohaeko, what needed to happen if new families joined Deohaeko and how they would participate in the fund, and more. The questions seemed endless with few simple answers.

Through a creative game developed by Deb Thivierge and Janet Klees (Deohaeko’s co-ordinator), the families were given a host of scenarios during one of their retreats. Each scenario was based on a letter from an anonymous donor or board member triggering a situation requiring a board response. Some of the scenarios represented situations the families had already considered while others were new. For example, a major concern for the board was what would happen if a family left Deohaeko? The game involved the families having limited discussion time and then voting (using beans) with varying time lines (7 to 20 minutes) and the results being recorded for later discussion. By getting this straw vote after a quick discussion it was possible to get a sense of where the group was on each issue and then allocating the necessary time to discuss each point. Sometimes there was almost unanimity. As so often happens, it is easy to have long discussions before people recognize that they are, in fact, agreeing with each other. On other issues there was a very mixed response requiring a more detailed discussion of alternatives.

Scenarios included:

How the money could, and could not, be used.

Whether donors could specify what their contributions could be used for.

Whether donors could have named funds within the general endowment fund.

How families could help raise funds.

How new families would benefit from the fund.

The results of these discussions led to a draft agreement among the families that they reviewed at their November 2001 retreat. On the issue of what would happen if a family and the son or daughter left Deohaeko, for example, it was agreed that they would not be entitled to any income from the fund. In effect, they agreed that the endowment fund belonged to Deohaeko and not to the families who helped set it up.

After revising and agreeing to the new draft, the families sought the advice of two lawyers familiar with these issues for a last review. The revised agreement (see Appendix L) was approved and negotiations with the Community Foundation of Durham Region began to discuss opening their endowment fund by the end of the Spring, 2002.

The families agreed that other families considering a similar process of creating an endowment fund would need: patience, energy, sufficient information, time (should not be rushed) and a willingness to go beyond typical fundraising.

As one parent said: Patience, patience, patience. Even people you think should have knowledge don't always have the knowledge you need. From a personal point, I wish we'd started this 20 years ago when ability, energy and knowledge would be at a higher point than they are now. A large lottery win would be marvelous.

Another parent suggests that families join a group of like-minded people to share your stories. It would be difficult to do on our own without the support of others who care and feel as you do. It can be rewarding but be aware of all the work involved.

The process took Deohaeko several years of collecting information, meetings, ongoing discussions between families and negotiating with potential fund holders. It can get frustrating trying to make the ‘right’ decisions, however, the slow process is necessary to cover all aspects of an agreement and successful endowment fund. Be patient. The results are worthwhile if properly planned.

One parent summarized their process this way: Deciding to create an endowment fund was the easy part--developing the agreement was a good process. Our group has worked well together and have made many decisions in many areas. Discovering how to create an endowment, where to get good information, who could help a small group such as ours, who would walk through this maze with us, was a horrendous task. Fund raising is ongoing and our small group even got good at it. It needs to happen. It takes time, energy and good ideas.

The financial future and security for our children was extremely important. Preparing our wills with a proper discretionary trust and designation was necessary. These allow our children to have extras in their life and safeguards that they will not live in poverty. A very important piece is to ensure dollars are there to provide sufficient funds to have good supporters. This financial piece needs to be well planned. Hopefully government continues their role but we as families also need to have alternate plans. Planning our endowment for Deohaeko is a wise move.

On Our Own...Together


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Copyright © 2002 Harry van Bommel

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