What is an endowment? It is a gift that is invested and kept for good, so that only what it earns is ever spent. If you have been wondering whether $10,000 given to a cause gets used up this year or keeps working after you are gone, an endowment is the second kind.
The word gets used for Harvard’s billions, but the idea works at a much smaller scale. At the Miami County Community Foundation, an endowed fund starts at $10,000, and that is enough to pay a local scholarship every spring.
This guide walks through how an endowment works, using real numbers from a real community foundation. You will see what a $10,000 fund makes available, how it differs from a one-time donation, what an endowed scholarship is, and how to start an endowment of your own. It also covers what an endowment cannot do, because a permanent gift is not the right fit for everyone.
What Is an Endowment?
An endowment is a pool of donated money that is invested rather than spent. The original gift, called the principal, stays in place. The earnings pay for the cause the donor chose, year after year.
The American Council on Education describes a college endowment as “an aggregation of donated assets invested… to support its mission in perpetuity,” and as a legally binding compact between a donor and an institution. That compact is the heart of it: the donor sets the purpose, and the institution promises to keep the money working for that purpose.
You will see two main types of endowment:
- A true or permanent endowment. The donor restricts the gift, and the principal is kept forever. This is what most people mean by an endowment fund.
- A quasi-endowment. Money an organization’s own board chooses to invest like an endowment. ACE notes that the only difference is that the governing board, not the donor, designates the spending purpose, so the board can also change its mind.
Endowments are also governed by state law. Kansas has adopted the Uniform Prudent Management of Institutional Funds Act (K.S.A. 58-3611 et seq.), which the Kansas Legislative Research Department describes as governing how funds donated to charitable institutions are managed and spent. In plain terms, a charity that holds an endowment in Kansas cannot treat it like a checking account.
How an Endowment Works, Using a $10,000 Fund
Big-university endowments are hard to picture. A small one is easier, so here is how an endowed fund works at the Miami County Community Foundation, in the Foundation’s own terms.
- The minimum is $10,000. That is the smallest endowed fund the Foundation will open.
- The principal is protected. The balance stays permanently invested. As Executive Director Tammy Booe puts it, “you cannot fall below that amount.”
- Only earnings are spent, under a 5% spending policy. A $10,000 endowed fund makes about $500 available each year for the purpose it was set up for.
- The fee is 2% in total: a 1% administrative fee plus a 1% community support fee. The community support portion is what keeps the Foundation itself running.
- Setup takes seven to ten business days.
The 5% figure is not unusual. ACE reports that colleges generally spend about 4 to 5 percent of their endowment’s value each year. A spending policy in that range aims to leave enough earnings in the fund that it can keep pace over time.
So the honest answer to “what does a $10,000 endowment pay for?” is about $500 of good work each year, for as long as the fund exists. That is not a large sum in any single year. Its value is that it keeps coming, long after the person who gave it.
Endowment vs. Donation: Endowed and Expendable Funds
Most giving is a donation: the money goes out and gets used. An endowment is different because the gift itself is never used up. A community foundation usually offers both, and the Miami County Community Foundation does.
An endowed fund starts at $10,000, keeps its principal, and spends only its earnings.
An expendable fund starts at $1,000 and can be spent all the way down to zero. Once it is spent, the fund closes. Tammy’s own illustration is a $1,000 fund given in full to the Salvation Army: once that thousand dollars goes out, the account closes.
Neither is better. They answer different questions:
- If you want the biggest impact now, an expendable fund puts all of the money to work straight away.
- If you want a smaller impact that never ends, an endowed fund trades speed for permanence.
A useful test is the name on the fund. If you want someone’s name still attached to a local award in thirty years, that is an endowment. If you want to meet a need this year, it is not.
What Is an Endowed Scholarship?
An endowed scholarship is a scholarship paid for by an endowment. The principal stays invested, and each year’s award comes out of the earnings. It is the most common reason families and groups set up an endowment, because a scholarship is a yearly event and an endowment produces yearly money.
A regular scholarship, sometimes called an annual or current-use scholarship, is funded by money raised and spent each year. When the fundraising stops, the award stops. An endowed scholarship keeps paying without anyone having to raise money for it again.
The arithmetic is simple. At a 5% spending policy, a $10,000 endowment supports an award of about $500 a year. A $1,000 award would take an endowment of about $20,000 at the same rate.
To see what that looks like in one county, here are the awards the Miami County Community Foundation publishes for the students of Paola, Osawatomie, Louisburg and Prairie View high schools:
- $500 for several awards, including the Suzy Wilcox Education Scholarship, the Jenny Jo Paulsen Cosmetology/Art Scholarship and the Bill McNatt / Louisburg United Methodist Church Scholarship.
- $750 for the Johanna Vickrey Nursing Scholarship.
- $1,000 for the Steve Pepoon Memorial Scholarship and the Jennifer Gander Memorial Scholarship.
- $1,750, as a one-time award, for the George H. Diehm Music Education Scholarship.
- $3,000 a year for the D.O. Smith Memorial Scholarship, renewable for a second year up to $6,000 in total. The second year is not automatic.
Many of these funds began after someone died. The Bill McNatt award is a good example: the Louisburg United Methodist Church set up the scholarship in memory of a long-time member who mentored its young people. You can read about each of the Foundation’s scholarships and who can apply.
One detail matters for families. Students apply for almost every one of these scholarships through their high-school counselor, not through the Foundation’s website. The school runs the application, generally between January and March.
How to Start an Endowment
You do not need to be a university or a millionaire. Individuals, families, businesses and churches all hold funds at the Miami County Community Foundation. Here is how to start an endowment there.
- Decide between endowed and expendable. Permanent and smaller each year, or spent in full and sooner. Everything else follows from this.
- Choose the purpose. A scholarship at one school, a cause you care about, or a memorial. Be specific enough that someone could follow your wishes decades from now.
- Name the fund. Many people name a fund for someone they have lost.
- Fund it. At least $10,000 for an endowed fund, or $1,000 for an expendable one.
- Allow seven to ten business days for the Foundation to set it up.
If a scholarship is what you have in mind, the Foundation has a full guide on how to start a scholarship fund, with the minimums and setup steps. For any other kind of fund, see how to establish a fund at the Miami County Community Foundation, or call (913) 404-7287 or email info@micocf.org.
If you want to add to a fund that already exists, you can give online through the Donate Now button and choose the fund from the list. You can also mail a check payable to the Miami County Community Foundation, with the fund’s name in the memo line, to 702 Baptiste Dr, Paola, KS 66071.
On taxes: the Foundation is a 501(c)(3) public charity. The IRS sets out the rules for deducting gifts to qualified charitable organizations, including the limits tied to your adjusted gross income. The rules have changed in recent years, so talk to your tax adviser about your own situation.
What an Endowment Can and Can’t Do
An endowment is a strong tool, but it has real limits. It is worth knowing them before you commit.
- It is permanent. Under the Foundation’s rules, an endowed fund cannot fall below what was put in. That is the point, but it also means the money is not coming back out.
- It spends slowly. Only about 5% is available in a year. If a need is urgent, an expendable fund or a direct gift will do more, sooner.
- It needs a clear purpose. A vague purpose is hard to honor in thirty years. A precise one is easier to keep faithful to.
For nonprofits, the case for an endowment is stability. Writing for Candid, Daniel O. Ash, Sharon Bush and John H. Jackson argue that funding nonprofit endowments gives organizations predictable, long-term resources that project grants do not. A small organization may not be ready to hold and invest one itself, and that is one of the jobs a community foundation does.
FAQ: Endowments and Endowed Scholarships
What is the difference between an endowed scholarship and a regular scholarship?
An endowed scholarship is paid from an invested fund’s earnings, so the principal stays and the award can continue indefinitely. A regular scholarship is paid from money raised and spent in the same year, and it ends when the funding does.
How much money do you need to endow a scholarship?
At the Miami County Community Foundation, the minimum for an endowed fund is $10,000, which makes about $500 available each year under a 5% spending policy. If you would rather fund an award for a limited time, an expendable fund starts at $1,000.
What are the disadvantages of an endowment fund?
The money is committed permanently and only a small share is spent each year. For an urgent need, or a gift you want to see used within a few years, an expendable fund or a direct donation is usually a better fit.
How do endowments make money?
The principal is invested, and the fund spends a set share of its value each year. Most college endowments spend about 4 to 5%, according to ACE, and the Miami County Community Foundation uses a 5% spending policy.
An endowed fund is usually part of a wider planned giving decision, and a life insurance policy is one way to fund one. If the fund will pay scholarships, the IRS rules for a scholarship fund apply as well.
Conclusion
So, what is an endowment? It is a gift that stays invested and keeps paying out. At a community foundation that can mean $10,000 today and about $500 of help every year for a cause, a school or a name you want remembered.
At that rate, a $10,000 fund will have given away roughly its original amount within 20 years, and the fund is still there to keep giving. That is the trade: less help in any one year, in exchange for help that does not run out.
If that sounds like what you want to build, browse the funds the Miami County Community Foundation already holds to see what local people have started, then call (913) 404-7287 to talk about starting your own.
