Q: My nonprofit currently uses all bequest proceeds for operating expenses. The family of recently deceased donor has questioned this and wants us to designate the funds for endowment. What should we do?
A: Remember that the only funds that serve as true endowment are those that are restricted by the donor. Since the donor’s will did not restrict the funds, it is impossible to have these funds go to endowment. However, they can be treated as “quasi-endowment,” “board designated endowment,” or “funds functioning as endowment,” which are funds your organization’s board will treat as endowment (only using the draw from these assets based upon your spending rule) unless the board formally acts to tap into the principal.
The larger question you need to address is what is your policy on using unrestricted planned gifts and why. Many organizations are not particularly thoughtful on this point and simply use the dollars to plug holes in their operating budgets. Best practice for donor-centered organizations encourages a formal policy based on donor expectations.
Most donors who make unrestricted planned gifts expect the proceeds to go to endowment. They are giving an organization a gift that represents part of their life’s work and hope that it will sustain the organization going forward. A policy that directs all or most unrestricted planned gifts to board designated endowment honors that legacy. At the same time, organizations do need some operating funds. Probably the best compromise is to set a policy stating that the first $X or X% (assume 5-10% or $5,000-$10,000) of any unrestricted planned gift is allocated to operating expenses, with the balance automatically allocated to board designated endowment. The board can always override this policy if funds from a particular planned gift are needed for operating or another purpose (or the donor/family has a clear preference that isn’t in the will). But it sets the tone that such gifts are not intended to be spent immediately.
Besides writing this column and consulting for PlannedGiving.com, Brian Sagrestano is President and CEO of Gift Planning Development, LLC, and a principal in Constellation Advancement, LLC. He co-authored The Philanthropic Planning Companion, which has everything a gift planning officer needs to know. Here you’ve got a direct pipeline to the author. Ask Brian your questions at PlannedGiving.com/Brian.