Establishing an endowment, particularly via a community foundation, is an easy and straightforward four-step process. The donor signs a simple agreement creating and naming the endowment. He or she then selects one or more causes to support, such as an eligible nonprofit organization or a field of interest. The next step is to decide whether the endowment will be funded immediately, over time or via a bequest. Finally, the donor specifies what will be donated: cash, securities or other assets.
Various federal and state laws govern the management, investment and spending decisions for endowment funds. In California, these include the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and the Uniform Prudent Investor Act (UPIA).
Notably, the Commonfund Institute’s 2013 Community Foundation Benchmark Study reported an average annual effective spending rate of 5 percent of endowment assets for grants and expenses.
An endowment fund requires an understanding of complex federal and state statutes and reporting requirements, as well as managing a portfolio of assets that is intended to last for decades or in perpetuity. For these and other reasons, establishing the endowment fund via a community foundation, which has the necessary experience, legal and investment expertise, is often the easiest, most practical and lowest-cost path.
Community foundations can accept a wide variety of endowment fund donations, including illiquid assets and bequests, and can serve donors who wish to establish their endowment fund well in advance of donating assets. Economies of scale typically allow community foundations to charge administrative fees of typically only 1 percent of assets for managing investments and grantmaking. Endowments offer an effective option for donors of varying levels of wealth.
Elliot Kristal, Esq., is vice president of charitable gift planning at the Jewish Community Foundation of Los Angeles. Susan Mattisinko, Esq,. is the foundation’s general counsel.