• The Importance of the Sustainable Endowment

    Nonprofit organizations and foundations have played a pivotal role in American culture for nearly a century. As a third sector next to corporations and government, they provide many types of programs and services to support the public that the other two sectors do not or cannot provide.

    The National Center for Charitable Statistics (NCCS) estimates that there are more than 1.5 million nonprofit organizations registered in the United States. These include public charities, private foundations, and other types of organizations. Nonprofits and foundations are also found throughout the world, but our concern in this book is solely those operating in the US under specific American tax laws and financial regulations.

    Nonprofits participate in a wide range of fields, including health, educa- tion, literacy, poverty reduction, social justice, religion, disaster relief, support for the arts, and more. They have been responsible for significant advances in the health field, such as eliminating hookworm and yellow fever in many countries, disseminating polio vaccines to the far reaches of the world, and virtually ridding humanity of smallpox. They have played a strong role in educating people about and treating HIV/AIDS.

    Nonprofits help fund theatrical and artistic productions, museums, cultural attractions for the public, and student scholarships for higher education. There is no doubt that nonprofits and foundations are a vital element in society that must continue contributing wherever they are needed.

    The Sustainable Endowment is my contribution to helping nonprofits and foundations learn how to be effective, well-managed, and sustainable. It is intended for executives and board members involved in the management of nonprofits, public charities, or private foundations operating in the United States. For our purposes, I do not make a distinction between these terms; all are organizations following the same basic ground rules when it comes to adhering to regulations to maintain Section 501(c)(3) tax-exempt status.

    For clarity, let’s note that “nonprofit” is an overarching term for many types of non-governmental corporations or organizations that do not seek to make a profit from their activities and are exempt from federal income taxes under IRS Section 501(c)(3). Instead, they use their financial resources to benefit a mission of some kind.

    There are roughly 29 sub-classes of nonprofits. One of these is a public charity, which collects donations from the general public to support a public cause, such as safety, disaster relief, assistance to the poor anywhere in the world, animal rights, and so on. A private foundation, often funded by a single individual or business, is equally dedi- cated to a cause or mission. Private foundations may donate to charities or may hand out monetary grants to individuals who seek to accomplish a goal on behalf of the foundation. Churches, religious organizations, educational institutions, and several other types of organizations may also be tax-exempt nonprofits.

    In my book, I will use the terms nonprofit and foundation interchangeably without distinction, as my goal is to help all types of nonprofit organizations that desire to improve their executive management, especially regard- ing their financial health. I will discuss the principles central to becoming a well-run nonprofit that understands how to manage its finances. Whether the nonprofit raises funds from public donors or is a foundation funded by a single source, the management of its investments plays an important role in its year-to-year success as well as its long-term sustainability.


    Discussing the financial management of a nonprofit encompasses many issues beyond the basics of investing. That is why this book is organized around 10 principles, beginning with three chapters covering the critical basics of foundation management.

    Following those three principles, the remaining seven will explain the specifics of how to go about the financial management of your endowment, especially in regard to investing the principal to maximize returns while minimizing risks. I do not delve into issues regarding a nonprofit’s fundraising efforts or operating budgets — those are your decisions.

    My goal is strictly to educate foundation leaders and investment committee members on the best practices for investing an endowment to maintain stability or to grow it over time with the least amount of risk. Executives at nonprofits and foundations, especially those on investment committees, come from a wide range of backgrounds. You may or may not be familiar with the investment concepts and principles that I present in my book, so please excuse the caution I have taken to ensure that I thoroughly explain basic terminology and the fundamentals of investing. I want to be sure all readers are comfortable with its contents.

    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon

  • Spending & Investment Policy Statements

    Keys to a Sustainable Endowment 

    The management of nonprofit or foundation assets can be a challenge. These are unlike managing family wealth due to the need for endowment longevity and the regular withdrawals usually made.

    Ideally, a foundation’s assets should grow beyond many lifetimes and allow for distributions of approximately 5% annually for most nonprofits. If the world could depend on financial markets consistently delivering returns in excess of 5%, or your donations exceeded this figure each year, managing these important assets would be quite simple. However, financial market returns are seldom consistent and can sometimes deliver losses rather than gains. Furthermore, in periods of financial market declines, your donations often decline or disappear altogether as donors tighten their own pocketbooks. 

    So how does a foundation attempt to bring consistency to the challenge of growing your assets, making annual withdrawals, and creating a sustainable endowment?

    The first step to meet the challenges of managing endowment assets lies in having a well-conceived, written Investment & Spending Policy Statements. These documents serve as the rulebook for your finance committee. They should be packed with all the details about how the foundation’s assets will be managed. These policies should be written to assist the finance committee and board not only in your quest for asset appreciation but managing risk. 

    A well-written and defined Spending Policy will include the goals of the foundation, the purpose of grants you make, and a statement of your long-term targets for grant spending. The policy should also include formulas to be pursued to “smooth out” your annual distributions based on recent year’s investment returns as opposed to using an absolute or fixed grant withdrawal rate that may have no connection to the growth or decline of your endowments assets. 

    For example, by using a moving average of recent annual returns, foundations can reduce the risk of overspending in any given year. Once the spending policy is established it should be reviewed and updated at least annually.

    The Investment Policy Statement is a document that assists the finance committee in meeting the spending policy guidelines while managing investment risk – key issues for fiduciaries. All too often foundations and non-profits run afoul in their management of risk. A well-written Investment Policy will instruct the committee on the guidelines to be followed to avoid taking on too much risk. At the same time, the Policy needs to spell out the upper limits of investment risk to meet long-term objectives. Too little risk can often result in below-average returns that equally limit your goals.  Risks need to be balanced. 

    The Investment Policy document will also define the goals of the foundation and all of the important factors that affect the investment of the assets. This will identify the foundation’s risk profile and growth targets, the types of investments allowable, the investment manager selection, guidelines for asset allocation ranges, and risk management strategies to prevent catastrophic loss. 

    In recent years, many foundations and non-profits have also added into their Investment Policy statements of environmental, social and governance (ESG) constraints. When completed, your Investment Policy thus serves as an important guide to reduce and manage risk, meet performance objectives, and fulfill the committee’s fiduciary duty.

    Today, more than ever, there are significant risks in global financial markets – many that we may know about, but more which we are unaware of. Though no one can predict with accuracy the outcome of future market returns or risk, a well-written Spending &  Investment Policy Statements will help your nonprofit’s finance committee to manage its way through up and down market periods and ultimately create a long-surviving, sustainable endowment.

    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon

  • Charitable Giving: Changes to Tax Laws May Change How You Gift Going

    I actively give back to local and global charities through my company and I know many of you do as well. In that spirit, I wanted to provide you with some changes that have been put into place regarding tax laws that may affect the way you gift to your favorite non-profits. If you are a non-profit, it is good to keep up with changing tax laws when asking for support.

    With the 2017 Tax Jobs Act, many more taxpayers will be using the standard deduction instead of itemizing. As a result, individuals who are used to charitable write-offs may no longer see a tax benefit from their contributions. This puts contributing to Donor Advised Funds (DAFs) and Qualified Charitable Distributions (QCDs) in a new light.

    Donor-Advised Funds (DAFs)

    You may also consider front-loading your charitable contributions while compounding your charitable impact, by contributing to a Donor-Advised Fund (DAF). One of the biggest advantages of a DAF from a strategic tax planning perspective is their flexibility: you make donations to the account and receive immediate tax benefits for doing so.

    You receive the deduction in the year the contribution is made, with no expiration on when the contribution must be made to the charity of choice. In fact, there is currently no set time frame during which you must pay out the funds. The donation you make can grow in the donor-advised fund account indefinitely or be distributed right away. Think of this as your charitable savings account where donors can contribute to the fund as frequently as they like and make grants to their favorite charity when they are ready.

    Donor-advised funds, like Schwab Charitable, – the 6th largest in the world – are recognized by the IRS as a tax-exempt public charity or 501(c)(3), thus are eligible to receive tax-deductible charitable contributions. However, donations to DAFs are not eligible as a QCD.

    Additionally, the 2017 Tax Jobs Act created higher standard deductions for taxpayers, making it less efficient to write off charitable donations. Instead of donors bunching their donations every other year to get over the standard deduction threshold and causing a feast or famine cycle for charities they can qualify for a current year, itemized deduction and grant to charities on their own timetable by donating to a DAF.

    DAFs might be useful for people who want to donate appreciated stock, mutual funds, exchange-traded funds, or other securities.

    Assets generally accepted include:

    • Cash equivalents
    • Publicly traded securities
    • Certain restricted, controlled, or lock-up stock
    • Mutual fund shares
    • Bitcoin shares
    • Private equity and hedge fund interests
    • Real estate
    • Certain complex assets, such as privately held C- and S-Corp shares

    Donor-advised fund tax deductions include up to 60% of adjusted gross income for cash donations and up to 30% for securities. Whether the donation is securities, cash or both, you must itemize in order to take the deduction.

    Qualified Charitable Distributions (QCDs)

    Individuals claiming the standard deduction can still get a tax break for giving to charity, just so long as they are 70½ or older and transferring the funds from a traditional IRA directly to a qualified charity.

    The QCD allows an individual to transfer funds from a traditional IRA directly to a qualified charity without the money being added to their adjusted gross income. If you are 70 ½ and have not yet taken your Required Minimum Distribution (RMD) for the year, then it can count toward your RMD for that year.

    One of the most important caveats is that these distributions must be made directly to a qualifying charity. If it is distributed to an individual taxpayer first, then it will be considered a taxable event.

    Many brokerage firms now allow individuals to order checks on their IRA accounts so that checks can be written and mailed directly to these charities. This is very convenient; however the taxpayer must be certain that the charity has cashed the check before the end of the year.

    Always get a receipt from the charity for tax reporting purposes. The charity must be a 501(c)(3) organization. Individuals, private foundations and donor-advised funds do not qualify as recipients. There is also a cap on the amount that can be gifted income tax free each year at $100,000 ($200,000 for spouses filing jointly).

    If neither of these options suit your gifting needs, please keep in mind you may gift up to $15,000 ($30,000 for spouses) per individual recipient in 2019. These gifts can be made tax-free either by check, transfer of funds, wire transfer or direct deposit into a 529 account.

    Here’s to happy giving!

    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon