In addition to Sarah Bothma, this post was authored with input from Edmund Russell.
An endowment provides great flexibility for charitable giving, allowing the founding donor to control the class of recipients eligible for grants and which charitable purposes to support. While most people associate endowments with educational and cultural organizations, establish free-standing and unaffiliated endowments can also be created. Endowments are ideal mechanisms for charitable giving by individuals, families or businesses desiring to have a lasting charitable impact.
Identifying the donor’s charitable purpose is the first step to forming an endowment. The donor’s charitable purpose largely determines how to define and structure the endowment. A donor may wish to establish an agency fund, in conjunction with a particular organization, for the purpose of providing financial support to such organization. For example, a fund for a local library. If the donor wants to provide support to more than one charitable organization, then a designated funds endowment should be established. Such an endowment allows the donor to specify specific nonprofit organizations for gift giving. For donors who desire a broader charitable giving approach, a field of interest fund endowment makes grants to organizations operating in the field of interest identified by the donor, such as the arts or education.
An endowment is not a legal entity, but instead refers to an arrangement whereby assets are invested, managed, and disbursed for the purpose specified by the donor. Endowments are usually organized as a not-for-profit corporation or a trust, which obtain tax-exempt status as a private foundation or public charity. The benefit of obtaining such tax-exempt status is that the fund can grow in a tax free, or tax-advantageous, manner allowing it to make a long-lasting impact. Such tax-exempt status also permits donors to take current tax deductions for assets used to create the fund, even if it does not start making charitable gifts until a later time.
Public charity status requires the organization receive a majority of its funding from the public; however, the deductions available to individuals and corporations from donations to public charities are subject to a higher limit than deductions to private foundations. Even though public charities have a higher deductibility that private foundations, most endowments which are not affiliated with an existing public charity are formed as private foundations. The benefit of a private foundation is control. Related parties may control the endowment, and private foundations can be funded by fewer individuals, or even one person.
It is common for donors to establish an endowment with a modest investment initially and add additional assets over time as part of retirement and estate plans. Funding an endowment as part of a retirement or estate plan can also be tax-advantageous. Donors who do not need their full IRA required minimum distribution (“RMD”) during retirement or who will be bumped into a higher federal income tax bracket by taking their full RMD can use IRA charitable rollover, to the extent the endowment is not a donor advised fund. The endowment can also be designated a beneficiary of the donor’s estate or their retirement accounts, which can also reduce taxes.
Rochester is currently ripe for creating an endowment. Take Mackenzie Scott’s recent giving of $20 million to the United Way of Greater Rochester, which was part of the $4.2 billion she gave to charities and endowments around the country. But, as discussed, creating an endowment is not reserved for billionaires, such as Mackenzie Scott. If you are interested in creating an endowment or if you have any other Corporate & Business Law concerns, please contact the Underberg & Kessler attorney who regularly handles your legal matters or Sarah Bothma or Edmund Russell, the authors of this piece, here or by phone at (585) 258-2818 for Sarah or (585) 258-2834 for Edmund.