Several years ago, one couple made a $712 donation to their favorite cause, and they've been contributing ever since. Some years their annual gift was a modest $20; other years they made no donation at all. In total, they've donated more than $9,000, but the value of their gifts is now more than $51,000. How can this be?
They had the foresight to establish an endowment fund in their name. Rather than spending their donations each year, their gifts are invested in the fund. As the principal of the investment grows, so does the income. That ever-growing income is used to support the work they care about, but the principal always remains invested in order to perpetuate the fund.
Getting Started
When you make a gift to an endowment fund, it can either be outright or deferred (such as through a bequest in a will). Either way, your one gift can turn into a legacy of annual gifts long into the future.
Suppose you'd like to make sure we receive $1,000 every year, even after your lifetime. Let's say KAOEF spends 5 percent of its endowment each year. To calculate the amount needed to perpetuate your gift, divide the annual gift amount, $1,000, by the amount called for in the spending policy, 5 percent, and you get $20,000. So, contributing $20,000 would continue the $1,000 annual gift indefinitely.
If the value of the endowment fund grows beyond the spending amount, so does the income. For example, if the fund shows a net return of 10 percent in one year, 5 percent would be spent and the other 5 percent would be reinvested. By the second year, the value of the fund would be 5 percent higher, or $21,000, and the "gift" from the fund would be $1,050.
There may be minimums associated with this type of gift. In addition, there are many variations on how to set up an endowment.
The information in this Web site is not intended as legal advice. For legal advice, please consult an attorney. Figures cited in examples are for hypothetical purposes only and are subject to change. References to estate and income tax include federal taxes only. Individual state taxes and/or state law may impact your results.
