Endowments and quasi-endowments: Similar, but not exactly the same

If you’ve been involved in philanthropy for a while, you certainly have heard the term “endowment.” You’re also likely aware that endowments are established to create a permanent source of support for a specific organization, the community foundation itself, or a particular cause.

Perhaps you’ve also heard the term “quasi-endowment.” What’s the difference, you might be wondering, between a “standard” endowment and a quasi-endowment? It’s especially confusing because the term “endowment” is often used in casual conversations to mean either or both types of endowments. It’s an important distinction because they are very similar but differ in critical ways.

On one hand, the original investment of assets and its appreciation (the “principal”) of a “standard” endowment must be held in perpetuity, and annual distributions are made from net income (such as interest and dividends). The terms of the endowment gift, typically set by the donor who establishes the endowment, prohibit the recipient organization’s board of directors from ever accessing the principal.

On the other hand, in the case of a quasi-endowment, the organization’s board of directors may be able to elect to bypass restrictions and access the principal for certain stated purposes such as emergencies, and in some circumstances even vote to remove the restrictions altogether. Annual distributions to supplement the organization’s budget are often made from a quasi-endowment based on market value percentages. The terms of quasi-endowments are typically set by the organization’s board of directors, and funds are added to the quasi-endowment by the organization itself at various points in time at the decision of the board of directors. This happens, for example, when the organization has a budget surplus or receives an unrestricted bequest or gift from a donor.

In either case, our team can help. If you’d like to establish a permanent endowment at the community foundation, whether during your lifetime or through a bequest, to support either the community foundation itself or a favorite charity, the board of directors and staff at the community foundation will ensure that the principal stays intact in perpetuity. On the other hand, if you prefer that your endowment gift include more flexibility for the organization it supports, our team can work with you and the organization to help structure your gift in the form of a quasi-endowment.

The community foundation team is experienced at managing the accounting, investment, and distribution aspects of all types of endowment funds. When you work with the community foundation, it’s easy and rewarding to structure your endowment as a gift to improve the quality of life for future generations.

Please reach out to us at the Cambridge Community Foundation to learn more about how our team can help as you work with your business-owner clients to navigate legal and tax developments that could significantly impact future plans for their privately-held companies. Contact: Jennie Woo, director of development, [email protected].