What is an Endowment Fund?

An endowment fund is a sum of money that has been contributed by donors, and which is used for the upkeep or operations of an organization. Endowment funds are commonly used by nonprofit and educational institutions. Some portion of an endowment fund may be restricted, so that the principal is protected; if so, only the earnings from the fund can be used. Any distributions from an endowment fund provide a dependable source of cash to the recipient, giving it a degree of operational stability over time. Depending on the tax classification of the receiving nonprofit entity, donations to an endowment fund can be tax-deductible for the donor.

Example of an Endowment Fund

A local community foundation establishes an endowment fund to support scholarships for students in the area. A donor contributes $500,000 to create an endowment, which is then invested to generate annual income. Each year, a portion of the earnings (e.g., $20,000) is used to fund scholarships, while the remaining income and principal continue to grow.