2022 is a promising year for Endowments & Foundations. From donor relations to investments, the outlook is optimistic for organizations to overcome the challenges of the past few years, which is outlined in this year’s Outlook for Endowments & Foundations webinar. While many topics were covered, your peers submitted questions regarding topics that are top-of-mind for their organization. Let’s answer them today.

How do you feel that the proposed Accelerating Charitable Efforts (ACE) Act will impact philanthropy?

The ACE Act is a bipartisan bill that seeks to accelerate charitable giving by restructuring various rules for private foundations and donor advised funds (DAFs). There are numerous provisions, and the bill continues to be debated, but the core of the proposed law is the incentives it creates to give away assets held in these vehicles faster.

Although most DAFs are utilized relatively quickly, currently, there are no formal rules regarding time limits or giving requirements. Private foundations, on the other hand, have a 5% annual payout requirement, including qualified expenses. It’s probably reasonable for lawmakers to close some of these loopholes for DAFs, to at least make them more comparable to private foundations.

However, the bigger issue may be the importance of perpetual giving. For some philanthropists and non-profits, the concept of equity between different generations is important. This could be true for an organization that has a permanence to its mission – schools, hospitals, social services, etc. Many donors value the ability to support both current and future beneficiaries and this kind of support aligns well with the needs of many organizations.

It’s difficult to know exactly how philanthropists might adjust their giving if the ACE Act is passed, but our view is that perpetual giving plays an important role. Effective communication between donors and non-profits is always needed to ensure gifts meet an organization’s mission.

Our current investment policy is weighted toward equities. We are a not-for-profit charged with preservation of principle in order to fulfill donor wishes and fund programs into perpetuity. Should we revise our policy toward a more conservative approach?

Regarding investment policies, we generally recommend focusing on the fundamentals of your organization when setting guidelines. This includes your time horizon, withdrawal needs, and risk tolerance. Many “endowed” portfolios, those that are perpetual with an ongoing withdrawal need, tend to be growth-oriented and therefore are more heavily weighted toward equities.

However, there are many nuances to consider, especially regarding your withdrawal needs. Do you have a formal spending policy? And can your funding needs be sustained if volatility were to occur? It is worth asking if there are any recent changes to your organization’s needs and if those require a change in your policies. It is best practice (and we recommend) doing a policy reaffirmation at least once per year.

A separate but related issue is how your portfolio should be positioned considering the current market environment. It’s important for investment polices to provide enough flexibility to manage changing market dynamics. For example, we suggest policies include an equity allocation range, instead of a single target, so that allocations can adjust for opportunities as the market presents them. When valuations and fundamentals are attractive, it makes sense to own more equity. Likewise, when valuations and fundamentals are less attractive, it may make sense to tilt toward fixed income. For clients in Manning & Napier’s multiple asset class portfolios, where we have discretion to invest in both equity and fixed income, we generally position the portfolios with a neutral to slightly above neutral weighting to equity today, which reflects opportunities we are identifying in the market.

Having both (1) appropriate policy guidelines aligned to your needs, and (2) the flexibility to adjust within those guidelines as markets change, are important tools for helping your organization reach its goals over the long-term.

For endowed giving, how do you seek out the first gift? Are donors more likely to lend support if an endowment is already well-established?

There does seems to be a chicken or the egg situation with endowments, because it’s true that donors may be more reluctant to support an endowment that’s not already well established. However, there are several ways to put their minds at ease.

One approach is to showcase the financial strength of your organization and its commitment to permanence. Consider establishing a reserve fund or a board designated fund to demonstrate that you have the discipline for long-term investing. Have a clearly defined mission and show that the need for support has been in place continually for many years. Confidence is the key element here. For your donors to have trust in your cause, they want to feel a sense of long-lasting impact.

Having all the necessary policies in place ahead of time is also a best practice. This includes a case statement specifically for endowed support, an investment policy with appropriate guidelines and priorities of objectives, and a spending policy that balances the need to provide current and future support.

Finally, give donors peace of mind by highlighting and utilizing appropriate legal protections. Complete a formal gift agreement to document their intentions, and let them know that, in most states, non-profits are legally required to follow donor intent and manage their endowment prudently. Some organizations will go so far as to provide regular reporting to donors on the status of their endowment and how it’s being managed and spent – all to help give comfort that their legacy is in good hands.

Conclusion

Overall, the keys to success this year are policy preparation and clear communication – whether it be within the organization regarding goals, or donors and their giving plans. To hear more about what we expect for non-profits in the year ahead, check out the replay of our 2022 Outlook for Endowments and Foundations webinar.

The information in this paper is not intended as legal or tax advice. Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.