When your organization receives a significant gift, one of the first questions your board needs to answer isn’t “where do we invest it?” It’s “what kind of fund do we actually have?” The answer shapes every decision that follows, how you can spend the money, what restrictions apply, and who has the authority to change the rules.

Most boards don’t know there’s a difference until they’re already in the middle of a governance conversation. Here’s what you need to know.

The two types of endowment funds

Traditional Endowment

• Also called a true endowment or donor-restricted endowment
• The donor places explicit restrictions on the principal; the original gift cannot be spent
• Only investment returns (interest, dividends, capital appreciation) are available for use
• Restrictions are legally binding; your board did not create them and cannot remove them without donor consent or a legal process

Board-Directed Endowment

• Also called a quasi-endowment or funds functioning as endowment
• Your board chose to treat these funds like an endowment, operating funds, surplus revenue, or an unrestricted gift set aside by board resolution
• The restrictions are self-imposed
• The same board that created the restrictions can modify or eliminate them by a formal vote

What your board can and cannot control

With a traditional endowment, the donor is a silent governing presence. The spending policy, investment approach, and any changes to the fund’s purpose must honor the donor’s original intent. If you want to change something fundamental, like accessing the principal in a financial emergency, you will likely need to go through a legal process called cy-pres, which requires court involvement.

With a board-directed endowment, your board retains authority. The same board that created the restrictions can modify or eliminate them by a formal vote. That flexibility is valuable, but it also means the fund’s long-term stability depends entirely on the discipline of future boards.

A simple way to think about it

Did the donor place written conditions on how the principal is used?

YES: You have a traditional endowment. The restrictions are the donor’s, not yours to change.

NO: Or if the gift was unrestricted, your board has the authority to decide how to treat these funds. You can establish a quasi-endowment by board resolution, set a spending policy, and document your intent.

Either way, the next step is the same: put it in writing. The difference between a fund that honors donor intent for decades and one that slowly loses its purpose is almost always a matter of documentation.

What good governance looks like

Whether you’re managing a traditional endowment or a board-directed endowment, the foundation is the same: an Investment Policy Statement that defines what the fund is for, how it will be invested, what the annual spending rate is, and how decisions get made.

Without that document, every new board member who joins inherits ambiguity. With it, they inherit clarity, and so does the mission.

Nina Milligan, CFP® | Zenith Wealth Partners

All written content is for information purposes only. Opinions expressed herein are solely those of Zenith, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.