Key Differences Between Current Use and Endowed Funds

The impact of a donation can vary significantly based on both how the donation is structured and the type of fund it is deposited into. Two common types of funds are endowed funds and current use funds. Both are commonly established to support scholarships, research grants, professorships, academic programs, cultural initiatives, or other restricted purposes within a charitable organization. 

While both endowed funds and current use funds play crucial roles in supporting organizations, each serve different purposes and have unique characteristics.  

Endowed funds: A gift that keeps on giving 

Endowed funds are designed to last in perpetuity. The original donation, or principal amount of the fund, is invested, and a portion of the investment earnings, usually a percentage or a fixed amount, is distributed each year to support specific purposes or programs designated by the donor.  

This ensures that the fund can provide ongoing support in perpetuity or for a specific duration, depending on the terms set by the donor and the policies of the organization. Endowed funds provide a consistent and reliable source of funding, helping institutions sustain their operations and pursue their missions long term. 

Here’s how endowed funds work: 

1. Once a donor has agreed to make an endowed gift to the organization, the donor will sign an agreement that outlines the purpose, gift amount, and terms of the endowment. 
2. The donor then irrevocably transfers their financial gift to the organization. 
3. The organization, often through a 3rd party, then invests the principal amount to create an endowment which earns investment income over time. 
4. A portion of the income is distributed back to the organization on an annual basis to be used according to the fund's purpose, while the principal remains intact and invested. 
5. Over time, if well-managed, the endowment grows, increasing the amount being invested and distributed for use, increasing the overall value and impact over time, in perpetuity. 
6. The organization will spend the annual distributions annually on the agreed-upon purpose in a manner that achieves the highest impact.  
7. The organization should aim to share stories of the fund's impact with the donors annually.  
8. Ideally, the donor feels gratified by the sustained impact of their gift, encouraging them to contribute further to the endowment or other initiatives. 

Current use funds: Immediate impact 

Current use funds, on the other hand, are utilized to meet an organization’s immediate needs. They provide an organization with financial flexibility to respond to changing circumstances, to address emerging needs, and to capitalize on opportunities as they arise.  

Current use funds are commonly used to meet short-term needs. Many charitable organizations maintain a balance between endowed funds and current use funds to support both their immediate and long-term goals. 

Here’s how current use funds work: 

1. Similar to endowed funds, the process begins with a donor agreement specifying the gift amount, fund's purpose and terms.  
2. The donation is then irrevocably transferred to the organization. 
3. The organization spends the funds on the agreed purpose in a manner that achieves the highest level of impact. 
4. The outcomes of this expenditure are shared with the donor, demonstrating the immediate impact of their contribution. 
5. The gratification of seeing their funds in action motivates the donor to continue supporting the organization, whether through the same fund or others. 

Key differences 

The primary difference between the two types of funds lies in their longevity and timing of impact. Endowed funds are a long-term investment in the organization's future, slowly disbursing proceeds over time, preserving the capital, and providing consistent support. Current use funds are an immediate cash injection, spent promptly to address pressing needs or opportunities. 

For donors, the choice between endowing a fund and providing current use funds can reflect their personal philanthropic strategy and financial situation. Those seeking to create a legacy may prefer endowments, while donors interested in addressing current challenges may opt for current use funds. 

By understanding the distinctions between endowed and current-use funds, you can tailor your giving to match your vision for a better future, whether it's a gift that endures or one that addresses immediate needs. 

Resources 

To help new teammates understand the differences between current use and endowed funds, and to help our donors make informed decisions, we've created an easy to understand graphic, available for download, which serves as a reference guide to these two types of funds. 

[Download the Reference Guide and Training Material Images] 

This reference guide will serve as a handy reminder of how a donor’s generous support can be structured for the best possible impact.