How Do Endowment Funds Work?

What is an Endowment?

An endowment a permanent fund, typically made of cash and other assets given to a nonprofit organization like Children’s Health to provide long-term financial support through investment of those assets. The income generated from the investment is used to support the organization's ongoing mission.

How do Endowments Work?

By establishing endowed funds, donors can ensure that nonprofit organizations, like Children’s Health, will have income in perpetuity to continue meeting the needs of the community we serve. Donors contribute money or assets to the endowment, which is then invested, and a portion of the investment income is used each year to fund the organization’s mission. These funds are professionally managed and governed by specific policies.

1. Create the endowment fund and decide how it should be used: Endowments are established through donations, and donors typically specify how they would like the funds to be used.

2. Invest and manage the funds: Endowment funds are invested in a diversified portfolio of assets which could include stocks, bonds, real estate and other investments.

3. Distribute Return: A portion of the endowment’s investment return is distributed annually to support the nonprofit’s activities.

4. Continued Support: Endowments are designed to be long-term creating a sustainable source of funding for the nonprofit and ensuring that programs can live on in perpetuity.

Types of Endowments

There are several types of endowments. Each is governed by specific policies on how that money can be invested, used and how money can be withdrawn.

• Unrestricted Endowment: This consists of assets that can be spent, saved, invested, or distributed at the discretion of the institution receiving the gift.

• Term Endowment: The principal can be expended after a period of time or a certain event.

• Quasi Endowment: A donation is made to serve a specific purpose. The principal is typically retained while the earnings are spent per the donor's specifications. These endowments are often started by the institutions that benefit from them via internal transfers or the use of unrestricted endowments.

• Restricted Endowment: The principal is held in perpetuity while the earnings from the invested assets are expended per the donor’s specifications.

How is an Endowment Funded?

At Children’s Health, the minimum required to establish a new endowment is $50,000. This can be funded through cash, stock or other non-cash assets, and can also be established as part of a planned gift. Endowments are established in consultation with a gift officer to create an endowment agreement.

A donor may also choose to contribute to an endowment that has already been established. This may be a fund created by another donor or a collective fund originally established by Children’s Medical Center Foundation to support our largest priorities including research, mental health, and general use.

Why Create an Endowment Fund for a Healthcare Organization?

By creating an endowed fund, the donor can honor their own legacy or the legacy of someone important to them in perpetuity to support the mission of Children’s Health. Our ability to make life better for children is furthered by these permanent funds that provide continued support, while extending the legacies of generous friends and partners who have established these endowed funds or were honored by them.

• Sustained Support: Reliable funding to support pediatric research, health treatments, and family support services.

• Legacy: Donors can leave a lasting legacy while advancing the future of pediatric care.

All donors who establish an endowment have the opportunity to be recognized as members of our Bradford Society. This legacy society not only honors those who have chosen to remember Children’s Health in their estate plans but also uniquely recognizes those who have committed to the future of making life better for children through a legacy gift such as an endowment.

How Children’s Health Manages Your Endowment Fund

Endowments are established to provide ongoing support for a project, program or need that is close to a donor’s heart. Contributions are invested to generate earnings, and each year, a portion of the earnings (as determined by the spending policy adopted by the board of Children’s Health) will support the designated purpose of the gift. Earnings in excess of the spend amount are reinvested, allowing the principal to grow. As the principal grows, earnings will also grow, providing an ongoing source of support.

Children’s Health Investment Office

The Investment Office at Children's Health manages the financial assets of the health care system, which include board-designated reserves in the form of a quasi-endowment and donor funds entrusted to Children's Health in perpetuity.

The Foundation's substantial investment portfolio offers a wide array of opportunities for active investment management, giving us the opportunity to partner with talented external fund managers to identify profitable investment opportunities greater than what the broader stock and bond market can provide. Active management goes hand-in-hand with diversification across investment mandates, investing styles, geographies and asset classes. The combination of active management and diversification allows us to strive for superior investment results over time.

Investment Approach

The four pillars of our investment approach — our long-term horizon, active management, diversification and awareness of risk — are meant to uplift the mission of Children's Health. For the Investment Office and its stakeholders, our first duty of care is as fiduciaries for the financial interest of the hospital system and its mission, including its ability to serve future generations.

How are Endowment Funds Distributed?

In general, endowment funds are distributed by spending only a portion of the investment income earned each year, while the principal remains invested to grow the fund in perpetuity.

The annual spending policy for endowments at Children's Medical Center Foundation specifies a 5% distribution of a rolling 12-quarter average of the ending fair market value of the fund. Because the endowment pool performance fluctuates from year to year, the 12-quarter rolling average helps to stabilize the support these funds provide to programs. The 5% distribution rate is reviewed annually to protect the corpus of endowments and ensure the funds continue to provide sustainable, reliable support for our donors' designated purposes. Endowment distribution policies comply with the Texas Uniform Prudent Management of Institutional Funds Act, as amended.

Are Endowment Contributions Tax-Deductible?

Yes, donations made to establish or contribute to an endowment funds are generally tax-deductible and can offer various tax benefits for both the donor and the nonprofit organization.

• Income Tax Deductions: Donations to qualified charitable organizations that establish or contribute to an endowment are generally deductible from your income tax if you itemize deductions.

• Avoid Capital Gains Tax: By donating appreciated assets, such as stocks or real estate, directly to the endowment fund, you can avoid paying capital gains tax on the appreciation of those assets.

• Estate Tax Benefits: Including an endowment fund in your estate plan can potentially provide estate tax benefits.

How do Endowments Make an Impact at Children’s Health?

Endowment funds help sustain important programs and clinical research needed at Children’s Health. More than 200 named endowments funded by donors are housed by Children’s Medical Center Foundation. A range of clinical, non-clinical, research, training and community-facing areas benefit from these funds’ annual distributions, which help sustain important programs and spur new developments at Children’s Health. Examples include clinical research, mental health, team member development and education, and patient family support services such as Child Life.

Additionally, a large portion of our endowments do not have a specific designation but are instead unrestricted for the general charitable purposes of Children’s Health. These funds provide the greatest flexibility to invest in short- and long-term solutions and to explore new avenues in pediatric care.

To learn more about endowment donor stories and the impact of these funds, you can read our current and past publications online.