Endowments are underexplored for creating independence from funders
Charitable endowments are often critiqued (and with good reason), but in certain circumstances, they provide the benefit of giving charities genuine independence from their funders.
Charitable endowments, in the classical sense, are funds that charities hold and invest, spending only the interest they make on the investments. Endowments as a source of revenue for nonprofits are distinct as the revenue is not contingent on recurring engagement with a donor — the organization just needs to prudently invest and spend its funds, and doesn’t need to apply for grants for that funding.
Endowments are common among universities in the US, and also used by many (especially older) nonprofits to provide a source of revenue independent from their donors. But these mechanisms are basically not used in the high-impact charity sector, except by donors themselves (who might give out the returns from their endowments as grants).
I argue three points that are somewhat in tension with each other:
Endowments often waste a lot of charitable resources that could be better used otherwise.
We should be equally skeptical of donor endowments as we are of charity endowments.
There are certain circumstances where having endowed funds is extremely useful, and would be beneficial for an organization’s impact (vs. spending the funds directly).
And correspondingly, donors should be somewhat open to granting funds that could be put into quasi and term endowments (but not permanent endowments, see below) to organizations in certain circumstances.
What are endowments?
In a US 501(c)3 context, there are several forms of endowments.
Perpetual/permanent endowments: A donor designates that their funds be held in the endowment forever, and the organization only spends the gains or interest.
Term endowments: A donor designates that their funds be held over a certain time period (e.g., many years), with the organization only spending the returns until that term ends.
Quasi-endowments: An organization chooses to invest its own funds, and spend the returns in an endowment-like manner.
Endowments can also be “restricted” where their gains are spent on specific programs, or unrestricted, where the organizations choose how they are used. These endowment types can also be combined (by an individual donor, or across institutional funds). Often, when you hear “this university has a $10 billion dollar endowment,” it means something like “this organization has a giant basket of various gifts from the last few hundred years, with different sets of rules governing specific portions of these funds in some complicated manner.”
Endowments often come up in the context of universities. For example, a common critique of elite educational institutions from the left is “why don’t they spend their endowments down and give their very good education to more people?” But, for many large universities, this is somewhat difficult. Endowments are typically governed in the US via a uniform law (e.g., law adopted identically by every state) called The Uniform Prudent Management of Institutional Funds Act (UPMIFA). Under UPMIFA, funds that a donor designates to a perpetual endowment are basically required to be held and invested (and not directly spent) unless various conditions are met which might look like:
The donor releases the restriction of the funds to the endowment (which they can only do if they are living — a problem for older universities)
The organization petitions a state attorney general and gets approval to spend the funds because the restriction is now illegal or impossible to achieve.
If the fund is less than $100,000 and over 20 years old, and the restriction is unlawful or impractical.
For universities, these conditions usually aren’t met. For example, Harvard’s endowment is around $52 billion USD, and produces around 37% of Harvard’s annual revenue. Of that $52B, around 80% is legally restricted and cannot easily be spent directly. This means that even if Harvard shifted strategies and wanted to massively increase endowment spending, it could only do so with around 20% of its assets. And only 5% of those assets are fully unrestricted — much of the endowment is restricted to specific programs, professorships, or other purposes.
Endowments therefore can be an immense source of income for institutions that have them ($2.5B in the last year for Harvard), but also are restraining — Harvard has access to this level of income basically forever (if they manage the funds well), but practically can’t do anything else with these funds. The donors who funded this endowment will directly impact how Harvard spends its assets basically indefinitely into the future (or until the law is changed).
Endowments waste a lot of charitable resources
Say I have $100 million USD (lucky me). I decide to donate this to my preferred charity. But my preferred charity doesn’t seem able to spend $100M easily. Maybe it seems like they can usefully spend only $10M each year, and will continue to be able to spend that much impactfully into the future.
But I’d like them to be less stressed by fundraising, so maybe I give them the entire $100M. They carefully and prudently invest it, and are able to get a consistent 6% return above inflation. I’ve given them the ability to basically get $6M of their funding, indefinitely into the future. This is probably a huge relief to the charity — $6M would be a lot of money to raise year after year. And, theoretically, in the long run (say after 17 years), I’ve given them way more than $100M.
But of course, if I hadn’t held the funds, I would have done something else with it. What might I have done?
Given it to other charities
I’ll assume for the purposes of this exercise that I think the charity spending $6M per year over whatever amount of time into the future will continue to be impactful. So this option seems not much better from an impact perspective.
The main upside of giving it away now to multiple charities (if I’m really itching to get rid of the money) is that I have more confidence in how it will be used — even if I think my preferred charity is the most effective, there isn’t a guarantee it will continue to be effective. Maybe there is a chance my preferred charity will decline in effectiveness, such that a gift with a more certain but lower impact now looks better than an uncertain impact in the future.
Of course, giving it all away now to many charities who can spend it immediately, on net, results in less money going to charity in the long run — unless I think charitable opportunities will get much worse over time, I might be causing less money overall to be spent charitably, so I also might need to prefer my present opportunities, or the value created by current interventions, to justify this (see intersections with patient philanthropy, below).
Invested it and given it away over time, like the charity.
Of course, I can also invest the funds, just like the charity. Assuming both the charity and I are equally good at managing funds (or hiring money managers), then this results in the same amount going to charity over time. But now I retain control instead of the charity retaining control.
If I just give the $6M I generate to the charity every year, they now have to worry about fundraising a bit more, so they are a little worse off.
But the advantage is I retain option value — I can choose to stop giving to my preferred charity (say, because they became less effective), and give to something else.
Invested it and make more money to give away
I somehow got $100M in the first place! That might mean I’m pretty good at making money.
Depending on my circumstances, there is some chance I can make a lot more money than I would just investing it in the market — maybe I can use it to start a business, or invest in some startups, or take other opportunities that aren’t available to the charity (or at least, opportunities the charity would never take).
While foundations and donor advised funds are subject to responsible investment requirements, individuals might not be, which means they can take greater risks with the funds (and thus see higher upside) than charities are legally able to, at least in certain circumstances.
If I am successful, I might generate a lot more money to give to charity in the long run, and this could offset the cost of not giving it to charity immediately.
Of course, I might be wrong and lose it! That would be worse, but I should presumably only take this path if it seems valuable in expectation.
And this is further subject to some kind of optimal stopping problem. Presumably at some point I should cash out and donate the money (again, see patient philanthropy discussion below).
Overall, these are all pretty plausible scenarios — even though it would be great for this specific charity to get an endowment, there are lots of totally reasonable worlds where I actually shouldn’t give it to them (at the cost of them losing some independence from funders) — it’s therefore not surprising that many high-impact charities don’t have huge endowments — their funders might have been making mistakes if they’d funded an endowment instead of pursuing other strategies.
But there are a few other reasons to think endowments might not be a great choice for funders.
Most (all?) things don’t need to exist or be funded forever
The best case against endowments is that they lock charitable assets into inflexible arrangements. In some cases, this effectively means that the assets are permanently locked into being invested and having their returns generate income for the organization holding them.
While this model might make sense for universities and hospitals, many charitable projects just don’t need to exist forever — their impact might be expected to be had only over a limited period of time. This might be because the project effectively resolves the issue they work on, or there are diminishing returns to continuing to work on it.
There might be some high-impact institutions that would want to exist indefinitely, such as research organizations, where an endowment might provide some benefit. But it’s unclear to me that research institutions can demonstrate that they can be highly effective or innovative forever. Of course, funding might be a barrier to continued impact, but institutions can change, atrophy, face bureaucratic drift, or otherwise stop being effective stewards of funds.
And many organizations just have inherently time-limited missions. I hope that we can one day end malaria — at that point, we might not need organizations that try to stop its harms. Giving these organizations perpetual endowments is not going to be beneficial in the long run.
I think that these points make a strong case against donors making gifts required to be endowed perpetually. At a minimum, it seems likely that effective endowments will be either limited in term, or made at the charity’s discretion (e.g., the quasi-endowment, described above).
Endowments often create worse incentives for the charities
Ideally, donors are able to provide some level of check on charity activities — they regularly review the activities and impact of the charity, and their funding is conditional (again, in an ideal world) on the charity continuing to use funds effectively.
Of course, in reality, charitable resources aren’t distributed ideally by impact: even highly effective donors might rely on heuristics like trust in the specific charity, the charity’s self-reported plans in a grant application, community and confidant impressions of their work, external research, etc. All of these heuristics and tools can cause mistakes.
But despite this, donors are providing a regular check on charity activities through their due diligence and decisions to continue or stop giving — if the charity stops being as impactful, impact-focused donors might stop giving, and direct their resources to more useful projects. Because of this, charities have strong incentives to align with donor interests, and if those donors are interested in impact, charities have stronger incentives to focus on impactful projects beyond their own intrinsic motivation alone.
However, endowments break this pattern — because endowments allow charities to receive some of their income independent of their activities, they remove these types of incentives. Charities can pursue their own goals, independent of donor interest.
This could be good and bad. Donors can make mistakes, or make strategic pivots that make them less impactful for external reasons (like their values changing or social pressure). If they change their priorities, they force charities they fund to change priorities, find new funders, or cut back on their work. These could all be bad outcomes for effective charities.
But having a regular check on a charity’s activities could also stop the charity from doing less impactful work. I can think of many examples of charities that closed their doors or reduced programs because they lost funding — charitable dollars would have been wasted if they had endowments to keep these less effective programs going. And because the cultural costs of change inside an organization are large, charity incentives probably point slightly away from staying impactful even on their own — an endowment might make this worse.
Many critiques here also apply to donor “endowments”
Of course, charities aren’t the only kinds of entities that can have “endowments.” Donors also have “endowments,” and often operate as such — many wealthy people choose to give away a portion of invested assets, or might have funds in foundations or donor advised funds that literally operate as an endowment.
These structures are subject to the exact same critiques:
Their funding vehicle probably shouldn’t be funded forever.
The same logic that applies to charities applies to donor vehicles. A donor’s foundation or DAF doesn’t need to exist in perpetuity — the problems and opportunities it was created to address will change, the founder’s values might become outdated or wrong, and the people managing it will turn over.
The Ford Foundation’s well-documented value drift from Henry Ford’s original intentions is a classic example: what was once a family foundation focused on Michigan shifted to a global focus very different from its original intentions (for better or worse).
They don’t have good incentives to stay impactful.
Private foundations and DAFs lack the external accountability that charities (theoretically) face from donors. Who checks whether a foundation is doing effective grantmaking? For operating charities, donors can provide this function. For foundations or individual donors, the answer is usually that no one has real leverage — board members at foundations are often family or close associates, and the IRS and legal authorities care about legal compliance rather than impact.
Foundation staff develop their own institutional interests. Research on nonprofit mission drift suggests organizations routinely shift away from founding purposes as internal stakeholders pursue their own goals. Foundations have even less external pressure to resist this than operating charities do.
DAFs have been critiqued (I think unfairly) as “warehousing” charitable assets — donors get immediate tax benefits while funds sit uninvested in charitable work — and this critique applies some of the same logic I’ve applied to charity endowments. The median DAF payout at community foundations is around 9%, meaning most assets are being held rather than deployed.
Of course, ultimately, the money that is given to the charity is owned by the donor, and given at their discretion, so it seems odd to frame conversations around their “endowment” in this light. But from the lens of “there are X dollars that could be given, and Y charities that could receive it. How do we optimally distribute funds?” these questions still arise.
Intersection with patient philanthropy
Patient philanthropy argues that donors should often invest and give later rather than giving now, because:
Investment returns allow more giving over time
Future opportunities might be more impactful
Our understanding of what’s effective will improve
This might seem to support charity endowments — if holding assets is good for donors, why not for charities?
But patient philanthropy arguments are also about who should hold assets during the waiting period, not just whether to wait. The arguments above suggest donors should usually retain control during the waiting period, because:
Donors can redirect funds if the intended recipient becomes less effective
Donors may have access to higher-return investment opportunities
Donors can respond to unexpected giving opportunities
Charity endowments lock in both the decision to wait and the recipient.
The exception is when the charity is better positioned than the donor to identify the right moment to deploy funds. For some organizations with deep domain expertise working on uncertain timelines — maybe some AI safety organizations, or groups preparing for specific future scenarios — this could be true. But it’s a higher bar.
But endowments can be useful
Despite endowments basically looking ineffective on many fronts, they have one incredibly useful function: they create institutions that are independent from their donors.
There are several places where having an institution that can basically operate without continuous approval of its donors might be useful:
Organizations that provide oversight for a community, especially a community those donors are engaged in
Sometimes, donors are deeply embedded in the communities they fund. These communities might create oversight bodies or ombuds bodies that serve a protective role, such as mediating conflicts, handling interpersonal issues, and similar.
Because donors wield a huge amount of power in nonprofit spaces, oversight bodies that depend on those donors for annual funding face obvious conflicts of interest. An ombudsperson who could lose their job if a major funder is unhappy with their findings cannot be fully independent.
Endowing such organizations creates genuine independence. The oversight body can investigate complaints about major donors, make uncomfortable recommendations, and publish critical findings without worrying about next year’s grant. This is probably one of the strongest cases for endowments in high-impact philanthropy.
Some research organizations
Research often benefits from long time horizons and freedom from short-term pressures. A researcher pursuing a decade-long project shouldn’t need to repackage their work annually to appeal to shifting funder priorities.
But the case here is weaker than for oversight bodies. Research quality can be evaluated (imperfectly) by outside observers, so donor oversight might actually improve outcomes by cutting funding to unproductive projects. The risk is that donors optimize for legible outputs rather than important ones — but an endowed research organization can drift toward unimportant work too, without the check of needing to justify its existence.
I suspect that it is worth endowing some aspects of research with very long feedback loops, to insulate it from year-to-year shifts in donor priorities.
Organizations with very long-term theories of change
Some organizations work on problems where impact is expected to continue to exist or only materialize over decades or centuries.
For charities with similarly long time horizons, dependence on annual funding creates pressure to demonstrate near-term results that may not align with their actual theory of change.
But this case also has limits. Very few organizations can credibly claim their theory of change operates on a multi-decade timescale in ways that can’t be decomposed into nearer-term milestones. And organizations claiming long time horizons are especially vulnerable to mission drift because feedback loops are so long.
Independence from donors doesn’t necessarily mean worse impact
I’ve argued above that donor oversight provides a check on charity effectiveness, and that endowments remove this check. But the relationship between donor oversight and impact isn’t straightforward.
Donor oversight optimizes for what donors can observe and evaluate. This works well when donor priorities align with actual impact and when impact is measurable. It works poorly when:
Donor priorities diverge from impact (e.g., donors might prefer visible programs over less visible, more effective ones, prefer direct work over research, etc.)
Impact is hard to measure or has long feedback loops
The most effective work is uncomfortable or unpopular with donors
Donor attention is fickle or subject to trends
For organizations in these categories, independence from donors might actually improve impact. An endowed organization can pursue unpopular but effective strategies, invest in long-term capacity building, and resist pressure to change in response to outside forces.
The key question is whether the organization has good internal incentives and governance to stay impactful without external pressure. This probably depends on:
Strong founding values and culture around impact
Board composition that prioritizes mission over organizational perpetuation
Some external feedback mechanism, even if not donor-based (e.g., peer review, community approval, regular hiring)
Built-in time limits or sunset provisions that force periodic reconsideration of how funds are spent.
So when should donors or ecosystems consider endowments as part of their giving?
Here are my very tentative best guesses:
Quasi-endowments should almost always be acceptable
Quasi-endowments — where an organization chooses to invest unrestricted funds rather than spend them immediately — should rarely be controversial. The organization retains full discretion to change course if circumstances change. This is just prudent financial management for any organization that expects to operate beyond the next year.
Donors should probably be comfortable with organizations building modest reserves and investing them. The question is one of degree: an organization sitting on 10 years of operating expenses while claiming funding constraints is different from one maintaining 1-2 years of runway. And an organization with more funds in reserve will inherently make a worse argument to donors that it has a lot of room for more funding.
Term endowments make sense for specific use cases
If a donor-restricted endowment seems appropriate, it should almost always have an end date. A 10-20 year term endowment, for example, might capture most of the benefits of independence while forcing periodic reconsideration of whether the arrangement still makes sense.
The strongest cases for term endowments are:
Oversight bodies where independence is structurally necessary
Organizations with genuinely long theories of change that are hard to evaluate from short-term outcomes.
Situations where the organization needs to be insulated from short-term donor volatility but not forever
Endowments probably shouldn’t cover 100% of operating costs
Even for organizations that benefit from endowment income, maintaining some dependence on ongoing fundraising preserves useful accountability. An organization funded 50% by endowment returns and 50% by ongoing grants has meaningful independence while still facing external pressure to demonstrate value.
The exception might be oversight bodies, where even partial funding dependence could compromise independence.
Endowments via bequests have different considerations
Bequests are a natural fit for endowment-style giving because the donor won’t be around to provide ongoing oversight anyway. A donor who plans to give $10M at death faces a choice between directing it to immediate spending, giving it to an existing endowment-like vehicle (like a community foundation), or creating a new term-limited fund.
The case for bequest-funded endowments is stronger than for living donors precisely because the alternative isn’t “donor retains option value” but “money goes somewhere without donor input either way.”
Of course, there are ways to avoid this — a donor might designate someone they trust to manage their assets after their death. But for many individuals, the largest giving opportunity in their life will come when they pass away, and the timing of their death might not align with the optimal time to give. Endowments might help manage this.