mission Matters Board-Designated vs. Donor-Restricted Endowments: What Nonprofits Need to Know October 26, 2026 Not sure how your nonprofit’s endowment funds can be used, or who gets to decide? This guide explains the rules, responsibilities, and smart strategies. Quick Takeaways Board-designated endowments generally offer greater flexibility, while donor-restricted endowments must follow the donor’s documented restrictions.Nonprofits should understand the difference between appropriated and unappropriated endowment funds when determining what is available to spend.A clear spending policy can help nonprofits balance current mission needs with long-term endowment growth.Endowment administration and spending must follow the applicable gift instrument, organizational policies and state law, including UPMIFA. Why it mattersCheck out our blog, Rethinking Endowment Gift Policies: Building Flexibility into NFP Giving. Endowments are critical to sustaining nonprofit missions, but not all endowments are created equal. Whether the funds are board-controlled or donor-directed can drastically impact how they’re spent, when they’re spent, and who gets the final say. Understanding these distinctions is essential for long-term strategy and stewardship.What are the primary categories of endowments?1. Board-Designated Endowment (also known as a quasi-endowment) This type of endowment is created when a nonprofit’s governing board, such as its board of directors or trustees, designates a portion of net assets without donor restrictions for long-term investment. Because the designation is internally imposed, it does not create donor-restricted net assets. The board generally retains the authority to modify or remove the designation and may make both the originally designated amount and accumulated investment return available for other purposes.Purpose: Often used when the board wants to ensure long-term financial stability or support for a specific purpose, like operational expenses, but flexibility remains with the board.2. Donor-Restricted EndowmentA donor-restricted endowment is created through a gift instrument that limits how or when the donated assets may be used. A perpetual endowment generally requires the original gift amount, subsequent gifts to the fund, and any donor-required accumulations to be maintained in perpetuity. A term endowment becomes expendable after a specified period or event. Amounts appropriated from the endowment may also remain subject to a donor-imposed purpose restriction until that purpose is satisfied. Purpose: This is typically used when donors want to support a specific cause, program, or area within an organization, such as scholarships, research, or an arts program.Board-Designated vs. Donor-Restricted EndowmentsCategoryBoard-Designated EndowmentDonor-Restricted EndowmentAuthorityControlled by the organization’s boardGoverned by the donor’s gift instrumentNet Asset TypeNet assets without donor restrictionsNet assets with donor restrictionsFlexibilityHighly flexible, can be changed or redirected by the boardRestricted; must comply with the gift instrument and applicable lawUsageCan be used or reallocated as needed by the boardMust be used in accordance with the donor’s documented restrictionsGoalSupports long-term funding with internal controlSupports long-term funding with donor-directed impactHow do organizations determine what to spend from an endowment? A spending policy typically allows nonprofits to use 4%–5% of an endowment’s average balance over the past three years each year while preserving the fund for the future. For board-designated endowments, the board may approve additional spending as needed. Nonprofits should also distinguish between appropriated funds, which are available to spend, and unappropriated funds, which remain invested.CategoryAppropriated Endowment FundsUnappropriated Endowment FundsDefinitionAmount the governing board has approved for expenditure in accordance with the gift instrument, applicable law, and the spending policy.Amount that remains invested and has not yet been approved for expenditure.Use- Board-designated: Used per board-approved purpose (operations, capital projects, etc.)- Donor-designated: Used for specified donor purposes; if supporting operations, funds become net assets without donor restrictions upon spending.Amounts remain invested and are not currently approved for expenditure. For board-designated funds, this is an internal designation rather than a donor restriction.ControlThe governing board may appropriate amounts annually in accordance with the spending policy, gift instrument, and applicable law.Amounts remain in the endowment until appropriated in accordance with the spending policy or, for board-designated funds, until the board modifies or removes the designation.GoalProvide current mission support while considering the duration and preservation of the fund.Preserve and grow the fund for future mission support.SpendingAvailable for use under set policies and spending rules.Not available until appropriated; contributes to long-term growth.FlexibilityAllows spending flexibility within defined guidelines.Not currently available for expenditure; flexibility depends on the gift instrument, applicable law, and whether the fund is donor-restricted or board-designated.Important:Endowment administration and spending are governed by the applicable gift instrument and state law, including the state’s enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA).
