How do Endowments Differ from Trusts

Endowments

1
An endowment is a monetary gift to a non-profit organization. Typically, the principal is used to earn interest, dividends or a return on investment. Oftentimes, the entire principal that a non-profit like a university, for example, has is referred to as its endowment. The principal is preserved while the return is used for a variety of functions, from charity to expansion and so on.
There are four different types of endowments that exist. These are: term, unrestricted, restricted and quasi. Term endowments set a term on the donation—i.e., the money can only be spent after the term has expired. The term can be a certain amount of time or an event (like a death)—but whatever it is, the money must only be used for investment purposes until the term has ended, then the gift can be spent however the organization sees fit. The unrestricted endowment can be spent however the receiving organization desires, whenever it wants. There are no restrictions. The restricted endowment cannot ever be spent; its principal can only be used to obtain a return on investment and these earnings, whether they come from interest or dividends, are what may be spent by the organization. The quasi endowment is often constructed by the organization as a way to protect the principal of an endowment. It usually binds the principal to be maintained while allowing earnings on the principal to be spent at the discretion of the organization.

2
Three institutions that are not colleges that use endowments are: 1) cultural institutions, such as museums, theaters or libraries; 2) service organizations, like the Red Cross, hospitals or clinics; and 3) religious institutions, like churches or synagogues. Each of these types of institutions can be the recipient of endowments so long as they are non-profit institutions.

3
The difference among trust, estate, gifts and endowment are numerous. A trust is set up by a grantor, who places assets under the control or management of a trustee, who oversees the assets for the beneficiaries. A trust is often used to save on taxes and protect assets. An estate is all of the property that is owned by a person at the time of the individual’s death. So a trust may be something that is set up earlier as a means of transferring wealth into something that is out of the possession of the individual so that it is not divvied up among inheritors at the time of death. Gifts are legal transfers of assets to the recipient. Unlike a trust, where the trustee has legal title but is not necessarily the beneficiary, the gift owner has both legal title and is the beneficiary. Endowments are monetary donations that can be used by the non-profit organization according to the terms of the endowment.

4
The requirements to start an endowment are to be a non-profit organization. The requirements to start an estate are simply being able to pay for them and able to pay taxes on them. The requirements for starting a trust are to have a trustee and beneficiaries named. Proceeds from an estate are taxable though inheritance is not. Taxes on the funds are typically paid prior to distribution. Estate expenses are tax deductible. Proceeds from a trust are taxable—i.e., income tax is paid on the taxable amount paid to beneficiaries. Deductions are only for distributed income for the trust. Gifts are taxable only on the part of the giver, who files the gift tax return and pays any tax on the money gifted if required to do so. Otherwise, the gift can be deducted.