You Asked: What to do with an undesignated bequest?
Dear Foundation,
Our church just received an undesignated bequest. We’re thrilled, but we don’t have a policy in place about what to do with it! It will probably take us a while to decide, and we don’t want to miss out on interest that we could have earned during our discernment process. But if we put it in our endowment, does that prevent us from spending the principal in the future once a decision has been reached?
Congratulations on receiving a bequest-- your ministry obviously had a big influence in the donor’s life. Undesignated funds can be a huge blessing. As you described, they also force your church leadership to do some discernment together. You’re wise to want to understand all your options at the beginning of this process.
The first thing to do is double-check the language in the will or trust that resulted in the gift. A truly undesignated gift should have certain buzzwords such as “undesignated” or “in its sole discretion.” Those are words that donors use to explicitly indicate that they trust your church leadership’s judgment about what to do with the gift. They give you maximum flexibility. If conversations develop along the lines of, “I’m sure this is what s/he would have wanted,” you have legal standing to gently remind your decision-makers that they’ve been entrusted to make a choice based not on the donor’s priorities but on the church’s priorities.
If you decide to spend part or all of the principal, the best practice with undesignated gifts is to use them for something other than the operating budget. That way, you get to celebrate using the gift for something “extra.” For example, we’ve heard of undesignated gifts that came at just the right moment to complete a major maintenance project. Using the gift to make a lump-sum payment only makes sense if the interest you’re paying on the loan is higher than the returns you would expect to earn by investing the gift, or if the payment was part of a larger “debt-free church” campaign. Another strategy is to return unexpected gifts to the community by using them for outreach ministries that you wouldn’t be able to afford otherwise. If you’ve got an upcoming capital campaign, you might choose to use the gift as seed money. Whatever project you choose, make sure to tell the story; storytelling can inspire more people to give!
If you decide to invest part or all of the principal, we have a family of portfolios for this purpose: Diversified Conservative, Diversified Moderate, Diversified Aggressive, and Fosill Free Moderate. Your leadership team should discuss its risk tolerance and choose a portfolio with a corresponding balance of equities to fixed-income instruments. Your team will also need to discuss whether or not to take regular distributions. Our flagship Diversified Moderate portfolio has returned an average of 7.47% per year net of fees for the past ten years. Many churches choose to take an annual distribution of 4% and reinvest the remainder of their earnings for growth.
Just because the donor didn’t specify that the gift should be used in perpetuity doesn’t mean that part or all of it can’t go into your existing endowment. A well-funded endowment is a gift to your church’s future leaders, and to the beneficiaries of your church’s future mission in its community. Each church endowment charter is different, but usually an act of the charge conference can designate new funds for the endowment. If you take this route, know that you’ll need another act of the charge conference to remove these funds from the endowment if circumstances change in the future.
This is a lot to think about! You’re probably right that it will take a number of months to come to a decision. One way to keep up with inflation while you decide is to put the money in a “parking lot” account with low exposure to market risk and high liquidity. Other churches have used our Stable Value portfolio for this purpose. It contains a mixture of laddered CDs and secured loans made to other United Methodist churches in the Northwest. The laddered CDs do a good job keeping up with inflation and protecting against interest rate drops, while the loans provide modest income. Withdrawals can be made at any time, and it usually takes less than a week for your church to get a check in the mail. Last year, the Stable Value portfolio returned 2.69% net of fees.
Blessings on your discernment process, and congratulations again on receiving this gift!