What is Endowment Tax ?

An endowment tax is a tax levied on endowments, which are sums of money used to maintain institutions like schools and charities. Usually, endowments are subject to special rules and tax authorities often treat the parent institution as a nonprofit, qualifying it for tax exemptions like elimination of endowment tax. In harsher economic times, governments may look on large sums of money retained by institutions as a potential revenue source, arguing that these groups should pay taxes on the money.
A typical endowment tax kicks in when endowments rise over a certain amount. This allows smaller institutions to avoid taxes, making the most of their endowments, while organizations with a great deal of money will incur some tax liability, typically a low flat rate, on funds over the limit. The institution must declare the size of the endowment and provide supporting documentation showing how they invest monies to grow the fund and how they arrange disbursements out of the endowment to make sure it still qualifies for special tax treatment.

What Are the Types of Endowments ?

 The different Types of Endowments

An endowment is money that is given to an organization, usually for a specific purpose. Endowments generally are meant to be used for investments that will create indefinite interest income for the recipient. Endowments come in many types, and can be classified by their type of recipient, their purpose, or by the way the finances from the endowment are handled. Recipients of endowments typically may be a college or university, a library, or a hospital. Endowments may be true, or permanent, endowments or they may be term endowments.
Endowments are generally managed in four ways. A term endowment pays a designated recipient, but only for a predetermined amount of time, or until a specific event occurs. An example of an event that might end a term endowment is the death of the endowment recipient or closure of the organization receiving the endowment. This type of endowment may also be called a living trust.

Another way to bestow an endowment is to have an investor outside the recipient organization invest the principal and turn the income from the principal over to the recipient. This type of endowment is called a fund held in trust by others. A permanent, or true, endowment is a principal investment that provides interest income to an organization indefinitely.
Sometimes, an endowment can be classified by how an organization is permitted to use its funds, whether the spending is restricted or unrestricted. Restricted endowment funds, sometimes called restricted-purpose endowment funds, are financial gifts given to an organization for a specified purpose. Unrestricted endowment funds, also called quasi-endowments, provide general funding for an organization or department. Where an unrestricted endowment would allow an organization to spend money on anything the organization needed, a restricted endowment might give a specific gift, like new musical instruments for a high school music program. In science, a restricted endowment can be for a specific purpose within a specific area of study.   
Within the academic world, another type of endowment is the endowed professorship. These highly-regarded, salaried positions are bestowed by an institution of higher learning. Often, professors receiving this honor are considered to be ranked above a standard professor at that institution. An endowed scholarship is a restricted-purpose endowment given to students at an educational institution.

How to Start with an Endowment ?

How to Get Started With an Endowment

First, think about how much you want to have in your endowment ultimately. You might look at the amount of money to fund your organization annually. You know that some of that money comes in through your normal fundraising efforts and some through fees from your clients. How much would you want to come from your endowment? Then calculate how much endowment would produce enough interest to fund that amount. For instance, say you need at minimum $500,000 annually to support your mission. Perhaps you would like one-fifth of that to come from your endowment, or $100,000. If you think you could get 5 percent interest (a reasonable, but still conservative, expectation) from your endowment, you know that you need $2 million in your endowment.
That is a lot of money but not out of reach if you have a cadre of loyal donors and supporters.
An endowment can be started with any amount of money, however small. But to build an endowment of any size is a long-term project. You will need to cultivate donors over time since many endowment gifts come as a result of a bequest upon the donor's death.
Your board will need to set up the rules of the endowment. For instance, you will want to name the endowment, restrict its use, and provide guidelines for how much of the interest can be used yearly and when the endowment principal might be tapped if needed under extraordinary circumstances. The endowment can be set up in your current nonprofit corporation, or it can be spun off into its own organization. Although it is not expensive or difficult to start an endowment, you will want to get some help. Your community foundation may be able to help you, including holding the endowment for you. Also, work closely with your accountant and attorney so that your endowment is in compliance with your state's requirements.

Raising the Money for Your Endowment

Explain to potential donors why you are setting up an endowment. How do you plan to use the endowment and its earnings? Answer any questions in all of you fundraising materials for the endowment, provide them on your website, and include them in the material you supply to your volunteers who will be "selling" the endowment to prospective donors. Find out if other organizations similar to yours in your community have endowments and how they use them. These facts will be helpful to show that what you are doing is not unusual, much less illegal.
Position your endowment building as good stewardship that will help ensure that your organization will be able to continue doing good in your community for many years to come.
Make sure that your fundraising for the endowment is in addition to your fundraising for immediate needs. Fulfill your need for operating funds before funding an endowment. Likewise, make sure you have a "rainy day" fund that can be tapped easily should unplanned problems arise for your nonprofit. An endowment is not a rainy day fund.
Not every donor is a prospect for endowment fundraising. Since wills and bequests are usually the main component of endowment fundraising, it means that you will want to choose your donors carefully and cultivate them over a long period of time. Endowment donors are interested in leaving a legacy and providing for the long-term future of the organizations they support.
The best way to ensure an ongoing effort for the endowment is to set up a planned-giving program and market it through special materials, seminars, events, and a legacy society.
Build a persuasive case for your endowment. Why should your donors make a long-term investment in your organization? How will their gift change lives, even save lives in perpetuity?
Explain how your organization will be a good steward of the donor's gifts. Provide options for donors to make their gifts and detail how donors will be recognized or what benefits they will receive.

Why Wait?

Even in a declining economic situation, the groundwork can be laid for building an endowment. It is not a task or goal to be achieved overnight anyway. Begin now and you might be in a much more stable financial position years down the road.

What are The advantages and disadvantages of Endowment ?

What Are the Advantages to an Endowment?

Stability is the main reason to have an endowment. Small and new nonprofits often only think about the current fiscal year or the next payroll. It is important to get out of that financial trap as soon as possible. An endowment helps diversify your organization's income and reduces your dependency. That you have an endowment can be enormously comforting for donors too...the idea that you plan to be around for a long time. You can also offer donors the option of providing a gift that will keep on giving well into the future, and/or the opportunity to fund the needs of the moment such as operating and program funding.

What Are the Disadvantages of an Endowment?

You might be criticized for having an endowment or for having too large of an endowment. Some well-known universities have come under attack recently for growing huge endowments while claiming not to have funds for other uses. Small nonprofits are sometimes criticized for not spending every dime on current needs. Even funders such as foundations might slight an organization that already has money. That is unfortunate since it only encourages financially shaky management, but you should take these biases into consideration as you think about setting up an endowment.

What is Endowment ?

What is Endowment ? here some definition of it :

Endowment is a fund that is made up of gifts and bequests that are subject to a requirement that the principal be maintained intact and invested to create a source of income for an organization. Donors may set up an endowment to fund a specific interest; and a nonprofit's governing body may set up an endowment. In any case, an endowment requires that the principal remain intact in perpetuity, or for a defined period of time or until sufficient assets have been accumulated to achieve a designated purpose.

 Or

An endowment is a charitable donation in the form of real property, assets, or funds, usually given to an institution to support a specific goal. Common endowment recipients are libraries, universities, and hospitals. Generally, an endowment is quite large, and an institution often receives multiple endowments which are pooled in a common fund. Typically, the principal of the endowment is invested, and the interest is used to fund projects.

Traditionally, endowment funds are used for major projects, such as constructing new buildings, funding an endowed professorship or chair, or sponsoring a lecture series. Often, the donors who gifted the endowment may placer restrictions on how it shall be used, stipulating, for example, that their endowment funds must be used to build a new university library. Typically, donors to private institutions are linked with the institution in some way; university alumni, for example, frequently donate sums to their alma maters to improve them.
In addition to private institutions such as universities and colleges, endowments are also used to create national funds, such as the National Endowment for the Arts and the National Endowment for the Humanities. These endowment funds are maintained to support artists and innovators in reaching their goals, and funds are typically disbursed in the form of grants. These types of endowments enrich society as a whole, and will benefit anyone who is willing to write a grant to apply for funds. In some cases, governments support national endowments to demonstrate a commitment to culture.

 Exemple  :

The university has the largest endowment in the higher education community.