- Such wealth would be invested into an endowment fund to sustain the trust.
- A high-net-worth individual or any individual with significant assets is rightly concerned about their offspring’s ability to prudently manage and preserve their wealth.
Endowment funds are in vogue. The last few years have seen lots of conversations among charitable institutions, high-net-worth individuals, alumni, higher education institutions and research institutions.
The conversations have revolved largely around continuing the vision and mandate of the founders amid dwindling donor funds and an uncertain future.
Whereas the majority of those who set up endowments or for whom endowments are set up are charitable institutions, non-profits, museums, religious institutions, hospitals, research bodies, and universities, among others, anyone can set up an endowment for various reasons.
A high-net-worth individual or any individual with significant assets is rightly concerned about their offspring’s ability to prudently manage and preserve their wealth.
Such persons appreciate the need for a will. But a will only passes on the wealth – it does not ascertain how the wealth will be handled and used.
Where a person wishes to maintain their wealth for more than just the immediate generation or beneficiaries, trust is the best tool for continuity and prosperity.
The Trustee (Perpetual Succession) Act and Trustees Act are some legal statutes that provide a framework for transferring wealth during one’s lifetime to a trust instead of beneficiaries directly.
Such wealth would be invested into an endowment fund to sustain the trust.
Some of the key considerations to have in mind, and this applies to anyone with assets they would like their beneficiaries to inherit, and not just high net worth individuals include having a will/trust in place, having a durable power of attorney for the executor of the will/trust, designation of the beneficiaries of the will/trust, healthcare power of attorney for decision making in the event the individual is incapacitated by illness, and guardianship designation in the event the beneficiaries are minors.
A fund manager will help establish such a trust and manage, invest, administer, and disburse trust and endowment funds the manager may outsource these services, especially administration.
This also applies where a wealthy person wishes to donate their wealth to a charitable cause.
The donation can be placed in an endowment fund overseen by a fund manager, thus ensuring sustainability and proper management.
The fund manager also ensures that the funds/capital raised are preserved and grow at a pace above inflation over the medium to long term while generating sufficient liquidity to support the mission of the endowment.
Endowment, therefore, is about building for the future without neglecting the present.
It is a strategy that has been employed by many institutions around the world, including local ones, to ensure liquidity to continue the mission while preserving the capital.
In other words, the heirs or the managers of the institution are only allowed to withdraw and utilize the interest while the capital remains invested in equity, bonds, and other assets, as the fund managers may determine.
Endowments provide institutions or families (whatever the case may be) with financial stability and help preserve the legacy and mission in the long term.
Evidence shows that endowment funds have grown in popularity in Kenya with more organisations taking them up as their investment vehicles of choice.
The returns generated by endowment funds have been instrumental in providing families with basic needs after the death of the benefactor, ensuring that wealth is not lost to poor management and battles for control.
They have also kept non-profits such as schools and universities running, enabling the growth of scholarship funds for needy students, funding critical research, and enabling foundations to continue development work in vulnerable communities.
One of the advantages of using an endowment as an investment vehicle is that the policies and principles governing the investment of the assets therein can be tailor-made to align with ethical and sustainable investment principles.
Sustainable investing is the practice of making investment decisions based on socially responsible and ethical strategies to ensure that a portfolio maintains a high standard of sustainability principles.
Investing through ESG (Environmental, Social, and Governance) principles constitutes part of sustainable investing and has become increasingly popular over the years.
This can be done through a variety of avenues including investing in listed companies on the NSE that conduct sustainable business such as renewable energy, investing in listed green bonds, and ESG-certified infrastructure or real estate projects.
Other advantages of endowment funds include the fact that they are long-lasting, cross-generational and offer certain tax benefits as endowment funds enjoy tax exemption status on all investment income.
Also, fund income can be used to purchase medical insurance and pay for education through education insurance policies offered by insurance companies.
To ensure the smooth running of any endowment fund, certain best practices should be put in place.
These include but are not limited to identifying a vision for the endowment fund; coming up with a written endowment policy; determining the investment policy to grow the endowment; identifying who will serve on the board of directors of the endowment fund and identifying a plan for the sustainable growth of the fund.
As with every investment decision, the right time to make a decision is today as tomorrow might be too late.
The writer is the Chief Executive Officer of Britam Asset Managers.