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.