What Is an Endowment Trust?

An endowment trust is a particular type of fund established for a charitable cause. Funds established in a trust can be used for a variety of purposes including educational and social programs. An endowment trust is usually started by one or more investors, and additional charitable contributions are sometimes made by others interested in helping the trust grow and continue in purpose. Individuals and groups in need of funds related to the purpose of the trust are then awarded gifts from the trust.

Sometimes referred to as an endowment trust fund, an endowment trust is one of many types of endowments. Other types include a true endowment, a quasi endowment and a term endowment. The type of fund is typically decided upon by the person setting up an endowment.

Endowment trusts vary in size and purpose. Some are established for such altruistic purposes as funding the educational goals of children from impoverished families while others may be established for more personal reasons, such as assuring that a house mortgage is paid in full and that heirs receive the balance of the fund. Rules pertaining to starting and managing an endowment trust vary depending upon where the trust is first established.

It is not unusual for endowment trusts to be established by one individual or a group of individuals before being opened to other donors. In this way, a trust is able to expand its scope of support and is able to continue to award funds to recipients for as long as investors continue to support its purpose. A common example of this type of endowment can be found at many colleges and universities. Often, university trusts are started by an individual or a family and continue in perpetuity as other donors continue to contribute to the trust to benefit students in need of financial assistance. Rules governing investment fees and taxes are governed by the jurisdiction where the trust is held, but in many areas donations to endowment trusts are not taxed.

While investors may directly contribute monetary gifts to an endowment trust, some are allowed to invest by way of bequeathing assets to a trust. In some parts of the world, such as the United Kingdom, individuals are allowed to buy and sell endowments. In these instances, buying an endowment or selling an endowment trust is akin to buying or selling an insurance policy.