What happens if the current value of an endowment is below its original value?
Unless expressly provided for by the donor, there is no absolute requirement that the value of an endowment fund must never fall below its original value. The board is given considerable discretion in determining spending from an endowment, but it must always act prudently, taking into account the considerations listed in Q4 above. Over the long term, it is generally expected that a perpetual endowment fund should maintain its value, adjusted for inflation, but short-term deviations from this objective may sometimes be justified as “prudent,” depending on the particular circumstances. It is important to keep in mind that private foundations must always comply with the 5-percent payout requirement imposed by federal tax law, even if distributions at that level would cause the endowment fund to fall below its target level.
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