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I am now rather confused. I thought one of the purposes of an endowment is to shield the organization from unexpected losses, or even to provide funds if a special opportunity arises. If the principal of an endowment cannot be used, how can it help if say a building is damaged and a deductible needs to be paid; or conversely if a building is needed and an excellent opportunity arises?

Your confusion may arise because organizations are not always precise in what they call endowment.  The purpose of a true endowment (i.e. donor-restricted gifts) is to provide permanent funding for charitable purposes from the income on the original gift.  Normally there is no provision for use of the principal in the case of an emergency.  The income could be pledged to support a loan to fix up the building, but the principal could not be invaded without the donor's approval or attorney general or court approval.  Many organizations set aside reserve funds that the board calls an "endowment," but the law is pretty clear that the board can also unrestrict those funds and spend whatever amount it deems appropriate to meet an emergency.  Those reserve funds are not considered true endowment.  --Don Kramer

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