Published June 27, 2013
Berkshire Hathaway Vice Chairman Charles Munger's recent gift of $110 million in stock to his alma mater, the University of Michigan, will provide housing for generations of graduate students and earn him an honored spot in the university's history books. But you don't have to be a billionaire to create a lasting legacy for students. By endowing a scholarship, you can accomplish a similar goal, see the immediate benefits of your gift, and take an income tax deduction to boot.
"I've seen minimum scholarship endowment requirements as low as $10,000 and as high as $100,000," says Nekita Nesmith, director of development at the University of Delaware College of Arts and Sciences. "The minimum dollar requirement is usually based on how the university invests the money."
Once you've decided to endow a scholarship, contact the development office at your chosen university or college. Someone will be assigned to guide you through the process. But it helps to consider several factors ahead of time, including what you hope to achieve, the amount of your endowment and options for funding, the tax benefits, and the satisfaction you'll get from your gift.
What is your objective?
"Consider what you'd like to accomplish with your scholarship," says Nesmith. Whether you want to make an impact for students in a chosen field, assist faculty or fund research programs, it helps to know your goals ahead of time. If you prefer that the university determine the best use for your scholarship, let the development officer guide you, she adds. "Our goal is to match the donor's desires with institutional needs."
Donors with a specific objective in mind can have a say in a variety of criteria, according to Chris Pizzinat, deputy director of the Office of Development at the University of California, Santa Barbara. "The most obvious criteria is need," he says. "That's usually the primary component for most people, but there are some donors where need is not the primary motivator. For them, it's merit," he adds. In that case, donors can design a scholarship for a particular major and set a minimum GPA.
Although donors have a great deal of discretion in the criteria of the scholarship, they can't name particular students to receive the scholarship. "That's not philanthropy," Pizzinat says. "That's just saying, 'I want this person to have the money.' There is a bit of a firewall between the donor and the recipient." Pizzinat adds that once students are selected by the university, the donor can meet with them, which is one of the benefits of endowing a scholarship.
Another limitation in California is a state law that stipulates that university scholarships can't discriminate on the basis of ethnicity or gender, says Pizzinat. "You can't create a scholarship for girls in engineering, for example." However, there are ways to direct the scholarship to a specific area, if the donor is so inclined. Since men outnumber women in engineering, the scholarship can be earmarked for "underrepresented students in engineering, with a preference toward girls," Pizzinat explains. "You have some wiggle room."
How much will you give and for how long?
The minimum amount of an endowed scholarship will vary with the university, as will the required number of years before it has to be fully funded. At both the University of Delaware and UC Santa Barbara, the minimum amount is $50,000, which can be stretched out over five years.The beauty is that once endowed, they can be added to over time, even through a will or trust at death.
"We've seen people create and add to them over time," says Pizzinat. "It's something you can call your own."
The higher the endowment, the higher the percentage that goes to students. "The goal is not to use the principal, but to use the income," Pizzinat explains. Today, a minimum scholarship of $50,000 with a 4.7% return will provide nearly $2,500 per year, he adds. The typical scholarship amount from UC Santa Barbara is between $1,500 and $2,500, so in this case, the scholarship could be given to just one student or split between two.
Some universities, such as UC Santa Barbara, will allow donors to pool together to create an endowment. Others, such as the University of Delaware, discourage it. Some will accept in-kind gifts such as artwork, while others prefer cash.
What are the tax benefits?
When it comes to the tax benefits of an endowed scholarship, several factors come into play, says Mike Cumming, leader of the tax practice group at Dykema law firm near Detroit.
If you make a cash gift during life, as a general rule, you can take a charitable deduction of up to 50% of your adjusted gross income, or AGI, each year that you give, Cumming says. If your gift exceeds 50% of your AGI, you can roll over the difference to the following year, for five years going forward.
If, however, your gift is in some form other than cash, the tax consequences are different. For example, if you gift stock, you can only deduct 30% of AGI, Cumming says.
Additionally, the rules on total deductions for individuals earning more than $250,000 per year recently changed, Cumming says. If you fall in that group, your deduction will depend on the amount your AGI exceeds certain thresholds.
Giving at death, through a trust or will, provides an unlimited charitable deduction, says Cumming. But if the estate falls under the current $5.25 million exemption, you might consider gifting during life so you can enjoy an immediate income tax deduction.
The right way to endow a scholarship for tax purposes is determined "case by case," Cumming says, "depending on your adjusted gross income and your federal gross estate."
How will you enjoy your gift?
"The benefit to endowing a scholarship now versus at death is that we can thank you for it," says Nesmith. Donors also enjoy the benefits of seeing their gift in action, so to speak.
At both the University of Delaware and UC Santa Barbara, donors are treated to various university events and receive special publications from the university. They have the opportunity to name the scholarship and meet the students, faculty and the university president. The size of the gift will determine the level of appreciation from the university.
"The idea is that you're able to interact with the university in a way that others are not," Nesmith says. But perhaps the greatest gift is the knowledge that you've made a difference for students now and in the future, she adds. "Scholarship endowments create a gift that will last a lifetime and beyond if managed properly."