Scholarship endowments: Benefits of giving

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Most people assume that creating a scholarship for college students is something only a multimillionaire would consider. But you don’t need to be a tycoon to leave a lasting legacy for students. An endowed scholarship is a donation that is invested by the college, the interest of which is used to fund scholarships each year. By endowing a scholarship, you can witness an immediate impact by helping deserving students — and receive a tax deduction along the way.

What is an endowed scholarship?

An endowed scholarship is a donation made to a college that earns interest each year. When you endow a scholarship, you’ll give a university, college or local foundation a certain amount of money. Then the organization will invest it how it sees fit and use the proceeds to fund a scholarship for years to come. You can add more funds over time, but the principal amount itself will never be spent.

If you decide to endow a scholarship, contact the development office at your chosen university or college. They’ll assign a representative to guide you through the process. Before endowing a scholarship, think about what you hope to achieve, the amount of your endowment, options for funding and the tax benefits.

Who can endow scholarships?

Anyone with extra funds can endow a scholarship, though the minimum amount depends on the university. Most schools have an endowment requirement between $25,000 and $50,000. Endowments can be made in cash, although some schools, like San Diego State University, accept appreciated securities, real estate or tangible personal property.

What to consider when endowing a scholarship

Endowing a scholarship can be a great way to make a lasting impact for students at your chosen institution. However, it’s also wise to sketch out a plan for your endowment before you commit.

What is your objective?

Whether you want to impact students in a specific field, assist faculty or fund research programs, it helps to determine your goals ahead of time. If you prefer that the university decide the best use for your scholarship, let the development officer guide you.

You may also be able to determine whether the scholarship is need-based or merit-based. For the latter, you can designate a scholarship for a particular major or request a minimum GPA. But keep in mind that while donors have a great deal of discretion in determining the criteria of a scholarship, they can’t name particular students to receive the scholarship.

Scholarships also cannot discriminate on the basis of ethnicity or gender. 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 could be earmarked for underrepresented students in engineering, with a preference toward female candidates.

How much will you give and for how long?

The minimum amount of an endowed scholarship varies based on the university, as will the required number of years before it has to be fully funded. Once endowed, scholarships can be added to while you’re alive or through a will or trust after you die. Cash is the most common way to fund an endowment, although you may be able to make an in-kind gift.

The higher the endowment, the higher the amount that goes to students. A minimum scholarship of $50,000 with a 4.7 percent return will provide nearly $2,500 per year. This could be distributed to one student or split between two.

What are the tax benefits?

As a general rule, if you make a cash gift while you’re alive, you can take a charitable deduction of up to 50 percent of your adjusted gross income (AGI) each year that you give. If your gift exceeds 50 percent 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 deduct only 30 percent of your AGI.

For more information about your specific situation, it’s best to consult with a tax professional.

The bottom line

Endowed scholarships are a great way to make a difference at an institution you care about. If you’re interested in endowing funds, determine how much you can afford to give, what parameters you’d like to set for the scholarship and which universities you’re interested in contacting. Then reach out to the development office of your chosen university to learn more about the process.

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