University Endowment

By Twickenham Advisors on January 19, 2022

Written By: Zeke Anders

Education is perennially one of the top opportunities in philanthropy. For college graduates, fond memories of time spent at their university is a large part of their identity. The university experience typically includes rich educational achievements, extracurricular pursuits, and friends and mentors who may have a life-long impact on their careers. Many alumni will want to give back to the institutions that helped launch their success. In some cases, you may have an affiliation with a school that you did not attend, but admire an area of study, and wish to support their research or curriculum. A university endowment is a great way to support the school and establish a legacy.

As you begin the process of planning to establish or contribute to a university endowment, what do you need to know?

When considering a gift, you will want to think about and work with the university to plan for how your funds will be used. You may have strong ties to a particular department or program. Rather than grant funds to the university for general use, you can be specific about how the funds will be utilized. For example, your gift can support a scholarship for students that meet specific criteria in a certain field of study. Alternatively, the gift can be used for a professorship, or to build or update select facilities. The gift could support an athletic or extracurricular program. There are many possibilities, each offering a way to pass on your values to generations of students.

To reach generations of students, it is important to establish rules on how much of the endowment will be used each year. Endowments are generally invested to grow the assets and income stream over time. Often, an endowment allows the institution to utilize the income, but not the principal of the gift. This ensures the endowment will provide funding for many years. Other goals have larger up-front costs which may not allow for this strategy, such as funding construction of a building, but they still make a long-term impact on the institution. The school can choose not to spend the entire income from the endowment, and instead reinvest it to continue growing the gift. It is important to understand what policies the school has in place around managing spending from endowments.

Another important consideration is when to make your gift. While tax benefits should not be the primary driver for your decision to give, you will want to maximize the benefits available when you do. Charitable income tax deductions are limited based on your adjusted gross income; therefore, a good time to make a large gift is when your expected tax burden is high. For example, if you have just had a liquidity event in your business, you will have high capital gains income in that year. This will allow you to make a larger gift and take advantage of the income tax deduction. Another option is to make the gift at death to reduce estate taxes. Unlike with income tax, there is no limit on the charitable deduction for estate tax. If you utilized your full exemption amount during your lifetime, you may decide to leave your remaining taxable estate as an endowment. A way to combine these approaches is through a charitable remainder trust. A charitable remainder trust allows you to give assets today and utilize the charitable income tax deduction but continue to receive income from the assets during your lifetime. At your death, the assets will pass to the college or university and be removed from your taxable estate.

Lastly, you will want to understand how the endowment will be invested as investment returns will be critical to the longevity of your gift. According to the National Association of College and University Business Officers, [1] many endowments target 7.5% annual returns. Endowment managers can employ a wide range of asset allocations to try to achieve this return, while attempting to preserve principal. It is important to feel comfortable with how your gift will be managed to feel confident that your legacy is handled prudently.

Creating or contributing to a college or university endowment is a great way to leave a lasting impact through philanthropy. Your gifts can share your values with tens, hundreds, even thousands of students who can help shape the future of the world. In today’s competitive landscape for higher education, there is always a need for support for financial aid, faculty, facilities construction and maintenance, research, athletics, and more. It doesn’t hurt that you can receive the benefit of tax deductions as well. Taking the time to plan your gift can be a fulfilling and rewarding experience, and it is never too early to start.

Disclaimer

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.

[1] https://www.nacubo.org/Research/2021/NACUBO-TIAA-Study-of-Endowments

Zeke Anders-Planning Specialist | zanders@twickenhamadvisors.com