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How To Set up a Scholarship/ Charitable Trust

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by Jan Allen

SBJ Contributing Writer

The most significant feature of charitable trusts and endowment funds is that they are permanent, according to Jan Horton, president and CEO of the Community Foundation of the Ozarks.

The advantage over outright cash to charities is that with a trust or endowment, the initial donation, whether cash or something of value converted to cash, is set up in an investment fund which continues in perpetuity.

In the beginning, an endowment donor may specify how and where the income from the donation is to be used, but the donor must relinquish any claim to the gift and the subsequent earnings produced from it, Horton stated.

A specified percentage of earnings, usually 5 percent, is designated for distribution each year, with the remainder of the earnings going toward administrative costs and the rest rolled into the fund principal.

There are 550 charitable foundations nationwide managing billions of dollars with earnings designated for worthwhile charities and educational needs. The Community Foundation of the Ozarks manages 205 individual funds which have an aggregate value of more than $25 million, Horton said.

Funds earmarked for education are often used for scholarships. The foundation provides an information sheet for donors to select a name for the fund and state the purpose. The fund may be named for a group, a family member or for the individual donor.

The designated purpose may be to help students from a particular school or region who are going into a certain field of study. Eligibility of the recipient can also be determined by such criteria as financial need and grade point average.

Steve Schoen, director of planned giving at SMS, warns that, while foundations are eager to follow a donor's wishes, requirements should not be set so tightly that no one can qualify in a given year.

In a scholarship fund, the donor may designate the type of selection committee to choose recipients, such as teachers, community leaders or members of an organization, but the donor is not allowed to be directly involved in the selection of the recipient.

This is one of the factors governing endowment funds, which fall under strict IRS rules. For the gift to be tax-deductible, the donor must relinquish control of the money. The donor cannot give an endowment directly to an individual or influence the selection process to benefit a certain individual.

For scholarship funds, both the Community Foundation and the SMSU Foundation set up a schedule governing application deadlines and procedure for notification of recipient. If the award is given at graduation or another public ceremony, the donor may attend and personally hand the scholarship to the recipient.

From this point the foundation takes over and monitors the student's compliance, such as proof of enrollment and grade point average. SMSU goes one step further and asks the student to write a thank-you letter to the donor, Schoen said.

Although cash donations are the most common gifts, funds for an endowment can come from anything of value. The Community Foundation once took on the chore of disposing of an Oriental art collection. With no auction companies in this area capable of handling the unique collection, it ended up on the auction block in New York, Horton said.

Both foundations have general funds in which anonymous cash donations in any amount can be made, and at SMSU the donor can designate an existing fund to receive the gift. To set up a named fund, the minimum donation at the Community Foundation is $10,000. However, this total does not have to come in one lump sum, according to Horton.

Some donors establish a fund with less money and contribute to the fund until it reaches the minimum requirement. The foundation sets a limited five-year term to reach the $10,000 level.

SMS sets the minimum gift at $100. Many donors make gifts this size or larger each year, Schoen stated.

Donors who wish to set up a charitable remainder trust, in which they receive the earnings during their lifetime then pass the fund and accrued earnings along to a foundation at their death, can still receive a tax benefit, although IRS guidelines still apply.

The trusts are drawn up by an attorney and are usually managed by a bank or trust company during the life of the donor.

Charitable trusts may be held by a bank or investment company and must have an administrator, said Jim Johnson, senior vice president of Mercantile Private Banking and Investment Company.

The trust company sets a minimum contribution, which may be $100,000 or as much as $250,000, Johnson said.

When the donor dies, the trust goes to the designated foundation and while the bank may continue to manage the investment portfolio, administrative duties revert to the foundation receiving the funds.

Schoen said these funds often come to the SMSU Foundation with no designation as to how the money is to be used.

He added, "It's better to let the charitable organization know while you're living what your preferences and desires are."

Both the Community Foundation and SMS have investment firms that manage the distribution of funds, with a committee for the foundation designating the percentage allocated for each type of investment.

A committee, separate from the one that chooses purposes and recipients, oversees the fund management.

The Community Foundation reports annually to the donors.

Information about a specific fund at SMS is available on request by contacting the university's Community Foundation.

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