More Colleges Allow Investments in Their Endowments

The following excerpts are from Arden Dale, Smart Investment With Harvard?, Wall Street J., March 24, 2007, at B2, which discusses how charitable trusts may invest in a college’s endowment:

Harvard was the first to offer such an option, in 2003. Other top schools, including Stanford University, the University of Notre Dame and the Massachusetts Institute of Technology, have been granted permission by the Internal Revenue Service to allow donors to invest with their endowments. * * *

The trust option allows donors to share in the returns earned by university endowments, which often have access to investments that are hard for individuals to hold on their own.

After a donor dies, the trust proceeds go to the university. One possible drawback: Tax rates on payments from the trust may be higher than some other investment options. * * *

To invest alongside an endowment fund, donors typically use a specialized version of a “charitable remainder trust,” in which donors put money and receive a regular distribution for a set period of time, usually for life. After the trust ends, the remainder of the assets must go to the charity.

Donors who invest in charitable-remainder trusts typically get an immediate deduction for the amount that is expected to ultimately end up with the charity. Some of the annual distribution that the donor receives, however, may be taxed as ordinary income, rather than capital gains. A donor could pay as much as 35% tax on distributions, rather than the 15% capital-gains rate. But for many people, the tax burden is offset by the higher returns endowments offer.

Special thanks to J. Brad Hickman (J.D. Candidate, Texas Tech University School of Law) for bringing this article to my attention.