I’ll never forget my father’s advice upon my college graduation: “Remember to change the oil in your car every 3,000 miles” and “Be sure to give back to your alma mater.” Both actions, he believed, would keep me moving onward and upward in the world.
And so they have, more or less. While I’ve modified the oil change recommendation to reflect my hybrid’s lower maintenance requirements, I’ve been a faithful giver to my college. With each gift, I’ve felt proud of my affiliation with my school, and its promise to coming generations of graduates.
What my father did not tell me, however, was how to be smart about that giving. He was purely a checkbook and spare–change philanthropist, writing year–end checks to his college and emptying his pockets into the Sunday plate. In this regard, he was like the vast majority of American givers: it is reported that as many as 85 percent of alumni donors make their gifts in cash.
Not until I became a CFP® professional did I discover the many other – and oftentimes smarter – ways to benefit your alma mater. The best way to give depends on a multitude of variables, including the size of the gift, its intended impact, and the donor’s financial circumstances. Many forms of gifts exist besides cash – securities, real property, a stream of income for a designated period. Finally, it’s possible to make a gift today that does not go into effect until the future.
With so many factors to consider, let’s divide the options into three gift buckets characterized primarily by the amount and frequency of the gift, and/or the relative ease of its implementation.
Bucket One: “Small and Simple”
This category includes all those “cash” gifts made by alums like my father, where the amounts donated are relatively modest. This bucket also includes gifts of time spent volunteering or fundraising. While time is not tax deductible, it is still an important resource for meeting the needs of your alma mater.
Most educational institutions have an “Annual Fund” for operating expenses. Alums receive regular appeals for contributions, usually at year-end. These gifts are generally “unrestricted,” meaning the college or university decides how to use your money.
Just because they are small, your gift can still be strategic, from both the donor’s and donee’s perspective. Rather than giving cash, you can contribute an appreciated security of approximately the same value. If you were instead to sell that security and give proceeds to your school, you would owe capital gain taxes on the appreciation, thereby reducing the gift amount or other resources. Be sure to ask your employer if it will match your gift; check, too, with the college giving office to see if there are matching funds given by other alums trying to bulk up the annual giving program.
Another relatively simple but strategic option is to establish a donor advised fund, through a community foundation, or custodial broker or mutual fund. Let’s suppose you give annually to your school, but this year expect a one-time bump in income, due to a property sale or large bonus. You’d like to offset the nonrecurring income with a charitable deduction. In this case, you might consider establishing a donor advised fund into which you put several years of your annual college gift. In the year you fund the account, you’ll get a charitable deduction for the full amount, even if you then direct the custodian to draw out a lesser amount each year to give to your school.
Bucket Two: “Planned Giving”
As the term implies, this gift category requires some careful planning and thinking – very different from simple checkbook philanthropy. Often it involves taking an asset and splitting its value between two beneficiaries, one of which is your alma mater, or designating assets to be gifted once you or your family no longer need them. Examples of this type of gifting include:
- Naming your alma mater as a primary or secondary beneficiary of your life insurance
- Designating your school as a primary or secondary beneficiary of your IRA or retirement plan
- Purchasing a charitable gift annuity whereby you receive income for a specified period, with any remaining value then transferred to the university or college
Where the planning and thinking get more complex is when gifts are made from a trust. One type of trust, called a charitable remainder trust (CRT), is usually funded with appreciated assets which are then sold and reinvested to provide the trust settlor with an income for life. At his death, the corpus in the trust is then transferred to the settlor’s alma mater. Another type of charitable trust works in an opposite manner. Called a charitable lead trust (CLT), it is set up to provide the college or university with income for a specified period, with the remainder reverting back to the donor or his family at the end of term.
Because of the complexity and expenses involved in setting up these charitable trusts, they are generally reserved for gifts of $100,000 or more. Tax benefits are associated with both types of trusts; in the case of the CRT, the present value of the remainder interest that goes to your alma mater can be taken as a charitable tax deduction in the year the trust is established. The income tax implications of a CLT are a bit more complicated, depending on whether the trust is set up as a grantor or non-grantor trust. Often, the primary goal of CLTs is not for minimizing taxable income, but as a way to transfer a sizeable estate to beneficiaries without incurring gift or estate taxes. Bottom line: this kind of gifting requires careful explanation, crafting and coordination by your CFP® professional and an attorney.
Bucket 3: ”Visionary Gifts”
This bucket contains gifts, generally very large, intended to build the future stability and prosperity of the educational institution.
Many colleges and universities have capital campaigns to improve their infrastructure as well as endowment funds. In the case of an endowment, the goal is to create a permanent base of invested capital to generate income for both current expenses as well provide resources for longer term projects. For example, a college may have an endowed scholarship or an endowed professorship. In giving to these endowments, you are effectively giving money intended to make money forever for these particular purposes. Given the sums involved, donors making these type of gifts often want to direct how the money will be used, seeing it as a perpetual personal memorial.
In addition to consulting with tax and financial planning professionals about these gifts, alums need to work closely with the institution’s leadership to ensure that their gifts reflect their personal intent as well as serve the important needs and philosophy of the school.
While much more can be said about the differences between the buckets, as well as between the types of gifts in each, one thing should be perfectly clear. It takes a lot more than a signature to make a thoughtful, strategic gift. Our alma maters teach us how to think, so it just makes sense to put that ability to work in the gifts we make to them.