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Why Not to Give Directly to an Alma Mater
Roger Silk | 02-20-02
I recently received a call from a long-time associate of mine, who happens to be an extremely competent and successful investment advisor.
"You'll be so excited to hear what I've done," he told me. "Jenny and I have just created a fund in our names at Princeton."
"Wow Mike. I'd like to hear more about it", I said. "What exactly is the purpose of the fund, and how does it work?"
"Well, it's for the business school," he replied hesitantly.
"What are they going to do with the money?" I asked.
"Um, they're going to invest it, I guess, and use part of it to help students."
"Mike, do you think they'll do a better job of investing it than you would?"
"Uh, no."
"Do you have any control over what they do with the fund?" I asked, strongly suspecting I already knew the answer.
"Uh, I guess not."
"You're a smart guy. I know you love Princeton. But how did they convince you to do it?"
"I got great tax benefits. I gave them $300,000 of appreciated stock. So I avoided the capital gains tax, and I got the income tax deduction. Given my tax bracket, it cost me only about 35 cents on the dollar."
At that point, I related the following to Mike.
University endowment funds are among the most popular recipients of direct gifts. Despite their popularity, we don't usually advise that people make large endowments for universities if the donor wants to have any kind of real influence over how that money is invested or spent.
It's not just that universities often pursue controversial policies, such as hiring radical professors or allowing courses to be taught that many donors find offensive. It's that most universities just don't need your money. Large universities already have enormous amounts of money, and a direct gift will not guarantee the kind of recognition or impact a donor might obtain elsewhere.
In the United States alone, colleges and universities have more than $195 billion in endowment assets. Thirty-four of these have endowments of $1 billion or more, including Princeton at about $8 billion.
Mike caught on pretty quickly.
"You know, Jenny and I are planning to give again this year. I guess there's another approach I should take that you're about to tell me about."
He was right. I reminded him of what he probably already knew, but just hadn't focused on. Instead of giving his money (or stock) outright to Princeton into a fund, he should create his own private foundation.
With his own foundation, I explained, he'd keep full control over the money. He could continue to invest it, and he could also decide when, to whom, and in what amounts to give it away. He would get the income tax deductions, and he could give stock to his foundation and avoid the capital gains tax on it.
I could almost hear him thinking.
"Roger, if I'm following you, I should not only be doing this myself, I should be telling my clients to have foundations too. That way, they'll keep control, and I can keep managing the money. They'll get their tax deductions, and everybody wins."
Exactly.
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