Choosing the right structure for educational gifts and long-term charitable giving
Creating a scholarship can be a meaningful way to leave a lasting legacy. However, individuals who want to fund scholarships through their estate plans face an important question: What is the best way to structure the gift?
Depending on the donor’s goals, a scholarship may be funded through a will, living trust, charitable trust, private foundation, or direct gift to an educational institution.
Each arrangement has different administrative, tax, and legal considerations. (If you are still deciding how much to give, our earlier post covers college funds and typical scholarship minimums.)
Option 1: Leave a Scholarship Gift Through Your Will
One of the simplest approaches is to include a charitable bequest in a last will and testament.
The will may direct the executor to distribute a specified amount or percentage of the estate to a qualifying college or university for scholarship purposes.
Advantages:
- Relatively straightforward to establish.
- Does not require creating a separate charitable organization.
- Allows the donor to identify a particular institution or charitable purpose.
- May qualify for an estate tax charitable deduction.
Considerations: The gift generally passes through estate administration, and the university must be willing and legally able to accept any restrictions imposed.
Option 2: Fund a Scholarship Through a Revocable Living Trust
A revocable living trust can also direct the trustee to distribute assets to a college or university after the settlor’s death.
For individuals who already use a living trust as part of their estate plan, this may be a convenient way to incorporate charitable giving.
The trust can specify the amount of the gift, identify the charitable beneficiary, and describe the intended scholarship purpose.
It can also provide alternative instructions if the designated institution no longer exists or cannot accept the gift.
Option 3: Establish an Endowed Scholarship at a University
A permanently endowed scholarship is designed to provide ongoing financial assistance.
Rather than distributing the entire gift immediately, the university typically invests the endowed funds and makes scholarship awards under its applicable spending policies.
A donor may be able to name the scholarship in honor of a family member or establish lawful eligibility criteria consistent with the institution’s requirements.
Universities frequently impose minimum contribution requirements for named endowed scholarships.
Donors should obtain written confirmation of these requirements before finalizing their estate plans.
Option 4: Create a Charitable Trust
A charitable trust may be appropriate when a donor wants assets held and administered for specified charitable purposes.
Unlike a direct gift to a university, a separately administered charitable trust may involve ongoing trustee responsibilities, including investment management, recordkeeping, distributions, tax compliance, and oversight.
The trust’s structure also affects whether it is treated as a private foundation or qualifies for another charitable tax classification.
Charitable remainder trusts and charitable lead trusts offer additional planning possibilities, particularly when donors wish to combine charitable giving with payments to individual beneficiaries.
However, these arrangements have specialized tax and administration requirements.
Option 5: Establish a Private Foundation
A private foundation may provide greater flexibility for donors who wish to support multiple educational institutions or maintain a long-term family philanthropic program.
A foundation may award scholarships directly to students, but doing so creates additional legal obligations.
Under Internal Revenue Code § 4945, private foundations generally must obtain advance IRS approval of their procedures for making scholarship grants to individuals.
Scholarship recipients must be selected on an objective and nondiscriminatory basis, and appropriate safeguards must prevent improper private benefit, including awards to the foundation’s insiders or their relatives.
Private foundations also face ongoing filing, distribution, and compliance obligations.
For some donors, the expense and administrative complexity may outweigh the advantages.
Can the Trustee Live in Another State or Country?
When a scholarship is funded through a trust, the donor may wish to appoint a family member or trusted advisor who lives outside the state where the trust was created.
Whether that person can serve depends on applicable state law and the trust arrangement.
For example, California generally permits an individual trustee to reside outside California.
However, appointing a trustee who resides internationally may create additional federal tax considerations.
A trust’s classification as domestic or foreign for federal income tax purposes depends in part on whether a U.S. court can exercise primary supervision over its administration and whether U.S. persons control all substantial trust decisions.
A foreign trustee may therefore create complications even when the trust itself is governed by the laws of a U.S. state. (For more on where a trust is “based,” see Can Your Trust Be Based in a Different State Than Where You Live?)
Trustee selection should account for residency, fiduciary duties, administrative practicality, and tax consequences.
What Restrictions Can You Place on a Scholarship?
Donors may wish to establish scholarship requirements based on financial need, academic achievement, geographic location, academic interests, or community service.
However, scholarship restrictions must comply with applicable law and the receiving institution’s policies.
Restrictions based on protected characteristics, including race or national origin, require particular scrutiny.
Donors should also consider what happens if the original scholarship requirements become impossible or unlawful to administer.
A carefully drafted charitable gift provision can identify alternative purposes that preserve the donor’s intentions.
Which Option Is Best?
There is no single structure that works for every donor.
For someone who wants to leave a fixed amount to one university, a charitable bequest through a will or living trust may be sufficient.
For someone seeking to establish a permanent named scholarship, a university-managed endowment may offer an efficient solution.
For donors seeking to support multiple institutions, retain a formal philanthropic structure, or involve future generations in charitable activities, a charitable trust or private foundation may warrant consideration.
The appropriate arrangement depends on the size of the gift, the intended beneficiaries, administrative costs, tax implications, and desired level of ongoing oversight.
Plan Today for the Impact You Want Tomorrow
A scholarship established through an estate plan can provide educational opportunities for generations.
However, the legal structure matters.
Working with an estate-planning attorney can help donors select an appropriate charitable giving strategy, document their intentions, and reduce the likelihood of future disputes.
Ginsburg Law Group assists individuals and families with wills, trusts, estate planning, and charitable giving arrangements. Contact our office to discuss how educational giving can become part of your estate plan.
Disclaimer: This article provides general legal information and is not a substitute for individualized legal or tax advice.
