Charitable Gifts to Higher Education–Beyond Taxes

People give to schools for many reasons and, given the amounts at stake, donors are typically well advised regarding the tax implications of their contributions. But there are other critical considerations that transcend taxation. 

With large donations to college endowments, it is particularly important for donors to understand the complexities of charitable giving. Indeed, unless taxes are a client’s sole reason for giving, which is rare, a failure to plan more broadly is myopic, potentially harming not only donors but also the institutions and important educational causes they support. 

Here are five questions financial advisors should raise with clients before they give:

Should there be a formal agreement? Donors as well as schools can benefit from documenting the key elements of larger gifts. Donors have an interest in ensuring that their intentions are clear in the near term and for the future, including after their death or in the case of disability. 

Likewise, colleges and universities may want to clarify their own intentions as well as the precise commitments of their donors. Beyond the obvious tax-related receipts, documentation can take the form of either an enforceable pledge or a nonbinding expression of intent. Schools may prefer the former, but the latter is usually advisable when a donor-advised fund will be used, as the IRS takes the position that, with certain exceptions, such funds cannot be used to satisfy the legally binding obligations of a donor.

When will the gift be made? Consideration should be given to whether a single contribution is preferred over a pledge to make periodic payments (assuming a gift of cash and not property). In most cases, schools will prefer a lump sum. Yet, donors should consider the potential benefits of a multiyear pledge, including the ability to: (1) observe the institution’s performance before disbursing further funds; (2) engage proactively with the institution during the pledge period; (3) in some cases, strategically control the timing of tax deductions; and (4) manage personal cash flow. 

Donors who agree to a multiyear pledge should clarify whether they can prepay or increase their commitments. They should also clarify whether amounts they raise from others will be counted against their commitments.

How will the gift be used? Colleges and universities often have broad missions. In turn, donors may want to specify how their gifts can and cannot be used. For example, if a donor is establishing an endowed scholarship, they may want to include specific criteria for evaluating candidates.

However, restrictions should come with some flexibility. If the permitted use is too narrow, the school may run into problems using the donation. Also, as time passes, a school’s needs and programs can change. To address this possibility, the school can be required to confer with the donor or select representatives if circumstances evolve.

How will endowments be managed? Major gifts are often meant to be perpetual in some way. For example, they may be intended to form an endowment that generates earnings to fund scholarships or other programs into the future. In these cases, donors will want to specify not only the allowable uses of the funds but also their expectations regarding how, where, and with whom the funds will be invested, as well as any administrative charges the school may impose on the funds. They should also request regular reporting of investment performance and how the funds have been used. That reporting should include future representatives or heirs.

What donor benefits are expected? While beyond the strict scope of this article, donors and higher-education institutions should ensure that they agree on the tax benefits of any gifts. If a donor receives a benefit in exchange for a gift, the tax deduction generally will be reduced by the value of that benefit, which should be agreed in advance.

Generally, however, donors may ignore what the IRS considers “incidental” benefits, such as attaching their name to a fund or receiving other recognitions. 

Donors should articulate their expectations regarding any incidental benefits they expect. In the case of naming rights, the college or university may negotiate for a limited period of recognition or a “morality clause” that enables the school to cease using the name if a controversy arises. As for donors who prefer confidentiality, that, too, should be spelled out clearly.

Michael Nathanson is chair and CEO of The Colony Group. He hosts the “Seeking The Extraordinary” podcast, which aims to identify, understand, and explore the undiscovered world of the extraordinary. He is a co-author of the book Personal Financial Planning for Executives and Entrepreneurs: The Path to Financial Peace of Mind. He is dedicated to bringing meaning and joy to the lives of The Colony Group’s clients and team members by fostering a culture that values lifelong learning, cultivates innovation and offers opportunities to live lives full of passion and purpose.