When people give scholarships through a charitable foundation or scholarship trust using funds from their own estate, it tells others that education is important to them. It leaves a legacy that inspires individuals to pursue education and facilitates that pursuit.
Setting up scholarship funds can also reduce estate taxes and income taxes. The Ohio estate planning attorneys at Gudorf Law Group, LLC in Dayton, Ohio recommend giving foundation scholarships or private non-profit scholarships if tax reduction is important to you. Private family scholarship funds do not receive tax reductions of any sort.
Probably the easiest way to give scholarships is by donating a portion of your estate to a public or charitable foundation with a scholarship program in place. Usually, each scholarship foundation has a variety of foundation scholarship funds to choose from that cover a broad range of purposes and recipient populations. The foundations usually name a scholarship in the donor’s name or in the name of someone the donor wishes to honor, adds the donated funds to the existing program funds, manages investment of the donated funds along with the existing funds, and selects recipients according to the scholarship criteria. The donor doesn’t have to set up their own foundation or trust or worry about who is handling investments or selecting scholarship recipients.
As an example, one client of mine – a teacher in Dayton public schools - donated $400,000 to Kentucky State University, her alma mater, to give scholarships to African American students. She also donated $800,000 to the Dayton Foundation’s African American Fund to establish a foundation scholarship in her name and her sister’s name. Kentucky State manages all the money donated to the university’s fund and selects scholarship recipients. The Dayton Foundation handles recipient selection but allowed my client to appoint her own financial adviser to handle investment of her donated money. A great variety of options are available through existing public and charitable foundations.
Scholarship donations of this sort are almost always tax deductible. The donor receives an immediate income tax deduction of up to 30% of their adjusted gross income (AGI) and excess deduction can be carried forward up to five years. The donor’s estate is also reduced by the amount of the scholarship donation, so estate taxes assessed on the donor’s estate will also be reduced.
Another way to give scholarships is by creating a private, non-profit organization to manage a scholarship trust. This approach allows the donor to give scholarships to specific purposes and populations that aren’t always covered by public foundations and allow the donor to designate their own criteria for determining who receives the scholarships. This approach also ensures that the people guiding the investments and selecting recipients are people the donor trusts or represent certain populations. At our Ohio estate planning attorneys’ office, we encourage designating a broad range of recipient populations to ensure there are enough scholarship candidates each year.
For example, my own father created a scholarship fund for students at the high school he graduated from. The Minster High School Scholarship Fund has given away over $1 million in scholarships since it was created in 1970. The scholarships are only granted to students of Minster High School. However, by using a non-profit organization, my dad was also able to ensure that the board controlling the scholarship fund represented all aspects of the community. The nine-member board is required to include a farmer, a small business owner, a large business owner, a teacher, a student and representatives of several other populations in the community. This diversity ensures that scholarships don’t just end up in the hands of a certain clique and that every student has a chance to receive a scholarship.
As long as the scholarship trust is irrevocable and the board is established as a non-profit organization, a private scholarship foundation receives the same tax breaks as a public or charitable foundation.
The final way to give scholarships is through a private family education trust. A scholarship trust of this sort enables the donor to provide scholarship expressly for members of his or her family. This approach is growing in popularity to encourage and help facilitate pursuit of higher education within the family and down through generations.
The donor who creates the scholarship trust can determine all the criteria for selecting recipients, define how the funds may be used, and decide how much to give with each scholarship and how often a recipient can receive a scholarship. The trust creator also assigns a distribution committee to award scholarships after the creator’s death. Another advantage of the family education trust is that it is revocable. At any time before his or her death, the creator can decide to dissolve the trust and end the scholarship. Sometimes this is necessary to pay unexpected expenses, such as healthcare needs, toward the end of life.
The primary disadvantage of using a family education trust to give scholarships to family members is that there is no tax deduction. Since the scholarship trust is revocable and isn’t part of a non-profit organization, it is not considered a charitable contribution. Therefore, no estate tax reduction or income tax deduction is available and the money is taxed a normal part of the estate.
Discover the best way for you to give scholarships
If you would like to give scholarships as a way to pass on a legacy of education, the Ohio estate planning attorneys at Gudorf Law Group, LLC, can help you determine whether a public or charitable foundation, private foundation or family scholarship trust best meets your needs. Arrange a free consultation with our Ohio estate planning attorneys by calling 1-877-483-6730.