Creating a perpetual endowment to fund scholarships

Situation:

A well-known donor, who was unhappy with many aspects of “traditional” charitable-giving approaches, was seeking a better plan that provided stronger benefits for all parties.

 

Action Steps:

The donor and his alma mater university developed a perpetual endowment in his name to fund scholarships. Under the plan, he made a $1.0 million tax-deductible contribution to the university which was deposited into a cash value-driven life insurance policy, owned by the university, insuring the life of a 45 year-old key faculty member for approximately $3.0 million.

  1. As the $1.0 million grows in the policy’s cash account, it can be used to directly offset the cost of endowment’s scholarship program.  By the time the faculty member retires at age 65, there is projected to be $2.6 million in this account.
  1. The university then cancels the policy, places $600,000 of the proceeds on its balance sheet, and contributes the remaining $2.0 million to two new polices ($1.0 million, per policy), insuring the lives of two additional key faculty members.
  1. Should death occur, the organization will receive $2.0 million, tax-free, and the insured’s beneficiaries will receive $1.0 million, tax-free (assuming the insured picks up the small annual income tax due on the “economic benefit” of the coverage).

 

Results:

The donor and the university are ecstatic that the plan:

  • Creates a pool of funds not subject to market risk for ongoing scholarships;
  • Enhances donor visibility, if desired;
  • Creates additional benefits for noted professors; and,
  • Is independent from university investment and spending policies.