Setting up a college endowment can be a meaningful and many times beneficial way for wealthy donors to ensure that a college retains a large reserve of money while funding programs or opportunities that are of some importance to the donor. Most of the time, the actual endowment set-up is handled by a university funding office. The donor still has a lot of choices to make, however. One of the most important considerations when setting up a college endowment is use specifications. If the donor wants the endowment to be used for a specific purpose, or to bear a certain name, he or she needs to draft that into the endowment agreement, along with any conditions on how the endowment should be handled or reinvested.
One of the very first things you should do when thinking about setting up a college endowment is to speak to a financial planner, preferably one unaffiliated with the school you will be donating to. A financial planner will be able to look objectively at your assets, help you determine an appropriate amount to give, and usually also help draft the terms of the endowment agreement so that it both memorializes your intentions and qualifies for tax and other benefits. Most of the time, university endowments must be relatively large sums of money. The idea behind an endowment is that the original money donated, known as the endowment principal, is kept by the college in trust, and the interest earned on that money is what actually funds the designated programs.
Savvy donors can often condition their college funding on certain investment decisions, including stipulations that the endowment principle be placed in stocks, in mutual funds, or in high-interest bond market accounts, for instance. A donor who is familiar with the ins and outs of the investment landscape may be able to make these conditions independently, but most of the time the recommendations come from a financial planner. Planners are also well-equipped to negotiate and coordinate with university endowment offices.
Schools are usually willing to be flexible when a lot of money is on the line, but many also have pre-written rules about how college endowments must be invested. Most also have rules pertaining to what percentage of college endowment interest must actually go to the named programs, and whether any percentage can be diverted to funding other projects. A college endowment that returns more than expected in interest can usually either lie dormant and continue to grow, or can be used elsewhere.
Donors who have preferences about the terms of their college endowment gifts usually need to memorialize those specifications in writing. This is particularly true when the gift is funding an endowed chair or an endowed department that can be named. If the donor wants the position or department to bear as certain name, that needs to be spelled out, and the conditions upon which that name could change or be adapted need to be negotiated at the front end. Understanding and defining the precise terms of your proposed college endowment is one of the most important parts of setting it up. University fund officers will usually walk through all of the options with you, but it is always a good idea to come prepared.
