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Creating an Endowment Equivalent
A combination of:
- Outright gifts
- Charitable bequest
Situation: John, a widower, would like to establish an endowment with Lake Forest College named for his late spouse, Louise. He thought of contributing $200,000 now so that he could enjoy seeing the results of his gift, but he hesitates because he fears he might need the money for unforeseen expenditures. He knows he could include a $200,000 bequest in his will to establish the endowed fund - but he would like to honor his wife now. He could also benefit from a tax deduction this year.
Solution: John includes a gift of $200,000 in his will to create the endowed fund and also decides to contribute $8,000 a year, which is approximately the annual amount that would be distributed from a $200,000 endowment. Because John is subject to a 32% tax rate, the $8,000 gift results in income-tax savings of $2,560 annually, reducing the net cost of the gift to $5,440. John retains control of his principal to the end of his life. So long as he continues the annual contributions, the arrangement is equivalent to an endowment. This win-win situation is achieved by blending annual outright gifts with a bequest in a will.
Priorities achieved:
- John establishes an endowment equivalent to honor his spouse.
- John reduces his income tax annually.
- John transfers wealth while minimizing taxes.
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