Funding a Scholarship Program

Tab 1

Fall 2012

Setting up a scholarship fund can be a great way to give back to your community and create a legacy that endows your philosophies and beliefs into perpetuity. Whether you establish a program with your alma mater, reward those who want to pursue a similar profession as yourself or assist students from your hometown who otherwise wouldn’t be able to finance an education on their own, there are plenty of possibilities.


Creating a scholarship fund may make a large impact on a community for generations, but there are a myriad of options you’ll need to consider before the first recipient ever receives funding.Since there are many legal requirements to comply with, too, it’s important to work closely with a tax advisor and an attorney, who can draft these important documents to create a scholarship fund.

Understand Your Motivation and Goals

“It’s important to understand your motivation for setting up the scholarship,” says Rebecca Bibleheimer, Relationship Manager for the U.S. Bank Charitable Services Group, who administers scholarship programs. “You need to determine if the eligibility standards for the scholarship will have a geographical parameter, if it concentrates on an area of study or if it has other stipulations to meet the goals of your scholarship," Bibleheimer says.


Then ask yourself:


  • How will the scholarship be administered?
  • Who are the beneficiaries?
  • How long do you want this scholarship to last?
  • Will income or principle be used to fund the scholarship?

“Whatever you do, you want to be confident that the program you set in place will accomplish the objectives you want to achieve,” says Sally Mullen, Chief Fiduciary Officer of U.S. Bank’s Wealth Management.

Tab 2

Fall 2012

Decide How Much Money is Truly Needed

Next, factor in how much money is truly needed to sustain a long-term scholarship program.


“When you look at perpetuity, how many kids the scholarship will benefit over time and the cost of administration, you arrive at a pretty big number,” Bibleheimer says. “Often, when we talk to people who are alive now and want to put this type of arrangement in place, they may want to fund it with a smaller amount in the beginning and then fund it with a larger amount when they die, so that’s a consideration written into their estate plan.”


Ultimately, this will determine whether you should implement the program through an institution, such as a high school or university, or work directly with a private fiduciary, such as U.S. Bank’s Charitable Services Group, which handles philanthropic services for private foundations.


“Scholarship funds are considered private foundations, so in essence, you’re funding a private foundation, which mandates paying out 5 percent of the trust’s assets annually,” says Michael Penfield,Senior Vice President and Managing Director

of U.S. Bank’s Charitable Services Group. For example, if the scholarship fund is valued at $2 million, the trust will need to distribute $100,000 that year in scholarships from the trust. The trust will be revalued, and the dollar amount required to be paid out is determined annually. 


Determine Whether You Should Work With an Institution or Independently

The amount of money involved must be enough to sustain a long-­term scholarship, year after year. A modest scholarship, one which may be endowed with $100,000 in order to provide scholarships in some amount such as $1,000 each year, is best established directly through the institution that you’d like to grant the scholarships, such as a local high school, Mullen suggests. Setting up a scholarship in that manner may be the most cost effective way to create a scholarship, Mullen says, given that annual management fees will likely be less expensive when a scholarship is administered through an organization. “Many schools and organizations have a program already in place, either through the organization itself or, if it’s large enough, through community foundations where there might be funds already set up,” Mullen says.

Tab 3

Fall 2012

For larger scholarships, those initially endowed with upwards of $1 million, Bibleheimer recommends having them handled privately and independently of an external organization. “An external institution such as your alma mater will often try to absorb your scholarship into their own fund and administer it themselves,” Bibleheimer says. Instead, consider creating scholarships of a more independent nature that are marketed under your name rather than a college or university to preserve their integrity, she says. Just make sure the endowed money is enough to sustain the scholarship for years to come, Bibleheimer cautions.


It is possible to create an irrevocable trust to fund scholarships independently of an institution. By creating such a trust the donor may be able to structure it in such a way where it can be administered over a long period of time, Mullen says.


Another option is creating a scholarship program named after an employee, as some companies have done. A company in St. Paul, MN, established a trust after an employee who died to provide lowinterest loans and grants to employees in times of need and financial crisis and academic assistance for the employees' children. The trust now offers financial assistance to employees worldwide. 

Structure and Administer the Program

“When a scholarship fund is created, it’s considered a private foundation by the Internal Revenue Service,” Bibleheimer says. “That means strict adherence to certain IRS rules for receiving tax-exempt status relates to how many students have to apply for the scholarship versus how many scholarships are actually awarded.” 


Here to Help


It's important to consult with tax and legal advisors prior to establishing the fund to ensure that it is set up and administered properly. For example, the IRS code has very specific scholarship program requirements. Given the complexities and related expenses, these private scholarship funds may typically make sense only if very significant funding is planned. It might also make sense for the trust to engage a third-party provider that specializes in administering scholarship programs to review all applications, recommend award recipients and maintain all scholarship records for administrative and tax purposes.

Tab 4

Fall 2012

Then, create the parameters for eligible applicants that will be wide enough to accomplish your goals with the scholarship, Bibleheimer says. For example, a scholarship for the descendants of an American Indian tribe required applicants to be descendants of the tribe and have a 3.0 or higher grade point average during their senior year of high school. “The scholarship was only open to student sapplying to two-year schools

and junior colleges. Since many students that qualified aspired to attend a four-year university, we modified the terms of that scholarship fund.”


While creating a scholarship can be a fulfilling process, remember that all scholarship programs need to be reviewed by tax and legal advisers to make sure they’re in compliance with the IRS.


Please see important information below.

Wealth Transfer