When Universities Manage Other People’s Money

I’ve finally found some concrete examples of university endowments managing other people’s money — and it turns out to be quite a large business.

Anne Tergesen gave a good overview of one way this happens in a BusinessWeek article from last year. Under something called a charitable remainder trust, you donate a sum of money to the university — but so long as you live, you get paid out 5% of the value of the trust each year.

Since the trust is invested in the university’s endowment, there’s a good chance that the value of the trust will increase each year, the 5% payout notwithstanding, and that your income will go steadily upwards. If the endowment does really well and you live long enough, you could end up being paid out substantially more than you paid in. When you die, all of the remaining money goes to the university.

Another scheme is the charitable lead trust from Boston College, which essentially turns the charitable remainder trust on its trust. Instead of the trust belonging to the university and making payments to the donor, the trust belongs to the donor and makes regular payments in the 5% range to the university. When the trust term ends — typically 10 to 25 years after it is set up — the full principal amount is given to the donor’s heirs, and the capital gains in the trust are generally tax-free.

Once again, the trust is invested alongside the university’s endowment. But in this case it behaves much more like a hedge-fund investment: instead of paying 2-and-20, you pay 5-and-zero. It all goes to a good cause, and the capital gains are untaxed.

There are many, many other options, too. Stanford, for instance, lists charitable gift annuities; deferred gift annuities; charitable remainder percent unitrusts; charitable remainder net income unitrusts; flip trusts; pooled income funds; and charitable remainder annuity trusts. They’re all different, but share one thing: the donor ends up getting back, in some way or form, a proportion of the assets that he initially donates.

I think there’s a good reason for these options being largely underneath the radar screen: they’re all basically ways of piggy-backing on the university’s tax-exempt status. If they become too popular, there’s always a risk that the IRS will start cracking down on them.

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