Setting Up A Scholarship Program

Jessica has always wanted to start a scholarship program for kids and wants to know the best place to put her money so that it can grow to build this fund.

QUESTION: Jessica in Mississippi recently graduated from medical school. She’s always wanted to start a scholarship program for kids and wants to know the best place to put her money so that it can grow to build this fund. Dave advises Jessica to first get rid of her own debt and become financially secure, then gives her some pointers on how to do this.

ANSWER: The first thing I want you to do is to build other wealth and to become debt-free. Before you start building a scholarship fund, you need to get your debt cleared. That’s a philanthropy move, or a charitable giving move, and you do that from strength. While you’re in debt, we’re not dealing with strength. But once we’ve done that, how do you build a scholarship fund?

Certainly, colleges love for you to endow a scholarship with them. For instance, you give them a chunk of money that you’ve built up and then they award the scholarships every year. If you want to award the scholarship individually and manage the thing individually, you’re not going to have a tax write-off on it unless you form some kind of 501(c)(3) to do that. You’d see your estate planning attorney, and you may develop some kind of trust. You might develop a foundation. Either one of those you can set up as a 501(c)(3), or you can combine them if you need to. But then you’re putting money into an investment, something like a growth stock mutual fund, and you’re saying you’re going to set aside $100,000 and give away $5,000 a year out of that or $10,000 a year out of that, and it ought to somewhere around self-perpetuate once you’ve gotten to that point.

If you’re just wanting to give away money and not have a nest egg that creates the investment return to give away, then you just cash flow your gifts. Figuring out a way to write that off is somewhat difficult, too, but it can be done. Depending on how complicated you want to make it, you could sit down with an estate tax or estate planning attorney to put everything together. What we did is formed a family foundation for all of our charitable giving, and then out of that we do some things like that. The majority of our giving goes to some ministry-type things.