NEW YORK – Rita Schneider and Ron Alberts wanted to give something back to Harvard University when they retired after many years working there. They also needed money to retire.
The couple found a way to meet their goals through a trust option that allows donors to invest alongside the Harvard endowment. Harvard was the first to offer it in 2003, but it is catching on at top schools around the country, including Stanford University, Princeton University and the Massachusetts Institute of Technology.
The money in the trust receives a return at the same rate as the endowments, which often has access to investments that are out of reach for individuals. After a donor dies, the trust proceeds go to the university. One possible drawback is that tax rates on payments from the trust may be higher than some other investment options.
The option has worked for Schneider and Alberts, who now live in Miami Beach as self-described beach bums.
The couple had strong ties to the school. Rita, 56, had taught French and Spanish to theology students at the Harvard Divinity School for 13 years in a summer program. Ron, 59, was a staff assistant in the registrars office there.
They funded three trusts at Harvard from the sale of appreciated real estate. The trusts pay them a handsome income; what is left when they die will be a gift to Harvard.
At Harvard, the donor doesn’t have to be an alumnus or employee, but the university is always the trustee. The trust is a charitable remainder annuity trust or a charitable remainder unitrust. These types of trusts generally pay income to the donor but direct the remaining assets to a charity on the donor’s death.
This month, the IRS revealed that it has given a group of additional schools the go-ahead to offer the trust option. Though the IRS didn’t reveal their identities, the University of Notre Dame confirmed it was among them.
“We’re just going public now,” said M. Jean Gorman, assistant vice president for development at Notre Dame. “This is a phenomenal opportunity for charities.”
Schneider and Alberts are particularly pleased that they were able to stipulate that when they die, the trust will go to the Harvard Divinity School to fund education on genocide.
“My father’s side of the family perished in the Holocaust and I wanted to honor them, and especially to devote my life earnings to the teaching of tolerance,” said Schneider.
The key to the trust option is that it allows a donor to harness the investing power of the endowment. University endowments are among the most successful investors.
Higher education endowment funds earned an average return of 10.7 percent in fiscal 2006, according to a recent survey by the National Association of College and University Business Officers in conjunction with TIAA-CREF. The S&P 500 Index for the period returned 8.6 percent.
“As far as I know, this is about the best place to invest and be able to sleep at night,” said Schneider.
Tax is one potential drawback. Money distributed from the trust is taxed as ordinary income, rather than capital gains. A donor could pay as much as 35 percent tax on distributions, rather than the 15 percent capital gains rate.
But for many people, the tax burden is offset by the higher returns endowments offer.
The option has been hugely popular at Harvard: The university has $1.5 billion in its planned giving program, and about $900 million of that is invested through its approximately 700 charitable remainder trusts. About 60 percent of the charitable remainder trust assets are invested through the endowment option.
“Having the endowment investment option has been tremendously beneficial for Harvard and our donors,” said Anne McClintock, executive director of University Planned Giving at Harvard. “It’s something that our donors have asked about for many, many years.”
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