Giving Back to Your Alma Mater

Alumni donations are vital to colleges and a great way to give back to the campus community. Some simple planning can maximize the benefits for everyone.

College was a place to learn and a time to grow. As the years pass, it becomes easier to realize what those years provided us and it’s only natural to want to return the favor.

There are many different ways to give back to the schools that did so much to shape us. From creating scholarship funds to supporting teams or making cash donations to a school’s general fund, supporting your alma mater financially can be a particularly rewarding component of your philanthropic activities.

The Power of Individual Giving
Historically, gifts from individual alumni provide the bulk of charitable support. In 2006, charitable contributions to colleges in the U.S. reached $28 billion — over half of which came directly from alumni and other individuals, according to a recent Council for Aid to Education report.

Although major gifts, like Nike founder Philip Knight’s $105 million pledge in 2006 to Stanford’s business school, receive a lot of exposure and press coverage, the combined value of smaller gifts from an army of contributors funds a far greater portion of higher education.

Donations provide an estimated 20% of annual college inflows. Without individual gifts, it would be impossible for universities to sponsor a full range of activities. This is particularly true at public universities, where donations fill the gap left by state funding cutbacks.

The Smart Way to Give
Individual gifts can be made in many forms. Unfortunately, sometimes donors can overlook the importance of structuring their gifts to maximum advantage.

Eighty-five percent of donors give cash, often in direct response to pledge drives. However, giving other assets may hold significant advantages for both alumnus and institution. For example, donating shares of appreciated stock, rather than selling the shares and then writing a check, allows you to give more and can help trim your tax obligations. Think of it this way: If you sell stock that has appreciated by $100,000 and then donate the cash from the sale, you would have to pay at least $15,000 capital gains tax and be able to deduct only the after-tax amount you contributed. On the other hand, if you give the stock itself directly, you can deduct the full market value of the shares without paying gains tax. Plus, the school receives a larger donation.

The same holds true for donations of other appreciated assets, such as artwork and historical papers, as long as you meet the Internal Revenue Service’s requirement for a rigorous professional evaluation of the gift’s market value. However with artwork, there is an exception. Artists may find it preferable to sell their work and then give a cash donation. That’s because artists can only deduct the cost of the materials used and not what the works would fetch if sold.

The Value of Trusts
Different types of trusts can also play an important role in generous and efficient gifting. A Charitable Remainder Trust (CRT) provides a payment stream for the donor’s or beneficiary’s lifetime with the balance of the assets going to the college when the trust expires. For instance, if you establish a CRT to benefit your alma mater and fund it with appreciated securities, capital gains are deferred and your income tax obligation lessened. You can choose to set a term for the trust of up to 20 years or for your lifetime. The trust will then make payments to you. When the trust terminates, the remaining principal goes to the school.

Similarly, a Charitable Lead Trust (CLT) provides the college income for the slated number of years, after which the remaining assets pass to the donor’s beneficiary. These trusts are ideal vehicles for donating highly appreciated assets valued at $250,000 or more.

Lastly, a Charitable Gift Annuity (CGA) makes it possible for you to receive an annuity with the balance paid to the school upon death. With a CGA, the university commingles your donation with other contributions. Payments can start when you make the gift, or be deferred to a later date.

Benefits to You
Subject to certain limitations, gifts can generally provide tax benefits. When giving cash, donors can deduct a maximum of 50% of their adjusted gross income annually, carrying forward any remaining deduction amount for up to five years. Generally speaking, gifts of securities offset up to 30% of adjusted gross income, carrying forward until the deduction is exhausted.

Work with your Financial Advisor to see which gifting option works best with your current financial picture, future strategy and philanthropic goals. Of course you should also discuss your personal tax considerations with your accountant or tax attorney. By taking the right steps to maximize your donation, you can ensure that your generosity supports your alma mater as effectively as possible.

Merrill Lynch does not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your advisor as to any tax, accounting or legal statements made herein.

Michael Falcon is Managing Director and Head of the Retirement Group at Merrill Lynch.

©2006 Merrill Lynch, Pierce, Fenner & Smith Incorporated. Member, Securities Investor Protection Corporation (SIPC). Reprinted by permission.