October 24, 2006
IRS ruling allows charitable trusts to be invested in Stanford endowment
The Internal Revenue Service this week provided Stanford University with a special ruling that will lift tax barriers that have prevented it from investing charitable trusts established by donors with the larger university endowment. To date, Harvard is the only U.S. university to have been granted this special permission.
Under the new ruling, qualifying trusts invested in the endowment will benefit from the strategies and management expertise that have resulted in the endowment's strong performance, with a 10-year average annual return of 14.8 percent through June 30, 2006.
The ruling will provide significant diversification and growth potential for the trusts as a result of increased exposure to asset classes previously unavailable to charitable trusts. Approximately one-half of the endowment's assets are invested in nonmarketable securities, also known as "alternative assets." These assets include private equity, venture capital, real estate, absolute return and natural resources investments. These types of investment assets had previously been unavailable to charitable trusts because they often produce "unrelated business income," a form of income ordinarily prohibited in trusts by the IRS. In addition, access to these types of investments is often quite limited and rarely available to smaller investors.
The IRS ruling applies to most charitable trusts set up at Stanford and shields them from unrelated business income. Donors who have already set up a charitable trust outside Stanford may still be able to benefit from the ruling if the trust is turned over to Stanford as its trustee and the entire charitable interest is irrevocably designated for the university.
Many donors are attracted to the tax and financial benefits of a charitable remainder trust, in which the donor or other named beneficiaries are paid a percentage of the principal annually for life. The trust assets that remain following the death of the beneficiaries then pass to Stanford, to be used according to the donor's instructions.
For more information about this new endowment investment option for charitable trusts, call (800) 227-8977, ext. 5-4358; write to firstname.lastname@example.org; or visit http://plannedgiving.stanford.edu/.