Paul L. Caron

Thursday, October 26, 2006

Stanford Gets IRS Ruling Permitting Trust Investments in its Endowment


Stanford announced this week that it has obtained a private ruling from the IRS

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.

From the Chronicle of Higher Education:

Charitable trusts typically pay dividends to donors, with the remainder of the trust going to the chosen charity when the donor dies. But tax rules have long required that the trusts be invested only in a conservative mix of stocks and bonds while steering clear of holdings in venture capital, real estate, and natural resources — asset types that are commonly owned by large university endowments. As a result, charitable trusts have been prevented from being added to university endowments’ investment pool.

Harvard University moved first to get an exemption for charitable-trust assets, and in 2004 it received a special ruling from the I.R.S. that allowed an initial transfer of $225-million in charitable trusts to the university’s huge endowment. University officials at the time said they expected the change to encourage more charitable trusts to be given by donors who were looking to benefit from the high returns enjoyed by the endowment.

The Stanford press release notes that qualifying trusts would “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% through June 30, 2006.”

The Harvard ruling is PLR 200352017 (Oct. 3, 2003). (Hat Tip:  Chris Hoyt.)

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