Stanford Joins Harvard in Getting a Break From the IRS on Charitable Trusts

October 25, 2006

A special ruling by the Internal Revenue Service will enable Stanford University to manage charitable trusts as part of its endowment, which, at $15.2-billion, is the third-largest in 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.

With this week’s ruling Stanford joins Harvard as the only two universities to receive the charitable-trust exemption. In a news release, university officials said 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 percent through June 30, 2006.”