How to Start a Scholarship Fund

My parents, siblings, and I want to establish a university scholarship to reflect our family's commitment to higher education. Where do we begin?

Setting up a scholarship is a wonderful way to give back, honor your values, and make a real difference in someone's life. The process is more manageable than you might think—particularly when it comes to the financial commitment—so long as you do the research, find the right partners, and come together as a family to support such an endeavor. Here are some initial questions to ask yourselves, and possibly your financial advisor.

You and your family should think about the values, vision, and purpose you want to perpetuate, and which beneficiaries would best reflect those goals. For example, will the scholarship be based entirely on merit, or will there be a need-based component? Other requirements might include community service, extracurricular activities, and specific areas of study such as the arts or sciences.

The key questions here are the size of the scholarship, what it will cover, and where it can be applied. Private scholarships range from a few hundred dollars for, say, books and other supplies to thousands for full tuition and fees. Toward that end, you'll also want to ask yourself if the scholarship will apply to the traditional four years of college, a single year, or somewhere in between. Finally, you'll want to determine whether your scholarship is tied to a specific institution or whether any accredited college or university will do.

It's also worth considering the selection process—and how engaged you wish to be. Indeed, your level of involvement will determine how you establish a scholarship. For example, you and your family can:

This is perhaps the most efficient option requiring the lowest level of involvement, since most colleges are already in the business of administering scholarships. You can make a gift to support financial aid and scholarships in general, or you can designate funds for a new limited or ongoing scholarship.

The minimum financial commitment and fees for administering a new scholarship vary, so you may need to explore several institutions before finding a good fit for your family's resources and goals. That said, you'll likely have little to no involvement in the award process, though you may be able to help define the selection criteria.

Many community foundations or scholarship funds accept outside contributions to support the organization's overall efforts or to start new scholarships that assist certain students.

As with universities, these organizations will have administrative and financial criteria that can vary depending on the duration and scope of your gift, and your involvement in the student selection process is likely to be limited. Nevertheless, it could still be an attractive option if your goal is to support students in a specific community.

Your family—or existing private family foundation—may want to set up an entirely new fund. Meeting legal criteria for a new scholarship—for example, demonstrating a transparent, nondiscriminatory process for selecting recipients and ensuring that none of the selection committee stands to gain from their choice—is an intensive and potentially costly process.

As a result, you may wish to consider working with a nonprofit scholarship administrator who can help design your program and handle the administrative responsibilities. Be aware that setting up a program of this magnitude will likely require an endowment in the tens of millions of dollars to be sustainable. 

If you plan to donate cash, it's fairly straightforward to gift the money directly to the university or community foundation you've decided to support. However, things get complicated if you want to donate noncash assets such as appreciated securities, art, or real estate. Small community foundations, in particular, may not have the ability or resources to receive, appraise, and liquidate noncash assets, limiting the scope of your financial support.

In such cases, you might choose to contribute through a donor-advised fund, which can help facilitate all aspects of the donation—from evaluating noncash assets all the way through to their sale. Once the assets have been liquidated, proceeds are added to your donor-advised fund account, where they can be invested for growth potential. You can then choose to recommend a one-time grant to your chosen organization or make smaller grants over time.

Plus, donor-advised funds are recognized as 501(c)(3) charitable organizations, so your contributions qualify for a tax deduction in the year of the donation. What's more, donating appreciated securities you've held for more than a year allows you to deduct the full market value (rather than just the original cost), thereby avoiding any capital gains taxes you otherwise would have paid on their sale.

However you choose to give, remember that the tax deduction for cash gifts to public charities is limited to 60% of your adjusted gross income (AGI), versus 30% of AGI for noncash gifts. If the size of your gift exceeds these thresholds, any unused portion can be carried forward for up to five tax years.

As you can see, there are many considerations when setting up a scholarship—but part of what's so rewarding about this admirable endeavor is how it can bring you together as a family and further define your collective values.