How to establish a scholarship fund

Can this couple make their dream of creating a $200,000 endowment fund a reality?

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(Photograph by Shannon Mendes)

Justin and his wife Danielle want to create a $200,000 endowment fund for civic-minded students (Photograph by Shannon Mendes)

The current situation

Justin Langlois, 30, and his wife, Danielle Sabelli, 29, recently moved to Vancouver. He’s a professor at a local university, while Danielle, who is currently articling at a law firm, plans to open her own practice when she finishes in a year’s time. Together, the couple earns about $100,000 annually but expects to increase that to $130,000 in a couple of years. Their only debts are a $297,000 condo mortgage and a $5,000 RRSP loan—obligations they’ll have no problem paying off as they don’t plan on having any children. “Post-secondary school was a good investment for us,” says Justin. “We want to support other students who want a good education but don’t have the money.”

That’s why the couple has a unique goal. They’d like to set up an endowment fund that would give out scholarships annually to a few civic-minded students. They’ve just started contributing $100 a month to a savings account and hope to contribute $10,000 or so annually starting in two years. By 2029—or 15 years from now—they’d like to have at least $200,000 in the plan, or enough to fund two to five scholarships totalling about $15,000 a year in perpetuity. Are they on track to do so?

The verdict

Justin and Danielle will not meet their goal of saving $200,000 in 15 years if they contribute only $10,000 a year. “Assuming an annual rate of return of 4%, they’ll have only $170,000,” says Ian Black, a fee-only adviser with Macdonald, Shymko & Co. in Vancouver. “They’ll be $30,000 short.”

To meet their goal, Black advises the couple to bump up their contribution rate to $12,000 a year starting in 2016. “Increasing their contribution by just $2,000 will do it,” says Black. Then, in 2029, Justin and Danielle can give the whole amount to a memorial scholarship fund at a university of their choice. “The university will then pool their money with other similar bursaries and manage it for them, but Justin and Danielle can still decide how the scholarships are disbursed,” says Black. At that time, they will also be entitled to tax credits that could result in refunds of up to 43% of their salary in the year the credits are claimed. “Those credits can be carried forward five years from the time of the handover, so they should see a tax accountant at that time, and also consider donating any refund,” says Black.

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2 comments on “How to establish a scholarship fund

  1. This analysis misses out on all of the earlier tax savings that are available. The contributions are all in after tax dollars and the annual income will be taxed, with no tax savings until the $200,000 donation is made 15 years down the road. What the couple should be doing is setting up a pledge for the scholarship in advance with the educational institution. Each year the couple would receive a charitable tax receipt for the amount of the actual contribution and the tax savings could also be contributed. In addition, the educational institution is most likely investing the funds as part of their much larger Endowment Fund which would likely earn a higher return than 4% per year. The 10 year median return for Canadian universities as of December 31, 2013 on Endowment Funds was 6.4%.

    By setting up a pledge with the educational institution in advance, making annual contributions, getting the annual tax benefit of the charitable receipt, not paying tax annually on the investment income, and by earning a significantly higher rate of return, the couple will achieve their goal much more quickly.

    Reply

  2. The title of the article is ‘How to Establish a Scholarship Fund’ but nowhere is that explained.

    Reply

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