Donors Flock to Invest in Harvard

Scores of Harvard donors have availed themselves of a new option to invest their trusts, totaling over $200 million, with the University’s acclaimed endowment.

The novel arrangement, approved by the Internal Revenue Service (IRS) last September, has already prompted 70 percent of eligible trust holders to make the switch from standard Harvard trusts to investments in higher education’s largest endowment.

Typically invested in relatively benign stocks and bonds, Harvard charitable trusts pay donors a set percentage or amount each year with the total trust going to Harvard upon the donor’s death. By investing in the University endowment, which has posted annual returns well ahead of standard trusts, donors and fundraisers are hoping to maximize benefit for both parties.

“I think the endowment actually offers a higher rate of return for the same amount of risk,” said Jack Meyer, president of Harvard Management Company (HMC), which invests the endowment.

Harvard fundraisers, facing an upcoming University capital campaign, are likely to push the new endowment option as a potential added benefit for donors.

“It may encourage some people to give a little more than they were planning to give, or perhaps give sooner,” said Anne D. McClintock, executive director of University Planned Giving Office.

A full-page advertisement touting the endowment option in the Harvard alumni magazine last month promised, “Greater potential returns for you, your family, and Harvard.”

THE ASTERISK

But while Harvard fund managers insisted the endowment posed no greater risk than ordinary charitable trusts, the endowment’s famously high returns over the past decade could still fade.

“Looking ahead into the future, I think it is logical to say the endowment will do better than an index fund, but it’s not certain,” said David W. Scudder ’57, vice president of trusts for HMC.

And the Planned Giving Office is well-versed in the art of the footnote. As one document notes, “*Past performance is not any indication of future returns.”

The new endowment option is a first in the field of charitable planned giving, and the IRS ruling still applies only to Harvard.

But Scudder said a number of fund managers at other universities had contacted him to express interest in initiating similar programs.

“I think, absolutely, you’ll see other universities looking at this as an opportunity to increase their endowments,” said Andrew C. Schulz, deputy general counsel for the Council on Foundations.

MAKING THE SALE

Harvard’s pitch to donors paints a best-of-both-worlds scenario.

“The main objective of any investor who’s in there for the long term is to get maximum return with as little risk as possible,” Scudder said. “The way the Harvard endowment has been run, that has been its achievement.”

“And, boy, if that isn’t an attractive picture, I don’t know what is,” he continued.

Still, while Harvard and its donors share an interest in maximizing returns, analysts said that fund managers looking out for the long-term health of the endowment could conflict with the short-term concerns of donors.

“While they’re in harmony, there’s always a potential conflict,” Schulz said. “Harvard has an interest in keeping its donors happy, but certainly...their major interest is with their long-term endowment.”

MORE CASH

Meyer said the trusts invested with the Harvard endowment would not count towards the annual endowment figure announced by the HMC. That number stood at $19.3 billion for fiscal 2003, which ended June 30.

But the trusts, which amount to roughly 1 percent of the endowment investments, could place further, if minimal, strain on the HMC.

Meyer said the additional cash would have little effect on the endowment’s performance.

“It hurts a very small amount,” he said. “Size is difficult for us, and having a larger endowment makes it more difficult.”

$216 million in charitable remainder trusts, the most common variety, had switched to the endowment as of yesterday, McClintock said. An additional $31 million in lead trusts had already made the changeover.

“This is like an internal mutual fund,” said Marc D. Hoffman, editor-in-chief for the Planned Giving Design Center.

IRS RULING

Fund managers at the nation’s largest non-profit organizations, including Harvard, are typically restricted by IRS tax laws in their investing of charitable trusts.

But the IRS letter ruling, requested by the HMC in January 2003, permits Harvard to invest in areas which would ordinarily produce disqualifying taxes. Most of those taxes will be paid by donors at a rate of 35 percent, Scudder said.

At the endowment’s recent pace, however, those taxes would be more than compensated by increased returns.

Other non-profit organizations must obtain their own ruling from the IRS to move forward with similar programs for their donors, although approval would likely come easily following Harvard’s precedent, according to Scudder.

As a stipulation of the IRS ruling, only trusts for which Harvard is the sole beneficiary are eligible for the endowment option.

The Planned Giving Office unveiled this year a separate charitable remainder trust, dubbed “tax-efficient,” for donors looking to minimize the tax rate on their payouts.

Scudder said donors with trusts at the HMC will soon have access to online, semi-annual reports of their investments. The system is slated to debut in a few months once security concerns are resolved.

—Staff writer Zachary M. Seward can be reached at seward@fas.harvard.edu.