Enjoying the Endowment

Harvard benefactors can, for the first time, participate directly in the superior investment returns earned on the University's endowment assets by Harvard Management Company (HMC). The Internal Revenue Service (IRS) last September issued a precedent-setting ruling that permits funds donated in charitable remainder or charitable lead trusts to benefit fully from the diversified, long-term investment strategies applied to endowment assets.

According to Anne D. McClintock, executive director of University Planned Giving, trust assets have previously been invested in bond, equity, and alternative-investment partnerships arranged by HMC. Although the returns have been fully competitive, they have trailed the results for endowment funds, which are further diversified, reflecting the larger size of the asset pool (about $1 billion in all planned-giving accounts, versus the endowment's $19.3 billion).

Under the IRS ruling, McClintock said, charitable trusts which designate the University as their ultimate beneficiary can now be invested in "trust units" whose performance will mimic the endowment returns exactly. Harvard, as a tax-exempt institution, does not need to worry about maximizing after-tax returns on its investments. But the potentially higher return from participating in the endowment may not be best for all trust beneficiaries, who receive income distributed from a trust during its life and pay tax at ordinary-income rates. Accordingly, a second new option will invest trust assets in an array of tax-efficient Vanguard mutual funds. Over time, they should yield lower returns tied to market indexes, but possibly higher after-tax income for beneficiaries. (Further details are available at www.post.harvard.edu/pgo [5] or by calling 800-446-1277.)