Combining Investment with Philanthropy:
Faculty and the MIT Endowment
Faculty who wish to receive income while making a gift to MIT can now invest in the MIT Endowment. In November 2006, the Internal Revenue Service issued a private letter ruling providing this opportunity to those who establish a charitable remainder unitrust (CRUT).
A CRUT is a fund managed by MIT that pays variable income for life. Specifically, the unitrust pays 5% of its fair market value each year to one or two beneficiaries. At the end of the trust’s term, any remaining assets support MIT students or faculty. Thus the CRUT combines investment with philanthropy.
CRUTs have long been popular because they let faculty and other friends of the Institute avoid capital gains taxes on highly appreciated assets, such as stocks or real estate.
Now, with the new ruling, the Institute can commingle the CRUT investments with those of the MIT endowment. In other words, a faculty member who establishes a CRUT can now request that it be invested in the endowment and receive approximately the same results as does the endowment.
The new option permits CRUTs to be invested in part in nonmarketable securities, or “alternative assets,” which form a significant portion of MIT’s endowment. These assets, including private equity, venture capital, real estate, and natural resources investments, are rarely available to smaller investors and will significantly increase the trusts’ diversification and growth potential.
The MIT Endowment
CRUTs invested in the new option will benefit from the MIT endowment’s historically strong performance. For example, if a CRUT earns 15% in a given year, it will pay 5% as income to its named beneficiaries. The other 10% would be reinvested, increasing the trust’s market value. Thus faculty can make a gift to MIT that will pay variable income and further diversify their portfolios, with the potential for very attractive income growth over time.
As of June 30, 2006, the MIT endowment totaled $8.36 billion, with an annual return of 23.0%. The MIT endowment has averaged a 15.3% return over the past 10 years (see chart). As always, past performance does not guarantee future results.
Because a CRUT and any additional gifts to it are irrevocable gifts to MIT, the donor also receives a series of tax benefits, including an income tax deduction and the opportunity to avoid capital gains tax. When a faculty member contributes highly appreciated assets to a CRUT, MIT can sell them without paying capital gains tax, and re invest all proceeds in a more diversified portfolio. Thus the CRUT converts the full value of the assets into investments that generate income for its beneficiaries. (Currently MIT requires all CRUT beneficiaries to be age 55 or older at the time of the gift.)
When the trust terminates (usually at the end of the beneficiaries’ lives), its remaining assets support MIT scholarships, fellowships, professorships, the MIT Libraries, or general educational purposes, according to the donor’s preference. For example, a faculty member could fund fellowships in a specific department, or support or establish a faculty chair.
The minimum to establish a charitable remainder unitrust is $100,000. For more information, contact Judith V. Sager, Director of the Office of Gift Planning, at 617-253-6463 or firstname.lastname@example.org. All inquiries are strictly confidential.