Funding Scholarships Through Donor-Advised Funds

Many donors to Stablish Foundation choose to create Donor-Advised Funds (DAFs) with the specific goal of granting scholarships for K-12 or post-secondary education. While the process of funding scholarships through a DAF may seem complex, with thoughtful planning and adherence to IRS rules, donors can make a significant impact on students’ lives. This article explains how both financial advisors and donors can navigate the rules and opportunities for setting up a scholarship DAF.

Key Rules for Funding Scholarships with a DAF

There are two primary rules to follow when establishing scholarships through a DAF:

1. Eligible Entities: Scholarships must be granted to qualifying organizations, which include:
   • Religious Organizations: Any religious entity serving a community qualifies for tax-exempt status and can offer scholarships.
   • Governmental Entities: Scholarships can fulfill a public purpose when awarded through public universities, colleges, or even elementary and high schools.
   • Public Charities: Some public charities also facilitate scholarships.
   • International Organizations: While more research is needed, some international entities may be eligible to provide scholarships.
2. Administration of Scholarships: Scholarships must be managed by a 501(c)(3) public charity or an educational institution.
   • Donor Involvement: While donors or their family members can be part of the selection committee, they cannot hold the majority vote or directly choose recipients. To ensure compliance, Stablish Foundation recommends that donors not participate in the selection process.
   • Grants Must Go to Organizations, Not Individuals: All scholarship grants must be payable to the organization sponsoring the scholarship, not to individuals. This ensures the process remains at “arm’s length” and complies with IRS regulations.

Steps to Create a Scholarship DAF

For financial advisors and donors interested in setting up a scholarship fund, here are the key steps:

1. Create a DAF with Stablish Foundation: This serves as the fund from which scholarships will be granted.
2. Select the Scholarship Beneficiaries: The donor identifies the organizations or educational institutions that will benefit from the scholarship grants.
3. Coordinate with the Institution: Stablish Foundation works with the chosen entity to determine how they will select scholarship recipients. Some institutions may have separate qualified organizations to administer the scholarship process.
4. Define the Scholarship’s Purpose and Criteria: The donor can outline specific parameters, such as academic focus, extracurricular activities, or personal circumstances. This flexibility allows the donor to craft a unique scholarship that aligns with their personal values and goals.
5. Determine Anonymity or Recognition: The donor decides whether they prefer to remain anonymous or to be acknowledged for their scholarship fund.

A Creative Example: The “C-Student” Scholarship

At Stablish Foundation, we’ve seen how donors can be incredibly creative in setting up scholarship programs. One donor, who was a university professor, established a scholarship fund upon her passing. Despite her academic success, she had been a C-student in high school and wanted to support students like herself. The scholarship, established at her university of choice, was specifically for students who had achieved a C average in high school.

This example illustrates how donors can establish scholarships with unique criteria that reflect their personal experiences and values, creating opportunities for students who might otherwise be overlooked.

Partnering with Stablish Foundation

For financial advisors, helping clients create a scholarship DAF can be a meaningful way to enhance their legacy while navigating complex IRS rules. Stablish Foundation provides the guidance and support necessary to ensure every scholarship fund is compliant, impactful, and aligned with the donor’s wishes.

Scholarships funded through a DAF can be as unique as the donor envisions, as long as they meet IRS guidelines. With careful planning and thoughtful intent, donors can make a lasting impact on future generations, while financial advisors can offer clients a powerful tool to align their charitable goals with their financial planning.

Let Stablish Foundation assist you and your clients in turning charitable visions into reality through custom scholarship programs.