Endowments & the Endow Kentucky Tax Credit Program

Frank Yozwiak

Boston and Philadelphia, 1790 – Benjamin Franklin, a Founding Father of the United States, got the idea to create an endowment for his native city of Boston, and his adopted home, Philadelphia.  In a codicil to his Will, Franklin left 1,000 pounds (roughly $4,400 at the time) to each endowment, on the condition that each gift would serve a purpose dear to his heart: to help young printer’s apprentices get started in their jobs, to fund public works – and also earn interest for 200 years.

At the end of the first century, the Boston endowment was used as instructed and had grown to 131,000 pounds, equivalent to roughly $391,000.  Over the next 100 years, proceeds of the endowment went to support public works in Boston, including using $322,490 to establish what is now the Benjamin Franklin Institute of Technology in the early 1900s.  At the end of the second century in 1990, the two endowments combined were worth nearly $6,500,000.   Both endowments have been used to fund public works, and to help thousands of young people achieve their dreams with scholarships and loans.

This is just one of countless examples of how a charitable gift can make a significant impact in the future.  At Ballast, we love to help our clients find efficient ways to give to causes near and dear to their hearts, and often times endowments are a great tool to achieve their goals.  There are plenty of existing endowments out there to which charitable-minded people can contribute, but there is nothing stopping anyone from creating their own endowment.

Donors establish an endowment fund when they want to leave a perpetual gift.  In general terms, assets are gifted to the endowment and a committee invests the assets and uses a percentage of the assets/annual income to benefit a charity or non-profit.  Endowments can be established under several different terms, allowing ultimate flexibility to those with charitable desires.  Donors most commonly will name a direct beneficiary, name a theme or cause, or leave the beneficiary to be determined annually by a committee.

An endowment that is directed to accumulate income for a specified term, coupled with compounding interest and market returns, can turn a relatively modest endowment into quite a sizeable fund over a generation.  The “Rule of 72” is an easy way to estimate the time it takes for an investment to double.  Divide 72 by the annual rate of return, and the result is the number of years it takes for the investment to double.  If we assume an average rate of return of 5% (obviously returns will vary year by year, some will be up, some will be down), an investment would double every 14.4 years.  Thus, if a donor funded an endowment with $50,000 today with instructions to reinvest all returns for a specified period, the fund would be worth $400,000 in the 43rd year and $1.6 million in the 72nd year.  This compounding can allow a relatively smaller gift to accumulate in value and provide a much larger income stream to a charity in the future.

For our clients in Kentucky, there is a great option called the Endow Kentucky Tax Credit Program.  Essentially, donors who make contributions to permanent endowment funds at qualified community foundations are eligible to receive a state tax credit – a dollar-for-dollar tax credit, not just a deduction – against their Kentucky state tax owed.  A total of $1,000,000 is available to individual and corporate taxpayers who are eligible to receive up to a 20% income tax credit (not to exceed $10,000) per taxable year.  A new allotment of tax credits is available on July 1 of each year.

For the most beneficial example, let’s assume a couple living in Kentucky in the 37% marginal tax bracket is inclined to give $50,000 to such a qualifying endowment.  The couple will receive a federal tax deduction equal to $18,500 ($50,000 x 37%), a state tax deduction equal to $2,500 ($50,000 x 5%), and the Endow Kentucky Tax Credit of $10,000 ($50,000 x 20%).  At the end of the day, the charity gets $50,000, but it only cost the couple $19,000 after considering their end of year tax deductions and credits.

We are nearing the time of year when, if you’re so inclined and you live in Kentucky, it makes sense to consider the Endow Kentucky Tax Credit.  Due to the obvious benefits of this tax credit, these funds go quickly.  A request for the tax credit must be submitted to Frankfort and July 1st is the first day for submissions.  If you are interested in taking advantage of this, we recommend starting the conversation immediately.

We are more than happy to help all our clients optimize every dollar through charitable giving at any time – whether it be through an established endowment, setting up their own endowment, taking advantage of the Endow Kentucky Tax Credit Program, using a Charitable Remainder Trust, or otherwise.  If you would like to give back to your cause of choice, create a new cause, or even just start the conversation to learn more about various ways to give back, please reach out to us as we would be honored to help.

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