Starting a Memorial Scholarship: Budget, Taxation, and Strategies

Creating a memorial scholarship is a meaningful way to honor a loved one while supporting aspiring students. However, the process involves several critical steps, from budgeting and funding to paperwork, selection, and promotion. This article provides an in-depth guide on how to start a memorial scholarship, including budgeting, taxation considerations, and successful strategies.

Step 1: Generate Your Budget

Before diving into the specifics, it's crucial to understand the financial requirements. A memorial scholarship typically requires a substantial initial investment known as the corpus, which generates an interest-bearing endowment. The annual interest, or yield, is what funds the scholarship.

For instance, to establish a $5,000 scholarship with an expected yield of 5%, you would need to contribute around $100,000. This corpus must be invested with a reputable financial institution to ensure the yield remains consistent and sufficient to fund the scholarship annually.

Step 2: Find the Funding Source

While you can contribute the full amount yourself, many individuals and families choose to leverage a network of donors or a non-profit organization. These entities can help secure additional funding, spread the administrative burden, and provide guidance on tax implications and legal requirements.

If you decide to contribute the full amount yourself, ensure the funds are legally vested in the trust for the scholarship. This can be done through a local bank or financial institution. If you're working with a non-profit, they can handle the complex paperwork and manage the funds.

Step 3: Choose Who You Would Like to Help and Determine Criteria

Decide on the criteria for selecting scholarship winners. Common factors include academic performance, extracurricular activities, personal circumstances, and community service. Clearly defining these criteria will help ensure fairness and transparency in the selection process.

Step 4: Do Your Paperwork

This is a critical step, involving legal and financial documentation. You'll need to draft a scholarship agreement, establish a trust, and file any necessary paperwork with your state's education or tax authorities. A legal professional can provide invaluable assistance in this process.

Step 5: Set a Deadline

Establish a deadline for applications. This helps you manage the process efficiently and ensures a fair and timely review of all applications. The deadline should be flexible enough to accommodate sending in materials but strict to provide a uniform submission process.

Step 6: Think Over How You Like to Promote the Scholarship

Promotion is key to attracting the right applicants. You can leverage social media, school announcements, community events, and partnerships with educational institutions. Establishing a website or dedicated page for the scholarship can also enhance visibility and attract more applicants.

Step 7: Select the Winners

Once applications are submitted, a selection committee will review and rank applicants based on the established criteria. This committee should be composed of individuals with relevant expertise and experience in education, community service, and student evaluation. Make sure to maintain confidentiality and provide feedback to all applicants.

Step 8: Award the Scholarship

After finalizing the winners, drafts a formal letter to each recipient, including all relevant details about the scholarship. Ensure all legal and financial paperwork is in order before you disburse the funds. Celebrate the accomplishments of the winners and involve the community in the awarding process.

Tax Considerations:

When giving away scholarship money, consider the following:

Direct Donation: If you send the funds directly to a non-profit educational institution for a specific nominee enrolled at said institution, there is no immediate tax burden. Tax Deductibility: Contributions to scholarships, especially those established in perpetuity (endowments), are generally tax-deductible as charitable donations, up to certain limits.

Under federal law, individuals can gift up to $15,000 per year to each recipient, and there is a lifetime exemption of $11.58 million. Gifts within three years of the donor's death may be included in their estate for tax purposes.

Charitable Bequest:

If you leave the scholarship as a charitable bequest after death and the money goes to an accredited education institution, the entire amount is typically estate tax-free, provided the recipient is not related to you by blood or marriage. Section 2055 of the U.S. Code 26 provides further details on charitable bequests and estate taxes.