Caveat Emptor!

Buyer beware!

From a perusal of many independent school websites, it seems clear that the financial crisis that began in Fall 2008 spurred donor interest in providing money to schools for the purpose of financial assistance for students. To be sure, such funding is a noble objective, and schools should be glad for the gifts.

Yet a number of schools should remain cautious about employing too many of those dollars. The reason? Those funds could leave just as easily as they arrived. Donors are making these gifts on an annual basis (or even on an as-needed basis), not by means of a longer-lasting vehicle, such as a planned gift.

If a school is accepting, let's say, $100,000/year from a wealthy alumnus to provide financial assistance, that represents a good chunk of change for most schools. Such schools are able to stay afloat financially--and keep enrollment at certain levels--precisely because the alumnus is giving that gift. What happens, though, when that gift goes away? How does the school absorb the $100,000 in its already-weakened operational budget?

So I say: caveat emptor!

Despite the best intentions of all donors and schools, this financial arrangement promotes a certain level of risk for the institution. The intentions are the very best, but the model is flawed. The best case scenario would be for the school, before entering into such an agreement for funds for financial assistance, to work with the donor to set up a planned gift that will continue to provide such funding in perpetuity. In other words, unless a school and its prospective donor can set up 1) an endowed financial aid fund or 2) a charitable trust (lead, remainder, or dynasty), the annual gifts for financial aid should be counterbalanced in the annual operating budget. Do not back out those amounts from the budget!

Caveat emptor!