SCHOLARSHIP ARTICLES

Selling the scholarship 529

An opportunity awaits financial advisers who can successfully introduce 501(c)(3) charitable organizations to the unique benefits of 529 plans. In fact, if I were a registered representative or RIA interested in 529 plans and looking for a special niche, I would be contacting the organizations in my town and proposing the idea of a ""Scholarship 529."" Since I am not a rep or RIA, I will be more than satisfied to see you, the adviser, making something of this opportunity. At first glance, the benefits of a 529 savings program in this context are not obvious. Charitable organizations do not pay income tax on investment income, so why should they be interested in 529 plans where the tax benefits are often cited as their major advantage? And assuming these organizations already operate scholarship programs, one would also assume that they already have managed accounts in place handling the investment of the scholarship funds. Consider, however, that there are likely to be thousands of charitable organizations around the country that currently do not operate a scholarship program, but would be intrigued by the prospect of adding one to their existing programs and services. Whether an organization's primary activities revolve around education, the environment, the arts, or any other social or humanitarian cause, a scholarship program can work very nicely in advancing and promoting its mission. Many organizations simply do not have the means to raise funds and invest and administer a scholarship fund. That's where you and a 529 plan come in. A 529 plan can be a great place to put the scholarship fund. It has as its sole objective the investment of money for future college expenses. Not only will a 529 plan offer targeted, professional investment management at a reasonable cost, but many 529 plans are willing to facilitate the scholarship award process by making distributions directly to an educational institution upon the organization's request. The distribution comes out as a tax-free scholarship to the award recipient, regardless of the 2010 sunset of federal tax exclusion, provided the requirements of IRC section 117 are satisfied. Charities also benefit from another special rule. Code section 529 generally requires that an individual be named as beneficiary for each account established with a 529 plan. 501(c)(3) organizations and state and local governments are granted an exemption from this requirement. This means that a single 529 account can be used to provide for all future scholarship award recipients. That one account can accept literally millions of dollars, notwithstanding the contribution limits that the states must apply to non-charity 529 accounts. Here is how you might approach this opportunity: First, suggest to the Board of a favorite local charity that the organization consider starting a new scholarship program. The program will make awards to selected postsecondary students meeting criteria set forth by the organization. Second, explain how a 529 plan works and how it can be used to invest and administer the scholarship fund. You will be in position to assist the organization in selecting one or more 529 plans and monitoring the investments over time. You will earn commissions and/or fees for your professional services. Third-and this is the clincher-offer your help in raising the initial dollars to go into the new scholarship fund. You can volunteer your time to get the fundraising effort going. You may have clients looking for worthy causes who would be willing to consider becoming benefactors to this new scholarship program. You may even offer to seed the scholarship fund with a contribution of your own dollars. Of course, you need to be careful to act in a legal and ethical manner, and so you should be sure to check with your broker-dealer or seek other guidance as appropriate. The end result is a scholarship program where there was none before. Deserving students will have a new source of financial assistance, the organization will be advancing its own charitable goals, and you will have a new 529 client. The 529 program manager, and the state agency responsible for the program, will be elated to have a new charitable investor and may even offer to help promote the new scholarship program as part of a public relations effort. Don't think I am dismissing the more obvious opportunity to pitch 529 plans to charitable organizations that have an existing scholarship program. Each is likely to have its scholarship fund already invested in managed accounts. The market downturn may have many Board members questioning their current investment policies and concerned about fulfilling their fiduciary responsibilities. Shifting assets to a 529 plan might go a long way in alleviating these concerns. With either new or existing scholarship programs, 529 plans and charitable organizations seem like natural companions. By making this connection, you will have benefited others as well as yourself."
 

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