How to Set Up a Scholarship Fund

It’s a good thing to donate money to those in need. For starters, you get to help someone other than yourself. But you will also experience an improved sense of well-being, become part of your community network and get tax-deductions. But you may be wondering how to set up a tax-deductible scholarship fund. Well, there are several things you need to know.

Generally, setting up a scholarship fund can be easy to do, but the specifics can vary depending on the type of fund you wish to establish. The easiest method is to set up a regular account for donations to a specified person or group. However, this type of scholarship does not carry any the tax exemptions you are looking for.

If you wish to set up a tax-exempt scholarship fund, the IRS requires to qualify as a charitable organization that can accept tax-deductible donations. The IRS says you must also follow the IRS scholarship guidelines to meet the criteria for tax-exempt charitable organizations.

There are various types of scholarship funds so the first step is determining the type of scholarship fund you want to establish.

If you simply want to raise money so a friend or relative can afford to go to college, you just need to learn how to open a scholarship bank account, and the process may be as simple as opening a bank account in that person’s name. However, if you want to create an ongoing charitable scholarship fund, you will face additional requirements.

According to the IRS, a good place to start is by consulting IRC Section 4946. This is the section of the Internal Revenue Code that specifies which types of individuals are “disqualified persons,” who are excluded from the charitable class when it comes to determining the tax-deductibility of scholarship contributions.

Section 4946 in particular excludes family members from receiving tax-deductible scholarship grants and specifies that the class of scholarship recipients be broad and indefinite, such as “lower-income students.”

For an individual scholarship fund, talk with your local bank or credit union about the specific requirements to accept scholarship deposits on behalf of another individual. However, for a charitable scholarship fund, you may want to consult with a tax expert to ensure that your fund meets all applicable IRS requirements when you open your bank account.

Once you've opened the account, it's time to fund the scholarship. Whether through your own contributions or those of donors, you cannot distribute a scholarship until you have money in the account.

In the case of a charitable scholarship fund, the most difficult task may be developing and implementing a selection process.

Typically, you must create a scholarship application form for potential recipients that may include elements such as a questionnaire and an essay. Tailor the application requirements based on the intended goal of the scholarship program.

If your scholarship fund grows large, you may consider outsourcing the day-to-day operation of the scholarship program to an established third-party vendor.

While establishing a scholarship endowment is easy, managing it is not. Scholarship management organizations can help you contain costs, reduce administrative headaches and increase compliance with federal and state scholarship laws.