The “Yale Model," which has become so conventional among endowments that it is often simply referred to as “the endowment model," involves a large allocation to alternative investments. Although planned giving portfolios and endowments have some similarities, a deeper look reveals that this large allocation to alternative investments may not be appropriate in planned giving portfolios.

Planned giving portfolios have several features that limit the appropriateness of a large allocation to alternative assets, including: the split-interest nature of these portfolios, their size, liquidity needs and tax constraints.

1

The Split Interests of the Beneficiaries

The split-interest nature of a planned giving portfolio differs significantly from that of an endowment. The balancing act between the distinct interests of the income and remainder beneficiaries limits the asset classes available for planned giving portfolios.

2

The Impact of Size on Asset Allocation

Most endowment portfolios dwarf the typical planned giving portfolio. When coupled with the minimum investment requirement of most alternative investment funds, the smaller size of the average planned giving portfolio can leave little room for an allocation to alternatives.

3

Different Liquidity Needs

Both endowment and planned giving investment portfolios are subject to liquidity constraints related to distribution requirements; however, the size, frequency and unpredictability of planned giving portfolio outflows make the inclusion of some alternative funds inappropriate.

4

Tax Constraints

Although planned gifts have a similar tax advantage as non-profits, there are some unique tax rules that limit the suitability of certain alternative assets.

“Despite the institutional overlap, the endowment model remains a model for endowments, not for planned giving.”

Despite the many apparent similarities between endowments and planned giving portfolios, the asset allocation mix of the typical planned giving portfolio reveals significant differences.

There are three ways to reconcile the asset allocation of planned giving portfolios with that of the endowment — but be aware of the trade-offs.
Seek a private letter ruling (PLR) from the IRS

This is an increasingly popular way of allowing for planned giving assets to be invested in the endowment, but comes with a significant tax penalty that may introduce an unrealistic performance hurdle.

Integrate alternative investments through liquid mutual funds

The mutual fund structure eliminates some concerns and allows investors to access alternatives at a much lower minimum investment. But not all strategies are available in a mutual fund format and some may present an additional performance hurdle.

Seek diversification benefits outside of alternative investments

An increased fixed income allocation achieves many of the objectives of an alternatives allocation. A diversified portfolio of equities, fixed income and alternative investments should help to produce less volatile returns and greater downside protection.

  • Disclosure

    This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. © 2016 The Bank of New York Mellon Corporation. All rights reserved.