Investing Charitable Remainder Trusts in Exeter’s Endowment

1. What are the implications of the private letter ruling (PLR) that Phillips Exeter Academy received from the Internal Revenue Service (IRS) in 2008?
Previously, trusts in Exeter’s charitable trust program could not be invested in Exeter’s Endowment. The PLR Exeter recently received provides that certain eligible charitable remainder trusts can now be invested in a manner that mirrors the investment strategy utilized for the Academy’s Endowment. This new charitable remainder trust investment strategy can provide broader diversification through exposure to multiple asset classes and a wide array of investment managers. It will be included as an additional investment option in Exeter’s charitable trust and planned giving program.

2. What is an Endowment Unit?
An Endowment Unit is a contract right that will be available only to certain eligible charitable remainder trusts in Exeter’s charitable trust program. This contract right allows a trust holding Endowment Units to participate in the Endowment’s return, without having any ownership interest in the underlying Endowment assets. Each Endowment Unit will represent a share in the Endowment, in much the same way Exeter currently accounts for the annual payout and return earned by the other endowed funds at the Academy.

3. What makes a trust eligible to invest in the Endowment Unit?
The trust must be a qualified charitable remainder trust (i.e., a charitable remainder annuity trust (CRAT) or charitable remainder unitrust (CRUT)) that irrevocably names Exeter as the sole remainder beneficiary and for which Exeter serves as the sole trustee. Generally, the option to invest in Endowment Units will only make sense for a trust where the potential for a higher Endowment Unit returns might be expected to result in higher payouts over the lifetime of the income beneficiaries. Existing CRUTs and CRATs managed by outside managers may also be able to benefit from the PLR if the Academy is able to become the sole trustee, and the entire charitable remainder interest is irrevocably designated for the Academy. For more information on CRUTs please visit http://phillips.exeter.edu/plannedgiving or contact the Planned Giving Office.

4. What is the primary advantage of this new investment option?
If the performance of the Endowment is superior to conventional trust investment options, the assets ultimately passing to the Academy on the trust’s termination will be greater and provide for enhanced support of Exeter’s mission. Since the payout to the income beneficiaries of a CRUT is calculated annually (as a set percentage of the value of the trust’s assets generally calculated on the first day of business each year) an increase in the value of the trust assets will also result in higher quarterly payments to the income beneficiaries. Therefore, the primary advantage to both the income beneficiary and Exeter of a CRUT investing in Endowment Units is the potential for superior performance of the Endowment compared to other investment strategies over a very long time horizon. While such superior risk-adjusted performance has occurred in the past (see chart below), it obviously cannot be relied upon as a predictor of the future.

5. What are the potential drawbacks and risks of this new investment option?
The Endowment is managed to provide for the long-term support of the Academy and to minimize the volatility of returns, in order to reduce the annual stress on the Academy’s operating budget. Exeter’s policy is to accomplish this by utilizing a mix of asset classes and investment strategies that are designed to provide maximum diversification. However, results can vary significantly, especially in times of market stress, and no assurances can be made that the historic results will persist in the future. The investment performance is likely to deviate from benchmarks and peer institutions and this investment strategy may also be reflected in a lag in performance in rising markets and superior performance in softer markets. Despite the Committee’s efforts to invest conservatively, the Endowment’s investments could decline significantly and, in fact, have declined during various periods in the past. Clearly any decline in the Endowment's investments and value of Endowment Units would reduce annual payments from the CRUT.

The taxation of payments to income beneficiaries from a CRUT invested in Endowment Units may be less favorable than that produced by other investment approaches. Payments up to the endowment spend rate (____% in FY 2008) will be taxed as ordinary income. The balance will likely be treated as long-term capital gain (or loss) or possibly return of capital.

Trusts invested in Endowment Units will have no power or right of any kind to control, direct, supervise, recommend or review the Endowment holdings investment decisions, or the Academy's business activities, operations, or decisions with respect to the Endowment, except the right to review the computation of the Trust’s payout from the Endowment to ensure that it is calculated based on market value of the Endowment Unit. Income beneficiaries will not be provided with information regarding the underlying investments in the Endowment and must accept the fact that they will not receive the type of information on holdings and underlying investment performance that they might receive from other investment strategies.

Please note: The overall investment performance for trusts invested in the Endowment Units will not exactly reflect the Academy's Endowment return, which is published annually each year as of June 30th. This is due to the fact that (i) each trust must hold some cash in order to make regular quarterly beneficiary payments, and (ii) the Endowment return is based on appraisals and valuations that take many months to gather while the Endowment Units are valued monthly based on the best available valuation information at that time. As a result, trust returns may be higher or lower than reported returns for the Academy's Endowment during any given time period.

For additional information:
Contact Chris Wronsky at Exeter’s Planned Giving Office (603) 777-3594 or cwronsky@exeter.edu

Chris Wronsky
Director of Planned Giving
Phillips Exeter Academy
20 Main Street
Exeter, NH 03833
(603) 777-3594 Fax (603) 777-4201