To set up a scholarship fund you have two realistic routes: create your own charitable organization and run the award yourself, or open a named fund inside a public charity that already carries the legal responsibility. Most families take the second route, because the IRS rules governing scholarships apply to the organization making the award, not to the person funding it.
Two Ways to Set Up a Scholarship Fund
Both routes end in the same place: a student gets money for school, and a name or a purpose stays alive in the community. What separates them is who carries the compliance work.
| Running your own private foundation | Opening a named fund at a community foundation |
|---|---|
| Form a legal entity and apply for tax-exempt status | The foundation is already the recognized 501(c)(3) |
| Get IRS advance approval of your grantmaking procedures before you award anything | Awards are made under policies the foundation already has in place |
| Write your own selection, conflict and recordkeeping procedures | Work inside procedures that already exist |
| File annual returns, manage investments, keep the books | The foundation handles accounting, banking and reporting |
| Issue donor acknowledgments yourself | The foundation receipts every gift |
| You control the whole program | You shape the purpose and the criteria; the foundation runs selection |
Can anyone start a scholarship fund? Yes. There is no wealth test and no requirement that you be a lawyer, an accountant or a nonprofit. What actually decides the shape of the fund is how much you want each award to be worth, whether it should be given once or every year, and how long you want it to last. A single award to one graduating senior and a scholarship that runs for thirty years are very different financial commitments, and it is worth settling that question before you settle anything else.
What the IRS Asks of Every Scholarship Program
The phrase that matters is “objective and nondiscriminatory.” Stripped of the legal register, it means a scholarship has to be a real opportunity offered to a real group of students, decided on criteria that connect to the scholarship’s educational purpose, by people who gain nothing from the outcome. Almost every rule below is a way of enforcing that one idea.
A group broad enough to count as a charitable class
Eligibility can be narrow and it can absolutely be local. Graduates of a single high school, students entering nursing, students who have done sustained community service – all of these describe a legitimate group. What eligibility cannot do is describe one person. If the criteria are drawn so tightly that only a predetermined student could realistically qualify, the payment is a gift to an individual wearing a scholarship’s clothes, and it is treated that way.
Written criteria and a process that runs the same way every time
The IRS points to academic record, aptitude, instructor recommendations, financial need and interviews as examples of legitimate selection factors. Leadership, service, career plans and field of study are fine too, as long as they genuinely serve the fund’s stated purpose. The requirement is not that you use any particular factor. It is that the factors are written down before applications open, and applied the same way to every applicant.
Who is allowed to pick the winner
This is where founders are most often surprised. You can define what the scholarship stands for, who it is meant to reach and what qualities should count. You cannot decide which applicant receives it. Where a sponsoring public charity does allow a donor or donor adviser onto a selection committee, it happens inside a tightly drawn structure: the charity appoints the committee, donors and related parties cannot control it, and awards follow objective procedures approved in advance by the charity’s board. That separation protects the founder as much as the applicants – it is what keeps the fund clear of any question of private benefit.
Advance approval, and who needs it
A private foundation generally must obtain IRS advance approval of its grantmaking procedures under Section 4945(g) before it makes scholarship grants to individuals. A new organization can request that approval as part of its exemption application; an existing one requests it separately. Scholarships paid out without approved procedures can be treated as taxable expenditures, which is an expensive way to learn the rule. A named fund at an established public charity does not put the founder in that position, because the charity’s own approved procedures govern the award.
When a Scholarship Gift Is Deductible, and When It Is Not
A contribution to a qualified charitable organization may be deductible. A payment to a particular student is a gift to an individual and is not, no matter how worthy the student is. The same problem appears in a subtler form when money goes to a charity with an understanding that it must reach one named person – the charity is being used as a conduit, and the deduction does not survive it.
The practical version of this rule: do not promise a scholarship privately to a specific student and then ask a charity to process the payment. Fund the program, let the program pick. Before you give, you can confirm an organization’s status through the IRS Tax Exempt Organization Search. How much of a qualifying gift you can actually deduct depends on what you gave, how you gave it and your own tax position, so run the numbers with your own tax advisor rather than with an article.
The Paperwork That Has to Exist
A scholarship does not end when the winner is announced. Whoever administers the fund has to be able to show that the published rules were followed and that the money went where it was supposed to go. Depending on the structure, the file usually holds:
- The published eligibility criteria, as they stood when applications opened
- Applications and evidence of eligibility
- Evaluation or scoring materials
- The selection committee’s decisions
- Recipient names and award amounts
- Records of how the award was paid and used
- Donation receipts and written acknowledgments
The IRS expects a private foundation making grants to individuals to keep adequate records and case histories, supervise the grant, and confirm the money was used for the approved purpose. Files for unsuccessful applicants matter as much as the winner’s, because they are the evidence that the process was applied evenly. On the donor’s side, a charitable contribution of $250 or more generally needs a contemporaneous written acknowledgment from the organization, identifying it, describing what was given, and stating whether the donor received anything in return.
Starting a Scholarship in Memory of Someone
Many of the funds held at community foundations began after someone died, and a scholarship is one of the few memorials that keeps producing something. The useful first question is not “how much?” but “what should carry forward?” A trade, a school, a profession, an obstacle they got past, a belief they kept repeating – any of those can become the fund’s purpose, and the purpose is what the eligibility rules then have to express.
The one constraint worth knowing in advance is the one above: a memorial scholarship still has to describe a genuine group of students rather than point at a student the family already has in mind. Families weighing a memorial fund against a one-time memorial gift will find the trade-offs set out in our piece on what people get wrong about memorial donations.
How a Scholarship Fund Works at Miami County Community Foundation
Miami County Community Foundation is a 501(c)(3) community foundation in Paola, established in 2007. Its classification has been checked against the IRS Exempt Organizations Business Master File: it is a publicly supported charity under Section 170(b)(1)(A)(vi), which makes it a 50% limit organization for donor deduction purposes. Its funds are held c/o First Option Bank, per its public IRS filings.
There are two fund structures. An expendable fund starts at $1,000 and can be spent all the way down; when it is spent, the fund closes. An endowed fund starts at $10,000, the balance stays invested, and it cannot fall below what was put in. The spending policy is 5%, so a $10,000 endowed fund makes about $500 available. The fee is 2%: 1% administrative and 1% community support, and the community support portion is what funds the Foundation’s own operations. Setup runs seven to ten business days. Individuals, families, businesses and churches all hold funds here.
Awards are run through the schools, not through the website. Almost every scholarship the Foundation holds is applied for through the student’s high-school counselor, at Paola, Osawatomie, Louisburg and Prairie View. The awards themselves are specific: the Steve Pepoon Memorial Scholarship is $1,000 for a Paola senior heading into writing, film, media arts or theater; the Johanna Vickrey Nursing Scholarship is $750 at Louisburg; the D.O. Smith Memorial Scholarship is $3,000 and reaches any Miami County school. You can see the full set of scholarships the Foundation awards, and the minimums, timeline and fund agreement are laid out on the Foundation’s page on starting a scholarship fund.
Gifts to an existing fund can be made online or by check. Checks are payable to the Miami County Community Foundation, with the fund name written in the memo line, and mailed to 702 Baptiste Dr, Paola, KS 66071.
Once a fund exists, students will apply to it: how senior-year scholarships work explains their side, what a strong scholarship essay looks like shows what committees read, and a template for grant proposals covers requests from organizations.
Where to Start
Settle the purpose first, because it decides everything downstream: who the scholarship should reach, what it should reward, whether it runs once or every spring, and what a meaningful award looks like in that field. Bring those answers to a conversation before you announce anything publicly – the eligibility language is far easier to get right the first time than to unpick after the first application cycle.
If you want to see what a working local scholarship looks like from the other side of the desk, our guide to which local scholarships exist in Miami County and how students apply covers the student’s route. When you are ready to talk through a fund of your own, contact the Foundation and start with the student you have in mind.
