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March 27, 2012

Giving News

Register now for the Austin Advisors Forum
Visit our online Professional Advisor Resource Center
Strategic opportunities in charitable gift planning for 2012
Drafting gift agreements between donors and charitable donees

Register now for the Austin Advisors Forum

Registration is now open for the April 20, 2012, Austin Advisors Forum, a continuing education conference for attorneys, accountants, and financial planners, jointly hosted by the Austin Bar Association and The University of Texas at Austin. Early registration ends March 30, so register now. Deadline for all registration is April 16, 2012.

The speakers and topics will include:

“The Prudent Investor Rule Twenty Years On (and After the Financial Crisis),” with Robert Sitkoff

“Family Limited Partnerships: Not Just a Passing Phase?” with John Porter

“Matters of Life & Death: Working with Clients at Various Life Stages on their Charitable, Financial, and Estate Planning,” with Shannon Guthrie

“What You and Your Clients Need to Know about Charitable Planning,” a panel discussion featuring Rodney Koenig

“Recent Developments Affecting Estate Planning,” with Stanley M. Johanson

You can see the full agenda of topics and speakers or register online.

The Austin Advisors Forum will take place on Friday, April 20, 2012, at the Thompson Conference Center on the UT campus (free parking is available adjacent to the conference center).

Questions?

Contact the Gift Planning team by email or phone, 512-232-8054.

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Visit our online Professional Advisor Resource Center

If you haven’t already done so, take a moment to visit our upgraded Professional Advisor Resource Center. You will still find information on ways your clients can make charitable gifts, along with sample language and the reference library of estate planning articles. In addition, we have also launched the new GiftLaw website, which includes GiftLaw Pro, a complete tax update service for professional advisors (attorneys, CPAs, CFPs, trust officers, and other professionals). This service provides you with extensive resources in tax, estate, charitable, and financial planning to help you better serve your clients in their charitable and financial planning.

The GiftLaw resources are made available to all advisors as a free service. They include:

GiftLaw Pro — GiftLaw Pro is a comprehensive charitable giving and tax information service providing the latest gift planning information and access to Private Letter Rulings, Revenue Rulings, Code and Regulations, Tax Court cases and other key planning materials.

GiftLaw Calculator — The Gift Calculator allows you to access and run calculations for a variety of charitable gifts including charitable gift annuities, remainder trusts, and lead trusts. The UT Austin Gift Planning team is also available to assist in helping you provide your clients with clear and understandable gift illustrations.

UT Austin Weekly Gift Planner — The Weekly Gift Planner e-newsletter features the latest news from Washington, tax law updates, PLRs, case studies, and timely articles.

Learn more about the various GiftLaw resources. Or see all the online resources we provide for professional advisors. You may also contact us by email or phone, 866­-488­-3927.

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Strategic opportunities in charitable gift planning for 2012

The current estate tax laws established by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 will expire at the end of 2012. While it would take a crystal ball to predict what will happen to the tax and estate laws in 2013 and beyond, the current laws, along with the recent improvements in the financial markets, provide some timely charitable giving opportunities for your clients.

No reduction in itemized deductions

The federal limitation (or “haircut”) on itemized deductions phased out between 2006 and 2010, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended elimination of the limitation on itemized deductions and the exemption phaseout to tax years 2011 and 2012. In tax year 2013 the limitation on itemized deductions and the phaseout of exemptions will return unless Congress acts.

For high-income taxpayers (adjusted gross income above $168,000 in 2009, the last year of limitations on itemized deductions) with philanthropic goals, this makes 2012 an excellent time to consider increasing charitable giving. Your high-income clients might want to consider paying off any outstanding pledge balances, making several years’ worth of annual gifts, or making the large legacy gift they’ve been considering. So long as your clients itemize their deductions, they won’t risk having their charitable deductions for this year reduced or eliminated.

Publicly traded stock

When the stock market began its decline at the end of 2007, dropping even further into 2008 and 2009, many charities saw a dramatic reduction in gifts of publicly traded stock as investors were understandably hesitant to liquidate their now-depreciated holdings in publicly traded securities. The past two years, however, have seen the market steadily increasing overall; the week ending March 16, 2012, the Dow Jones Industrials averaged over 13,000, the highest levels reached since December 2007. Many investors have now recouped most of their paper losses and may have appreciated securities that they have owned for more than one year.

With a charitable gift of publicly traded stock, your clients can avoid paying any long-term capital gains tax on the increased value of the stock. Moreover, with no limitation on itemized deductions (as mentioned above), a donor receives a charitable deduction for the full fair market value of the stock.

Gifts from IRA accounts

Currently, no IRA rollover provision is in effect for 2012. Both houses of Congress have proposed legislation that would make the IRA rollover permanent, but whether Congress will act to extend the IRA rollover before the end of 2012 remains unclear. Despite this, your clients could still benefit from making a direct transfer from an IRA to charity in 2012.

Individuals age 70½ and older who don’t need all or part of the minimum required distribution from an IRA in 2012 and who would like to make a charitable gift can direct their IRA custodian to make a transfer to charity. In the best case scenario, Congress authorizes IRA rollovers for 2012 and the donor’s transfer to charity from the IRA is a tax-neutral event, with no income reported and no charitable deduction. Yet even if Congress fails to reinstate the IRA rollover and the amount the donor has transferred to charity gets reported as income, the donor still receives a corresponding income tax charitable deduction. So long as the donor itemizes his deductions and can deduct 100 percent of the gift on his federal return and state income tax return (if not a resident of Texas), all of the withdrawal is deducted and not subject to income tax.

Reducing transfer taxes and charitable lead trusts

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides for the largest estate-tax free transfers since before World War I, with a combined gift and estate tax exemption of $5 million through the end of 2012.

For your clients who consider $5 million enough for their heirs, they can make outright gifts to heirs or fund irrevocable trusts in 2012 to lock in these tax-free transfers.  At death your clients’ other assets can be used to make gifts to charity. These charitable bequests can take the form of direct gifts to charities but can also include funding private family foundations or donor advised funds.

For donors who would like to transfer more than $5 million to heirs and still make charitable gifts, a charitable lead annuity trust could be the answer. The donor funds the trust during his lifetime. When the trust is funded, the charitable value is calculated and this value is exempt from federal gift tax. Only the remainder value — the right to receive the trust asset when the trust ends — is subject to federal gift tax.  If that remainder value is less than $5 million, no gift tax is due if funded before the end of 2012.

During the trust term (usually a specific number of years) a fixed dollar amount is distributed to one charity or divided among several charities. At the end of the trust term, the assets are distributed to the individuals named in the trust document. No additional gift or estate tax is due when the trust ends, even if the trust assets are more than the original amount contributed to the trust. Depending on the payout rate and the term of the trust, the charitable gift tax deduction could be as high as 100 percent.

If you have clients who are charitably inclined, make sure you are talking to them about one of these many opportunities to take advantage of the current estate and gift tax laws before the end of 2012.

The Gift Planning team at The University of Texas at Austin is happy to explore any of these charitable giving options with you and your clients at no cost or obligation.  Please feel free to contact us at:

The University of Texas at Austin
University Development Office
Gift Planning team
P.O. Box 7458
Austin, Texas 78713-7458
Phone: 512-475-9632
Toll free: 866-488-3927
Fax: 512-471-3439
Website
Email

IRS Circular 230 Notice: The University of Texas at Austin does not provide legal, tax, or financial advice. Consequently we urge you to seek the advice of your own legal, tax, or financial professionals in connection with gift and planning matters. This communication (including any attachments) is not intended to be used and cannot be used for the purpose of avoiding tax-related penalties.

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Drafting gift agreements between donors and charitable donees

Even for experienced professional advisors, drafting gift agreements between clients and charities can create complexities and considerations not found in other areas of their practice. The following outline, “Drafting Gift Agreements Between Donors and Charitable Donees,” presented by Alan F. Rothschild, Jr., and Richard L. Fox at the 2012 Heckerling Institute on Estate Planning, can provide helpful guidance as you work with your clients on their charitable giving plans.

I. Introduction

A. Charitable gift agreement

While a charitable gift can be contained in a will, trust, or deed, the majority of such arrangements are evidenced by a written gift agreement prepared and executed while a donor is in life. The gift agreement documents either the terms of a substantial current gift or the donor’s intention to make a future gift, either in life or upon death.

B. Determination of gift terms

Absent a written instrument, it is difficult to determine the terms of the gift or the donor’s true intentions. Such terms might be found in conflicting correspondence between the donor and donee, in oral exchanges between parties, some of whom are not available or in life when uncertainties arise, or based upon long-forgotten campaign solicitation materials.

II. Drafting tips

A well-drafted charitable gift agreement should include the following:

A. Donor’s intent

A clear statement of the donor’s wishes that should tie in to any restrictions on the use of funds and any other provisions included to anticipate future changes in the circumstances. (See E below)

B. Donee’s policies and procedures

These policies should be included in the gift agreement or incorporated by reference. If not in the gift agreement itself, the donor should be provided with a hard copy of these policies and procedures, or at least the provisions related to fees, current spending policy, and the donee’s ability to amend its policies.

C. Restrictions and conditions

Many donors today want to specify particular uses for their gifts rather than making gifts for the donee’s general charitable purposes. These restrictions must be carefully and thoughtfully drafted after discussions between the donor and donee. Alternatively, a donor may be satisfied with the use of precatory language (“It is my wish …”) rather than more binding, but frequently less flexible, gift restrictions.

D. Recognition and publicity

1. The gift agreement should specifically address whether the donor desires, and the donee is willing, to name the project or building funded by the donor in honor of the donor or their designee. If so, will this naming take place immediately, after funding is complete, or upon the donor’s death?

2. Any naming opportunity should also address under what circumstances “un-naming” may be appropriate.

3. Whether or not naming rights are involved, the gift agreement should address if publicity is sought or allowed. For gifts to organizations subject to open record statutes, it is important for the gift agreement to be drafted in such a way as to protect the confidentiality of the donor, should that be important to the donor.

E. Amendment/variance

For significant gifts to an endowment fund or for the funding of a long-term project, it is critical to address future changes in circumstances through an amendment or variance provision. These provisions should be coordinated carefully with the general statements of the donor’s intent and any restrictions on the gift.

1. A donor is generally focused on the outcomes of a particular project he or she is funding, while the donee’s development officers want to “close the deal” as quickly as possible. It is in the best interest of both parties to contemplate future changes and how such changes will be.

2. Change-of-circumstance provisions must also balance conflict between the donor’s desire for certainty and a donee’s desire for flexibility in the future.

3. For example, a donor contributes $25 million to construct a new laboratory on the campus of State University. The life expectancy of this building is approximately 30 years. The gift agreement should expressly address whether the donor’s name will be placed on any successor facility (and if it is, how will the university raise the money from future donors for a replacement?), the naming opportunity will lapse or the donor’s prior contribution will be recognized elsewhere on campus or within any replacement facility.

4. The gift agreement must anticipate not only the obsolescence of buildings but of academic programs, changing demographics, and evolving government funding priorities.

5. While donors can specify another charitable organization as an alternative beneficiary (“gift over”) if the gift conditions can no longer be met, alternative-use provisions are a less lethal option than a gift over.

a. Sample alternative use language might include: If, due to changed circumstances, it is impractical to carry out the above purpose, the gift will be used for:

i. “A purpose as nearly as akin to the original purpose as possible” (to be stated by donor in the gift agreement); or

ii. By drafting specific language to be included in the gift agreement, a donor may designate a specific alternative use, such as another program or position.

b. The gift agreement should also specify whether a determination of future uses will be made with the input of the donor or their successor or whether a designated person or group of persons affiliated with the donee makes this determination.

F. Reports and accounting

1. What reports does the donor require?

2. Can the donee provide these consistently and without undue additional effort?

3. To whom should they be sent, particularly when the donor is no longer in life?

G. Enforceable pledge/statement of intent

1. Generally, the gift agreement should be drafted in a manner that specifically states that it creates a pledge that the donee can enforce against the donor or their estate. This locks the donor into his commitment, providing certainty to the donee and certain tax advantages to the donor, including the ability to deduct payments made from the donor’s estate to fulfill any unpaid commitment at the time of the donor’s death.

2. If the donor intends that the commitment be paid from his private foundation or donor advised fund, it is important that the gift agreement not be a binding personal pledge since such pledges cannot be fulfilled from these types of grant-making entities.

H. Standing to sue

1. Traditionally, the donor of a charitable gift relinquished all control over the donated property and only the state attorney general could sue to enforce the terms of the gift agreement. Although this law is evolving, if the donor seeks to preserve the right to enforce the terms of their gift agreement, a standing-to-sue provision should be considered.

2. Any such provision must be drafted in such a way that it does not contravene the Internal Revenue Code’s requirement that the donor relinquish control to be entitled to a charitable income tax deduction.

I. Standard contract terms

While charitable gifts are “feel good” transactions, just as in the area of professional ethics, do not forget these are still business transactions. Be sure to include standard contract terms, such as:

1. The written gift agreement signed by the donor and the donee represents the entire agreement between the parties. It is particularly important that the donor be satisfied with the terms contained in the gift agreement itself as many laypersons assume that the sidebar conversations with the university president or museum director are somehow incorporated into the agreement.

2. Any amendments must be in writing and signed by both the donor and donee.

3. A governing law provision is also important since many large gifts are made to institutions located in jurisdictions other than the donor’s domicile.

© 2012 University of Miami School of Law.  This material was prepared for the 46th Annual Heckerling Institute on Estate Planning sponsored by the University of Miami School of Law. It is reprinted with the permission of the Heckerling Institute and the University of Miami. All rights reserved.

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