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UT Austin Gift Planner — Sept. 8, 2010

Giving News

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Sept. 8, 2010

Welcome to The University of Texas at Austin Gift Planner, an online resource for professional advisors in the estate and financial planning industries. The Gift Planner provides practical information on gift planning issues, reports new developments in charitable giving techniques, connects you with leading professionals, and informs you about key events and resources at UT Austin.

Recent events

Professional Advisors Day 2010

The Gift Planning Team hosted the third annual Professional Advisors Day on May 14, 2010. More than 70 attendees at this free event received two hours of continuing-education credit. Presenter Trey Cousins spoke about Aggressive Estate Planning without the Necessity of IRS Litigation, while Michael Whitty discussed Turning Over the Helm without Losing Sail: Navigating Financial, Estate, and Business Succession Planning for Family Business Owners. Attendees were also treated to a tour of the Texas Advanced Computing Center Visualization Laboratory, featuring Stallion, the world’s largest resolution tiled display, and a presentation about energy security by Charlie Cooke, principal associate director of the Energy Institute at The University of Texas at Austin.

Mark your calendars now for next year’s Professional Advisors Day, coming up Friday, May 13, 2011.

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Upcoming events

Blanton Museum of Art
Turner to Monet: Masterpieces from The Walters Art Museum
Oct. 2, 2010 – Jan. 2, 2011

Monet's Springtime

The Blanton Museum of Art at The University of Texas at Austin presents Turner to Monet: Masterpieces from The Walters Art Museum from Oct. 2, 2010 – Jan. 2, 2011. This selection of 40 19th-century paintings includes works from Impressionist artists Claude Monet, Camille Pissarro, Édouard Manet, and Edgar Degas, as well as British and American masters J.M.W. Turner, Gilbert Stuart, and Asher B. Durand, among others. Ned Rifkin, director of The Blanton, says, “This special exhibition will offer our visitors a rare opportunity to experience one of the country’s finest collections of 19th-century painting.”

Blanton Museum of Art
The University of Texas at Austin
MLK at Congress
www.blantonmuseum.org

Harry Ransom Center
Discovering the Language of Photography: The Gernsheim Collection
Sept. 7, 2010 – Jan. 2, 2011

Discovering the Language of Photography: The Gernsheim Collection, an exhibition at the Harry Ransom Center, explores the history of photography through the center’s foundational photography collection. The exhibition runs from Sept. 7, 2010 – Jan. 2, 2011, at the Ransom Center, a humanities research library and museum at The University of Texas at Austin.

This exhibition is made up of two complementary and interweaving narratives — the history of photography as told through the collection’s imagery and the history of the collection’s formation and methodology. The Gernsheims assembled a peerless collection, predominantly in the area of 19th-century British photography, and many highlights will be on display alongside works by unknown or lesser-known artists who used various means to improve or to exploit the relatively new invention of photography. The exhibition will highlight key moments in the history of photography, important technological and ideological shifts in the act of picture making, and narratives that served the Gernsheims as key points of collecting.

Harry Ransom Center
The University of Texas at Austin
21st and Guadalupe streets
www.hrc.utexas.edu

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New rates for charitable gift annuities

Effective July 1, 2010, the American Council on Gift Annuities approved a slight rate increase for single and two-life charitable gift annuities. If you have clients who already have a charitable gift annuity (CGA) and have considered creating another one or if you have clients who might be interested in setting up a CGA for the first time, now is an excellent time to have that conversation.

To give you some idea of the effect of this rate increase, consider that a 70-year-old individual who creates a $50,000 CGA will now receive $700 more after-tax income over the lifetime of the annuitant than he or she would have received prior to the increase. For a couple ages 75 and 80, with a two-life CGA funded at $100,000, the after-tax income would increase by a total of $1,260 over the expected lifetime of the annuitants.

The Gift Planning team is conducting a charitable gift annuity campaign this fall to increase awareness of both this rate increase and the advantages overall of charitable gift annuities as a vehicle for charitable giving. If you have clients who you think may be interested in establishing a CGA to benefit The University of Texas at Austin, please feel free to contact any member of our Gift Planning team at 512-475-9632 or 866-488-3927 (866-4UTEXAS). Please keep in mind that the minimum amount to establish a CGA through the UT Foundation is $10,000, and the minimum age is 55.

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Charitable giving trends in 2010

Those of you who advise your clients about charitable giving may be interested in the findings of the most recent study of American donors conducted by Penelope Burks (Cygnus Applied Research Inc.), a respected researcher in philanthropy. Unsurprisingly, the economy is still the No. 1 motivator among the minority of donors who plan to give less money to charity this year. On a happier note, however, a greater number of donors in the past year increased rather than decreased their charitable giving, and a majority of those surveyed said that they expected their charitable giving to remain roughly the same from 2009 to 2010.

For those of us who work in gift and estate planning, the news is also good. Among those donors who already have a will but have not made a charitable bequest, 32 percent said they would definitely/very likely/seriously consider putting such a provision in their will. And among those who have already made a charitable bequest, only 4 percent said that a charitable organization influenced them to make that gift provision.

For more information about the survey, visit the Cygnus website at www.cygresearch.com.

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Unintended consequences of IRC Section 2511(c) on charitable remainder trusts?*

With the repeal of the federal estate tax on Jan. 1, 2010, Internal Revenue Code 2511(c) went into effect.** Specifically, Section 2511(c) provides:

Treatment of Certain Transfers in Trust: Notwithstanding any other provision of this section and except as provided in regulations, a transfer in trust shall be treated as a transfer of property by gift, unless the trust is treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1.

In theory, since there is no federal estate tax in 2010 there should also be no need for the gift tax. After all, Congress enacted the gift tax as a backstop to the federal estate tax to prevent taxpayers from simply giving away assets during their lifetime, thereby avoiding estate tax liability at the time of their death. In reality, the gift tax remains in place in 2010 to discourage income shifting, whereby high-income taxpayers could give away income to individuals or trusts in lower-income tax brackets.

Section 2511(c) attempts to prevent this income-shifting strategy by treating all transfers to trusts as gifts, subject to gift tax, unless the trust is wholly owned by the grantor or the grantor’s spouse (in which case the income from the trust would remain taxable to the grantor or spouse). As soon as Section 2511(c) took effect, confusion arose as to the statute’s meaning with regard to wholly owned grantor trusts. Did the statute intend to make transfers to wholly owned grantor trusts incomplete for federal gift tax purposes? Did a gift occur at the time the trust made distributions to the grantor or when the trust terminated? If this was the case, then estate planners and their clients worried that many of the benefits of wholly owned grantor trusts would be eliminated by Section 2511(c).

In an attempt to clarify its position, the IRS issued Notice 2010-19, which reads:

Some taxpayers may have inaccurately interpreted section 2511(c) as excluding from the gift tax transfers to a trust treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1, even though those transfers would otherwise be taxable under Chapter 12. The provisions of Chapter 12 regarding the substantive law applicable to the gift tax were not amended by EGTRRA, and those provisions continue to apply to all transfers made by donors during 2010.

Section 2511(c) is an addition to those substantive law provisions and is applicable to transfers made in 2010. Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax.

Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1 is considered to be a transfer by gift of the entire interest in the property under section 2511(c). The provisions of Chapter 12 as in effect on December 31, 2009, continue to apply (both before and during 2010) to all transfers made to any other trust to determine whether the transfer is subject to gift tax. (emphasis added)

Based on Notice 2010-19, it is currently impossible to make an incomplete gift to a non-grantor trust. In the IRS’s own words “each transfer made in 2010 to a trust … is considered to be a … gift of the entire interest in the property.”

The IRS makes no specific exclusion for charitable remainder trusts (CRT) and thus has undermined the use of this charitable giving vehicle in 2010. This raises significant concerns for gift planners and professional advisors whose clients may be interested in establishing or adding to a charitable remainder trust in 2010. In past years when a donor established a CRT and retained the income interest in the trust, the value of the interest retained by the grantor was not subject to federal gift tax and the donor could claim a gift tax charitable deduction for the value of the remainder interest assigned to the charity.

Based on the plain reading of Section 2511(c), in combination with Notice 2010-19, this approach appears to no longer apply. Instead, it is possible that in 2010 a donor who funds a CRT may have made a taxable gift for the entire amount transferred to the trust, including the donor’s income interest, yet the donor could only claim a gift tax charitable deduction for the value of the remainder interest designated to charity.

Experts in financial and charitable planning vary in their opinions as to how the IRS will ultimately come down on this issue. For now though, it is uncertain whether a donor who establishes a charitable remainder trust could exclude the income interest from federal gift tax or whether the grantor might incur gift tax liability for the entire charitable gift, with only the remainder interest eligible for the gift tax charitable exclusion.

If you or your clients would like more information about this topic or about charitable remainder trusts, please contact the Gift Planning team at 512-475-9632 or giftplan@www.utexas.edu.

* After some initial research, the Gift Planning team has been unable to find any information dealing with the impact of Section 2511(c) on charitable lead trusts (CLT), specifically generation-skipping CLTs where the donor uses the CLT as a vehicle to pass on significant assets to future generations while avoiding generation skipping transfer taxes. Based on the above interpretations of Section 2511(c) and Notice 2010-19, it would appear that non-grantor CLTs established in 2010 could be subject to the same uncertainty as Charitable Remainder Trusts with regard to gift tax liability. If any of you have dealt with this issue in your practice, or have any advice to share on this topic, please contact our office at giftplan@www.utexas.edu.

** IRC Section 2511(c) expires after Dec. 31, 2010, with the resumption of the estate tax.

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Christiansen and Petter approve use of charitable lids

Two court cases in the past year, Christiansen v. Commissioner (2009 WL 3789908 (8th Cir. Nov. 13, 2009) ) and Petter v. Commissioner (T.C. Memo 2009-280 (Dec. 7, 2009) ), have affirmed the use of charitable lids as a financial and estate planning technique for donors with illiquid assets.

“Charitable lids” refers to a planning technique whereby a taxpayer can avoid estate or gift tax liability by ensuring that if the IRS reduces a valuation discount then the excess amount will pass to charity rather than back to the taxpayer or to another individual. The excess amount that passes to charity will then qualify for a gift or estate tax charitable deduction.

Until Christiansen and Petter, the controlling case for valuation adjustment clauses was Commissioner v. Proctor (142 F.2d 824 (4th Cir. 1944) ), where the Fourth Circuit held that valuation adjustment clauses were contrary to public policy as they impeded the IRS’s ability collect taxes. In Proctor, however, the valuation clause specified that the portion of property subject to gift tax would revert back to the donor. Since Proctor, the IRS has argued that this same reasoning should also apply to valuation adjustment clauses where the amount subject to gift or estate tax liability would pass to charity. In Christiansen and Petter, both decided in late 2009, the 5th Circuit Court of Appeals and the Tax Court disagreed with the IRS.

In Christiansen, the 8th Circuit affirmed the use of a charitable lid in an estate plan where the donor left a defined amount to a single beneficiary (her daughter) with the provision that any portion of the estate her daughter disclaimed would pass to charity. The daughter did disclaim all property beyond a defined amount. After the estate tax audit, the IRS challenged the value of the estate, and the excess valuation amount passed to charity in accordance with the disclaimer. The estate took an additional charitable deduction for the increased value, and the IRS disallowed the deduction, arguing that the adjustment clause in the disclaimer was against public policy. Both the Tax Court and the 8th Circuit disagreed, finding, among other things, that public policy actually favors gifts to charity.

Soon after, the Tax Court upheld a defined-value gift tax clause in Petter, where the taxpayer attempted to transfer a substantial amount of UPS stock that she had inherited to her children and to charity. The transfer documents included a complex formula clause, designed to have the taxpayer avoid exceeding her lifetime gift tax exclusion. The IRS then audited her gift return and increased the value of the property. The increased amount all went to charity, but the IRS argued that there should be no corresponding increase in the charitable deduction. The Tax Court rejected this argument, using the same reasoning found in Christiansen.

Even though the IRS may appeal Petter to the 9th Circuit, for now these two cases provide good news for wealthy taxpayers with charitable intent and illiquid assets. Although there is no estate tax in 2010, the estate tax is slated to come back with a vengeance in 2011. And in the meantime the federal gift tax is still a consideration. Based on Christiansen and Petter, it appears that charitable lids are an excellent and quite viable estate and gift planning technique. For more information about charitable lids and other charitable estate planning strategies, please contact the Gift Planning team at 512-475-9632, 866-488-3927 (866-4UTEXAS) or giftplan@www.utexas.edu.

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In memoriam

It is with great sadness that we report the passing of James A. Elkins, III, of Houston on June 10, 2011, at the age of 58. Mr. Elkins, who received his MBA from The University of Texas McCombs School of Business, was a longtime member of the Gift Planning Advisory Council and a friend to many of us. At the time of his death Mr. Elkins, a third-generation Houstonian, was the chairman of asset management firm Houston Trust Co.

In addition to his work with the university, Mr. Elkins was a trustee at the Baylor College of Medicine, Rice University, Methodist Hospital, and Texas Children’s Hospital. He also was the former chairman of the board of trustees of St. John’s School. He served on the boards of several foundations and nonprofit organizations including the Children’s Museum of Houston, the Houston Museum of Natural Science, the Houston Parks Board, and the Houston Zoo.

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