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UT Austin Gift Planner – June 22, 2009

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Welcome to The University of Texas at Austin Gift Planner, a 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.

June 22, 2009

Vol. 2. No. 3

Recent events

Professional Advisors Day

The University of Texas at Austin Office of Gift Planning hosted the second annual Professional Advisors Day on May 13, 2009. Nearly 100 professional advisors attended the event and earned CLE credit for “Developments in Charitable Gift Planning” and “Charitable Planning for People Who Aren’t Wealthy.” Attendees also learned about two exciting projects happening at the university: the transformation of Speedway into a scenic pedestrian mall that will revitalize the campus environment and enrich the student experience and the Landmarks Public Art program, which aims to enhance the aesthetic character of the university while building a world-class collection of public art. Following the conference, attendees were treated to private tours of the recently renovated Bass Concert Hall and the Moncrief-Neuhaus Athletics Center, the training facility of The University of Texas Longhorns.

“Understanding Generational Differences in Estate Planning”

David Stillman delivered the presentation “Understanding Generational Differences in Estate Planning” at a joint event Feb. 13, 2009, hosted by The University of Texas at Austin and the Texas A&M Foundation. Stillman defined various generational groups, such as baby boomers and Generation Xers, and discussed the traits and influences of each group and how they affect estate and charitable gift planning. Stillman explained how professional advisors could approach clients of each generation to better engage them in the estate planning process.

Welcome the newest member of the Gift Planning team

Marcia IngerPlease join us in welcoming Marcia Inger, who joined the Office of Gift Planning as a director on May 11, 2009. Prior to joining the Gift Planning staff, Marcia served as the chief development officer for the Texas Advanced Computing Center at The University of Texas at Austin, as an assistant director of development at the University of Virginia, and as an associate with the law firm of Morgan Lewis in Philadelphia. She earned both her bachelor’s degree in art history and her law degree from the University of Virginia.

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New opportunities for charitable lead trusts

Your clients may benefit from a sophisticated method of structuring charitable lead trusts that increases charitable payouts over time. An escalating charitable lead trust especially makes sense in uncertain economic times.

The method was described at the fall 2008 meeting of The University of Texas at Austin Gift Planning Advisory Council in a presentation by council member Robert M. Weylandt (BBA ’79, JD ’82), managing director and wealth advisor for J.P. Morgan Private Bank. Weylandt’s presentation included analysis of an escalating payment clause described in the annotations to sample CLT trust documents issued by the IRS in 2007 and 2008 (see below). The following article is based on information provided in Weylandt’s presentation.

Zeroed Out Charitable Lead Trusts

Charitable lead trusts are often used to pass wealth at reduced transfer taxes. The typical structure of a CLT is determined by adjusting the payout rate and trust term so that the available gift tax exemption is fully utilized and the gift tax value of the transferred assets is zero (or close to zero). For example, with the May 2009 Section 7520 rate of 2.4 percent, a trust term of 39 years and a payout of 4 percent would zero out the remainder. Other trust terms and payout percentages that zero out the remainder:

  • 28 years — 5 percent
  • 22 years — 6 percent
  • 18 years — 7 percent

Escalating Charitable Lead Trusts

In 2007 and 2008, the IRS for the first time published sample documents for charitable lead annuity trusts (CLATs) and charitable lead unitrusts (CLUTs), respectively. See Rev. Proc. 2007-45, 2007-29 IRB 89 (inter vivos CLAT); Rev. Proc. 2007-46, 2007-29 IRB 102 (testamentary CLAT); Rev. Proc. 2008-45, 2008-30 IRB 224 (inter vivos CLUT); Rev. Proc. 2008-46, 2008-30 IRB 238 (testamentary CLUT). Although some planners have been recommending and drafting charitable lead trusts (CLTs) for many years, they had to create their own trust forms based on their interpretation of the Tax Code. The IRS form documents offer planners security because they now can check their documents against those of the IRS to ensure the necessary provisions are included.

One aspect of the IRS forms that has sparked conversation is a clause in the annotations to the sample trust documents permitting an escalating payment clause. The relevant provision allows the trust to vary the charitable payment during the trust term as long as the amount is ascertainable at the beginning of the trust. The annotations to the CLAT forms provide, “Alternatively, the governing instrument of a CLAT may provide for an annuity amount that is initially stated as a fixed dollar or fixed percentage amount but increases during the annuity period, provided that the value of the annuity amount is ascertainable at the time the trust is funded [or at the time of the decedent’s death].” See § 5.02, ¶ 2.01, subsection 2 of Rev. Proc. 2007-45, IRB 89; Rev. Proc. 2007-46, IRB 102. Similarly, the annotations to the CLUT forms provide, “Alternatively, the governing instrument of a CLUT may provide for a unitrust amount that is initially stated as a fixed percentage amount but increases or decreases during the unitrust period, provided that the value of the unitrust interest is ascertainable at the time the trust is funded [or at the time of the decedent’s death].” See § 5.02, ¶ 2.01, subsection 2 of Rev. Proc. 2008-45, 2008-30 IRB 224; Rev. Proc. 2008-46, 2008-30 IRB 238.

An escalating CLT makes smaller payments in the early trust years and larger payments in later years. There are two types of escalation. The trust may choose to utilize a constant escalation rate for the entire term (e.g., 10% increase each year, 20% increase each year, etc.) or it may utilize a varying escalation rate during the term (e.g., 0% for years 1-2, 10% increase for years 3-5, 20% increase for years 6-9, 30% increase for years 10-14, and 40% increase for years 15-20). A modeling program can be helpful when determining the escalation type and rate because different escalation rates may provide the greatest benefit to the remaindermen, the charity, or the CLT itself.

Escalating CLTs have the highest success rate (defined as the value of the assets at the end of the trust term) when the section 7520 rate is low and the trust term is longer than 10 years. Conversely, it is more useful to have a short-term CLT (less than 10 years) with a low escalation rate in a high section 7520 environment because it can be difficult to predict the success of an escalating CLT when section 7520 rates are high. As a result, escalating CLTs can be useful in uncertain economic times when assets are underperforming. Currently, depressed asset values and a historically low section 7520 rate (2.4% for May) present a “perfect storm” of factors that may lead to an increased usage of both straight and escalating CLTs. With an escalating CLT, the lower initial payout rates should buffer against the need for any significant sale of trust assets during the early trust years when the market is underperforming and allow the trust to recover over time and benefit from potentially higher returns during the later years when the payouts to charity are greater.

Moreover, adding a payment escalation clause can increase the benefit to the remaindermen. Lower payments to the charitable beneficiary in the early years of the term allow the trust to compound its gains. Because part of the charitable value during the early years is retained in the CLT, the economic benefit compounds, thereby increasing the total distribution to the non-charitable remainder beneficiaries.

With the recent interest in escalating CLTs, you may encounter one in your practice sometime soon.

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Campaign for Texas creating impact

The Campaign for Texas is not only succeeding financially — it is also changing the world in real ways, according to a new report by The University of Texas at Austin.

“Thanks to the generosity of the University’s friends, the first two years of the Campaign for Texas have been a success,” President Bill Powers writes in a message accompanying the campaign report. “As I write in early 2009, we are more than a quarter of the way toward meeting our $3 billion goal.”

So far the Campaign for Texas has raised $882 million. The campaign report outlines accomplishments and goals for each college, school, and unit since the Campaign for Texas began in 2006. Some examples of ongoing University initiatives that are backed by private support:

  • An assistant professor in the College of Engineering is developing a pen-size probe that will use pulses of light — not a biopsy — to detect skin cancer.
  • The Institute for Computational Engineering and Sciences has launched a computer-modeling initiative to tackle such issues as heart disease, cancer, climate change, and the global energy crisis.
  • Children who have never been to a museum will get the chance to visit the Blanton Museum of Art. The program also provides real-world experience for University students in art education, who help conduct the guided tours.
  • The University of Texas Libraries will collect and digitally preserve records of worldwide genocide and human-rights violations.

The campaign report also shows how the University’s funding picture has changed in the past quarter century. In 1984-1985, 47.1 percent of the University’s budget was covered by state support. By 2008-09, that number had dropped to 15.5 percent.

The Campaign for Texas runs until 2014. Read the entire Campaign for Texas report.

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New scholarship will be among nation’s most prestigious

Only the best students become Longhorns, and only the best Longhorns will become 40 Acres Scholars.

Texas Exes are creating the 40 Acres Scholarship Program, which will offer the University’s most prestigious scholarships to incoming freshmen. The full-ride scholarships will be renewable and merit-based. When fully funded, the program will support 300 scholars, making it not only the largest, most comprehensive scholarship program on the UT Austin campus but also one of the largest merit-based scholarships in the country.

Created by the Texas Exes in response to the Commission of 125 and its call for improving the undergraduate experience, the four-year scholarships for undergraduates will be augmented by enrichment opportunities that include community service, study abroad, and internships. Scholars will receive:

  • Full four-year scholarships, including tuition, fees, books, and living expenses.
  • Priority housing in honors residence halls.
  • Funding for summer programs: public service after freshman year, study abroad after sophomore year, internships related to field of study after junior year.

Students will undergo a rigorous, competitive selection process based on their academic performance, capacity to motivate and lead fellow students, and overall citizenship. Alumni will participate in the screening and interviewing process, and deans from the colleges and schools will have the opportunity to use these scholarships as recruitment tools. An advisory board made up of prominent Texas Exes will serve as mentors to the students.

A 40 Acres Scholarship can be named with a contribution of $500,000. While unrestricted endowments are preferable, the Texas Exes will work with donors to customize criteria for a specific school or college.

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