Untitled Texas Attorney General Opinion

ATTORNEY GENERAL OF TEXAS

GREG ABBOTT

March 12,2004

Mr. Benton Cocanougher Opinion No. GA-O 163

Interim Chancellor

The Texas A&M University System Re: Whether The Texas A&M University System

A&M System Building, Suite 2043 is authorized to administer charitable remainder

200 Technology Way trusts (RQ-011 O-GA)

College Station, Texas 77845

Dear Mr. Cocanougher:

You ask whether The Texas A&M University System (the “A&M System”) is authorized to

administer charitable remainder trusts.

You inform us that the A&M System is considering administering charitable remainder trusts

established to comply with section 664 of the Internal Revenue Code and Internal Revenue Service

regulations. ’ As we understand these trusts, a donor irrevocably transfers assets to a charitable trust

that is administered by a trustee. The donor may be eligible to take a charitable income tax

deduction for the gift.2 The trust pays income to the donor and/or other beneficiaries, at least one

of which is not a charitable entity, for the lifetime of the noncharitable income beneficiaries or for

a specific term. Upon termination of the trust (either upon the death of the noncharitable income

beneficiaries or at the end of a term of years), the trustee distributes the amount remaining in the trust

to one or more charitable entities or uses the trust for a charitable purpose. See Request Letter, supra

note 1, at 1; I.R.C. 9 664; see generally 34 AM. JUR. 2D Federal Taxation (2003) 71 19206-07.

Section 664 of the Internal Revenue Code provides for two types of charitable remainder trusts:

Charitable Remainder Annuity Trusts (CRATS), for which the income payment is a fixed amount

that does not change from year to year,3 and Charitable Remainder Unitrusts (CRUTS), for which

‘See Letter from Dehnar L. Cain, General Counsel, The Texas A&M University System to Honorable Greg

Abbott, Texas Attorney General (Sept. 16,2003) (on file with the Opinion Committee) [hereinafter Request Letter].

‘See I.R.C. 0 170(f)(2)(A).

3Section 664 of the Internal Revenue Code provides that a charitable remainder annuity trust is a trust

(A) from which a sum certain (which is not less than 5 percent nor more than 50

percent of the initial net fair market value of all property placed in trust) is to be

paid, not less often than annually, to one or more persons (at least one of which is

not an organization described in section 170(c) and, in the case of individuals, only

to an individual who is living at the time of the creation of the trust) for a term of

(continued...)

Mr. Benton Cocanougher - Page 2 (GA-0163)

the income payment is a fixed percentage of the trust assets’ annual fair market value and thus

changes each year depending on the trust’s market value.4

3(. . .continued)

years (not in excess of 20 years) or for the life or lives of such individual or

individuals,

(B) from which no amount other than the payments described in subparagraph (A)

and other than qualified gratuitous transfers described in subparagraph (C) may be

paid to or for the use of any person other than an organization described in section

170(c),

(C) following the termination of the payments described in subparagraph (A), the

remainder interest in the trust is to be transferred to, or for the use of, an

organization described in section 170(c) or is to be retained by the trust for such a

use or, to the extent the remainder interest is in qualified employer securities (as

defined in subsection (g)(4)), all or part of such securities are to be transferred to

an employee stock ownership plan (as defined in section 4975(e)(7)) in a qualified

gratuitous transfer (as defined by subsection (g)), and

(D) the value (determined under section 7520) of such remainder interest is at least

10 percent of the initial net fair market value of all property placed in the trust.

Id. 8 664(d)(l).

4Section 664 of the Internal Revenue Code provides that a charitable remainder unitrust is a trust

(A) from which a fixed percentage (which is not less than 5 percent nor more than

50 percent) of the net fair market value of its assets, valued annually, is to be paid,

not less often than annually, to one or more persons (at least one of which is not an

organization described in section 170(c) and, in the case of individuals, only to an

individual who is living at the time of the creation of the trust) for a term of years

(not in excess of 20 years) or for the life or lives of such individual or individuals, ’

(B) from which no amount other than the payments described in subparagraph (A)

and other than qualified gratuitous transfers described in subparagraph (C) may be

paid to or for the use of any person other than an organization described in section

170(c),

(C) following the termination of the payments described in subparagraph (A), the

remainder interest in the trust is to be transferred to, or for the use of, an

organization described in section 170(c) or is to be retained by the trust for such a

use or, to the extent the remainder interest is in qualified employer securities (as

defined in subsection (g)(4)), all or part of such securities are to be transferred to

an employee stock ownership plan (as defined in section 4975(e)(7)) in a qualified

gratuitous transfer (as defined by subsection (g)), and

(D) with respect to each contribution of property to the trust, the value (determined

under section 7520) of such remainder interest in such property is at least 10

percent of the net fair market value of such property as of the date such property is

contributed to the trust.

Id. 9 664(d)(2).

Mr. Benton Cocanougher - Page 3 (GA-0163)

You explain that the A&M System’s duties in administering a charitable remainder trust

would include “calculating the interest of the . . . donor” and making “ongoing calculations . . . to

determine the annual payment to the beneficiary of CRUTS as well as the tax classification of the

distributions to any non-charitable beneficiary.” Request Letter, supra note 1, at 1. You state that

although “once in place these vehicles are fairly straightforward, more complex versions would call

for fairly sophisticated decision-making by the fiduciary.” Id.

In support of the A&M System’s position that it is authorized to administer charitable

remainder trusts, The University of Texas System (the “UT System”) has submitted a brief

describing its charitable remainder trust progran? The UT System informs us that it has

administered CRATS and CRUTS for over 30 years and that it currently administers over 40

charitable remainder trusts with a combined value of over $32 million. See UT System Brief, supra

note 5, at 2, 4. The UT System contracts with The University of Texas Investment Management

Company (UTIMCO)j to manage such trusts “[t]o insure invested trust assets result in a reasonable

amount of income or gain from the sale or disposition of the assets.” Id. at 3. “In addition to

managing and investing the funds . . . , UTIMCO satisfies all federal filing requirements and

provides annual accountings to the noncharitable beneficiaries.” Id. at 4. The UT System informs

us that its board of regents’ rules require that in order for that system to administer a charitable

remainder trust, “[a] minimum of $50,000 in principal is needed” and the system or one of its

component institutions must receive at least 50 percent of the remainder interest. See id. at 3. The

UT System asserts that these charitable remainder trusts “will provide much needed future support

for the component institutions of the U.T. System.” Id. at 4.

In addition to the administrative duties described by the A&M and UT Systems, a trustee also

has certain legal duties and obligations imposed by the Texas Trust Code.7 See TEX. PROP. CODE

ANN. $5 113.001-.026 (trustee’s powers), 113.051-.060 (trustee’s duties) (Vernon 1995 & Supp.

‘See Brief from Cullen M. Godfrey, General Counsel, The University of Texas System to Nancy S. Fuller,

Chair, Opinion Committee, Office of the Attorney General (Nov. 17, 2003) (on file with the Opinion Committee)

[hereinafter UT System Brief).

‘?-JTIMCO is a section 501(c)(3) investment management corporation formed by the UT System board of

regents to manage investment assets under the board of regents’ fiduciary care. The UT System board of regents

contracts with UTIMCO to invest funds under its fiduciary control. See http://www.utimco.org.; see also TEX. EDUC.

CODE ANN. fj 66.08(b) (V emon 2002) (“The [UT System board of regents] may enter into a contract with a nonprofit

corporation for the corporation to invest funds under the control and management of the board.“).

‘Pursuant to the Uniform Management of Institutional Funds Act, the Texas Trust Code does not apply to an

institutional fund. See TEX. PROP. CODE ANN. 5 163.009 (Vernon 1995) (“Subtitle B, Title 9 (the Texas Trust Code),

does not apply to any institutional fund subject to this chapter.“) (footnote omitted). However, a charitable remainder

trust is not an “institutional fund” within the meaning of the Uniform Management of Institutional Funds Act. The Act

defines an institutional fund as “a fund held by an institution for its exclusive use, benefit, or purposes, except a fund held

for an institution by a trustee that is not an institution or a fund in which a beneficiary that is not an institution has an

interest other than possible rights that could arise on violation or failure of the purposes of the fund,” id. 0 163.003(6)

(emphasis added). A charitable remainder trust is “a fund in which a beneficiary that is not an institution has an interest

other than possible rights that could arise on violation or failure of the purposes of the fund.” See id.; see also id. 0

163.003( 5) (“‘Institution’ means an incorporated or unincorporated organization organized and operated exclusively for

educational, religious, or charitable purposes, an institution ofhigher education, or a foundation chartered for the benefit

of an institution ofhigher education.“) (emphasis added), (7) (“‘Institution ofhigher education’ has the meaning assigned

by Section 61.003, Education Code.“).

Mr. Benton Cocanougher - Page 4 (GA-0163)

2004). The Texas Trust Code requires as a general matter that a trustee must have the “legal capacity

to take, hold, and transfer the trust property” and must accept the trust. See id. $9 112.008(a), .009

(Vernon 1995).

We address the A&M System’s general authority under the Education Code and other law

to accept and administer charitable remainder trusts and to act as trustee for such trusts. You do not

specify whether the A&M System’s work in connection with these trusts would include business

activities that might be regulated by other law, and we do not consider whether the A&M System

must comply with any other such law in engaging in such activities.8 Furthermore, in answering your

query, we assume that the A&M System would pay charitable remainder trust beneficiaries income

payments from trust assets, as opposed to public funds, and that the A&M System would receive

adequate compensation for administering a trust. Thus, we do not consider any issues that might

arise with respect to the A&M System expending public funds in connection with administering a

charitable remainder trust.’ Finally, we also assume that the A&M System or one of its component

institutions would receive the remainder (or a substantial portion of the remainder) of any charitable

remainder trust administered by the A&M System and that the A&M System would ultimately

benefit from any such trust.

You specifically ask about the A&M System’s authority under section 85.30 ofthe Education

Code. Section 85.30 provides as follows:

(a) Donations ofproperty may be made and accepted by the

board for the purpose of establishing or assisting in the establishment

of a professorship, chair, or scholarship in the university system or

any of its component institutions or for creating in the university

system or any of its component institutions any trust for any lawful,

educational, or charitable purpose, either temporarily or

permanently, and the donations or trusts thereby created will be

governed by the rules prescribed by this section.

(b) The legal title to the property shall be vested in the board

acting as an entity, or the State of Texas, to be held in trust for the

purpose under any directions, limitations, and provisions that may be

declared in the donation or trust agreement, not inconsistent with the

objectives and proper management of the system or its component

institutions.

(c) The donor may declare and direct the manner in which the

title to the property shall thereafter be transmitted from the trustee in

‘See, e.g., Ozee v. Am. Council on Gift Annuities, 888 F. Supp. 13 18, 1322-25 (N.D. Tex. 1995) (addressing

the authority of a nonprofit corporation to sell charitable gift annuities).

‘See, e.g., Tex. Att’y Gen. Op. No. JM-551 (1986) ( considering the authority of Southwest Texas State

University serving as trustee of ranch property to expend appropriated funds for permanent improvements and operation

of the trust).

Mr. Benton Cocanougher - Page 5 (GA-0163)

continued succession, to be held for and appropriated to the declared

purposes.

(d) The donor may declare and direct the person or class of

persons who shall receive the benefit of the donation and the manner

of their selection.

(e) The declarations, directions, and limitations shall not be

inconsistent with the objects and proper management of the system

or its institutions.

(f) The title to the property donated shall be received, and the

trust conferred in the donation shall be assumed, subject to laws that

may be passed and carried into effect from time to time which may be

necessary to prevent the loss of or damage to the property donated or

an abuse or neglect of the trust so as to defeat, materially change, or

prevent the objects of the donation.

(g) Copies of the donation shall be filed with the board.

TEX. EDUC.CODEANN. 9 85.30 (Vernon 2002) (emphasis added). You also ask about section 85.3 1,

which provides that “[tlhe board may at its discretion charge administrative fees for services

rendered in the management and administration of any trust estate under the control of the system

or any component of the system.” Id. fj 85.3 1(a).

Section 85.30(a) authorizes the board of regents to accept property donations “for the purpose

of establishing . . . a professorship, chair, or scholarship in the university system or any of its

component institutions orfor creating in the university system or any of its component institutions

any trust for any lawful, educational, or charitable purpose.” Id. 9 85.30(a) (emphasis added). It is

not clear to us that a charitable remainder trust, which will have at least one noncharitable income

beneficiary and will not be distributed to the A&M System until the death of the income

beneficiaries or at the end of a specific term, is a trust “creat[ed] in the university system” as

contemplated by this provision. See id. (emphasis added); see also id. 9 85.30(b)-(c), (f).

Furthermore, section 85.3 1 broadly authorizes the board to “charge administrative fees for services

rendered in the management and administration of any trust estate,” but does not itself authorize the

A&M System to act as trustee. Thus, in order to answer your question, we look beyond sections

85.30 and 85.3 1.

The A&M System is governed by a board of regents, to which chapter 85 of the Education

Code grants broad authority. See id. 9 85.11 (government of the A&M System “is vested in a board

of nine regents”); see also id. 0 85.01(2) (f or chapter 85 purposes “board” means “the board of

regents of The Texas A & M University System”). Section 85.2 1(a) of the Education Code provides

that the board of regents “shall make bylaws, rules, and regulations it deems necessary and proper

for the government of the university system and its institutions, agencies, and services.” Id.

5 85.2 1(a). Attorney general opinions have concluded that section 85.2 1(a) and similar provisions

Mr. Benton Cocanougher - Page 6 (GA-0163)

granting broad powers to certain other state university board of regents give those “state universities

. . . broad authority to provide services and perform functions not expressly authorized by statute.”

Tex. Att’y Gen. Op. No. DM-329 (1995) (concluding that although no statute expressly authorizes

a state university to operate a debit card program, a court could construe the broad statutory powers

of a board of regents to impliedly authorize a state university to do so); see also Tex. Att’y Gen. Op.

No. JM-1146 (1990) (concluding that statutes authorized the A&M System board of regents to

operate the faculty club as an auxiliary enterprise). Moreover, given their broad powers, “[sltate

institutions of higher education have authority to undertake a wide variety of activities that are not

strictly educational but that support the educational mission of the university.” Tex. Att’y Gen. Op.

No. DM-429 (1996) at 6. Relying on a state university board of regents’ broad powers, a 1941

opinion of this office recognized a board of regents’ authority to establish a department to

“‘develop[] the University through gifts and endowments,“’ and to use public funds to pay the

department’s expenses. See Tex. Att’y Gen. Op. No. O-4167 (1941) at 3, 7 (authority of the UT

System board of regents to manage and govern the university under former law included authority

to spend appropriated funds for public relations and fund-raising).

More specifically, chapter 85 expressly authorizes the A&M System to accept and administer

gifts. Section 85.2 1(b) provides that the board of regents “is specifically authorized, upon terms and

conditions acceptable to it, to accept and administer gifts, donations, grants, and endowments, from

any source, for use by the system or any of the components of the system.” TEX. EDUC. CODE ANN.

fj 85.21(b) (V emon 2002). This office has concluded that a provision similar to section 85.21(b)

grants the UT System board of regents “considerable discretion to accept donations ‘of any kind’

with conditions attached by the donor.” Tex. Att’y Gen. Op. No. MW-373 (198 1) (concluding that

Education Code section 65.3 1(e) authorized the UT System board of regents to provide office space,

utilities, and telephone service to the University of Texas Law School Foundation, a nonprofit

corporation, as terms and conditions attached to the foundation’s donations). Thus, the A&M

System board of regents has broad authority to accept and administer conditional gifts.

In addition, other laws recognize the authority of state institutions ofhigher education to hold

property in trust. Subchapter A of chapter 51 of the Education Code, which governs funds of

institutions of higher education, including the A&M System, generally recognizes governing boards’

authority to hold and invest donations and gifts, including trust funds. See TEX. EDUC. CODE ANN.

9 51.002(a)(lO) (V emon 1996) (the governing body of certain institutions including the A&M

System may retain control of certain funds including donations and gifts to the institution).” For

example, section 5 1.003 1(a) provides that “[a] governing board may deposit funds under its control

- * - 7 may invest funds under its control in accordance with Chapter 2256, Government Code and,

with regard to donations, gifts, and trusts, may establish endowment funds that operate as trusts and

are managed under prudent person standards.” Id. 5 5 1.003 1(a) (Vernon Supp. 2004). And section

5 1.004(b) provides that “[a]11trust funds, including gifts, grants, and bequests received, establishing

or adding to endowment funds, loan and scholarship funds, and funds for other current restricted

“See also TEX. EDUC. CODE ANN. $0 5 1.OOl (“The provisions of this subchapter apply to each institution of

higher education, as that term is defined by Section 61.003 of this code, including each public junior college to the extent

possible.“), 61.003(3), (8) (including the A&M System within definition of institution of higher education) (Vernon 1996

& Supp.2004).

Mr. Benton Cocanougher - Page 7 (GA-0163)

purposes, shall be credited to separate accounts and shall not be commingled with other local or

institutional funds.” Id. 0 5 1.004(b) (Vernon 1996). The Government Code recognizes the authority

of institutions of higher education to accept and hold real property in trust. See TEX. GOV’T CODE

ANN. 8 2204.003 (Vernon 2000) (“An institution of higher education, as defined by Section 6 1.003,

Education Code, may accept a gift or devise of real property from a private entity to establish

scholarships or professorships or to be held in trust for other educational purposes only if done

consistently with rules and regulations adopted by the Texas Higher Education Coordinating Board

pursuant to its power to adopt such rules and regulations under Chapter 6 1, Education Code.“).

Finally, chapter 182 of the Finance Code regulates state trust companies, which include

entities that act as trustee under a written agreement or that receive money and other property in a

trustee capacity to invest. See TEX. FIN. CODE ANN. 0 182.001(b)(1)-(2) (Vernon Supp. 2004).

Generally, entities that engage in the trust business must obtain a state trust company charter. See

id. 8 182.006. However, the legislature has exempted state institutions ofhigher education from that

requirement, thus recognizing their authority to act as trustee. See id. 9 182.021(13) (“a company

does not engage in the trust business in a manner requiring a state charter by. . . acting as trustee by

a public, private, or independent institution of higher education or a university system, as defined

by Section 61.003, Education Code, including an affiliated foundation or corporation of such an

institution or system acting as trustee as provided by the Education Code”).

Taken together, these provisions clearly recognize the authority of a state institution of higher

education to act as a trustee and to hold property in trust. While it is not clear whether section 85.30

of the Education Code contemplates charitable remainder trusts, it specifically authorizes the A&M

System board of regents to accept and hold property in trust, see TEX. EDUC. CODE ANN. 8 85.30(a)-

(b), (f) (Vernon 2002), and section 85.31 authorizes the board to charge fees for managing and

adrninistering “any trust estate under the control of the system,” id. 8 85.3 1(a). Thus, although no

statute may expressly authorize the A&M System to accept or administer charitable remainder trusts

in particular, we conclude that the A&M System’s authority with respect to trusts in general together

with its broad grant of power in section 85.2 1(a)-(b) to adopt rules and to accept and administer gifts

give the A&M System board of regents the authority to accept charitable remainder trusts as gifts

and to administer charitable remainder trusts from which the A&M System or one of its components

will receive the charitable remainder. See id. § 85.2 l(a) (the A&M System board of regents’

rulemaking authority), (b) (the A&M System board of regents “is specifically authorized, upon terms

and conditions acceptable to it, to accept and administer g#s, donations, grants, and endowments,

from any source, for use by the system or any of the components of the system”) (emphasis added).

Because we believe that other provisions authorize the A&M System to accept and administer

charitable remainder trusts, we need not resolve whether section 85.30 of the Education Code

authorizes the A&M System to administer that particular type of trust.

Mr. Benton Cocanougher - Page 8 (GA-0163)

SUMMARY

The Texas A&M University System is authorized to

administer charitable remainder trusts from which the system or one

of its components will receive the charitable remainder.

BARRY R. MCBEE

First Assistant Attorney General

DON R. WILLETT

Deputy Attorney General for Legal Counsel

NANCY S. FULLER

Chair, Opinion Committee

Mary R. Crouter

Assistant Attorney General, Opinion Committee