Charitable Giving and Endowment (III.A) (8%,10 questions)

Question 1

2023 Percentage Deduction Limitation Rules

Answer 1

Picture

Question 2

Donor Advised Fund

Answer 2

• Contributions are irrevocable, and donor receives immediate income tax deduction subject to AGI LImitation.
• Reduction in donor’s potential capital gains plus no capital gains tax paid on donated appreciated securities.
• Unlike private foundations, DAFs are not required to distribute at least 5% of their average net assets to acceptable charitable organizations yearly.

Question 3

Charitable Lead Trust (CLT)

Answer 3

• Income to charity for life or a term of year and remainder to individual beneficiaries.
  -More effective as interest rates decline.
• Assets plus potential appreciation could pass to decesndants or bene’s at a fraction of their value for gift tax purposes.

Question 4

Charitable Remainder Trust (CRT)

Answer 4

• Income to individual beneficiaries for life or a term of year and the remainder to charity.

Question 5

Two Types of CLTs

Answer 5

• Grantor and non-grantor
  -Grantor - May receive an income tax deduction for gift. Pays tax on income and pays cap gains when charity sells trust assets.
• Non-Grantor (More common) - Grantor does not receive tax deduction for gift. Trust is taxed on income. Typically offers more benefits for gift and estate planning purposes.

Question 6

CRAT & CRUT

Answer 6

• The annual pyaout must be minimum of 5%
• The annual payout may not exceed a max of 50%
• The duration of the non-charitable interest in the trust may not exceed either the life of the non-charitable beneficiary or 20 years.
• There must be a remainder interest in the trust for the benefit of charity equal to at least 10% of the initial trust value.

Question 7

CRT

Answer 7

• Must be irrevocable
• The donor is entitled to a charitable deductions for income, gift and estate tax purposes for the present value of the remainder interest given to charity.
• No capital gain is realize by the trust on the sale of the contributed assets.
• There is one exception: a 100% excise tax is imposed if the CRT has UBTI.

Question 8

CRT Term

Answer 8

May last for a term of years (not to exceed 20 years) or for the life of one or more bene’s who are alive at the creation of the trust.

Question 9

CRT Tax Advantages

Answer 9

• An income tax charitable deduction is available in the year of the gift
• No capital gain is realized by the trust on the sale of the contributed assets
• Tax exempt, with the possible exception of the UBTI.

Question 10

CRT - Income Bene’s and Taxation

Answer 10

• There is a four-tier system for determining the income tax character of the distributions made from a CRT, which is based on the following order:
• Ordinary income generated by the CRT in the current tax year, plus any ordinary income which was not ditributed in prior years.
• Capital gain income generated by the CRT in the current tax year, plus any cap gains income which was not distributed in prior years.
• Other income generated by the CRT in the current tax year or prior year.
• Distribution of principal (not income)

Question 11

CRAT Requirements

Answer 11

• The annual pmt to the non-charity bene must be 5% and not more than 50% of the initial fair market value of the property transferred to the trust.
• The pmts must stay fixed from year to year.
• The pmts must be made for a term of year (not exceeding 20) or the life of the non-charity bene.
• Must be paid annually
• The remainder on termination must be paid to or for use of the charity.

Question 12

CRUT Requirements

Answer 12

• The annual payments to the non-charitable bene must be at least 5% of the fair mrkt value of the assets in the trust
• Pays fixed percentage to at least one non-charity bene who must be living at the time trust is created of no less than 5% nor more than 50%.
  -Pays a variable amount, depending on the annual value of the CRUT.
• the % unitrust cannot be changed.
• Cannot pay any others outside of the non-charity bene and the charity.

Question 13

Types of CRUT’s

Answer 13

• “standard” CRUT
  * Provided the fied % annual payout of the unitrust amt.
• Net Income Unitrust (NICRUT).
  * The non-charity bene is paid the lesser of the trust’s net accounting income or a fixed % of the value of the trust without a make-up provision.

Question 14

NIMCRUT

Answer 14

• Net Income with Make-up
  -The trust provides that if there is a short-fall of annual income based on the fixed percentage expectation, that is acceptable, and the shortfall is to be made up in the future.
  -Pays the lower fo the unitrust amt or the trust accounting income.

Question 15

Flip Unitrust

Answer 15

• Begins as a NICRUT or NIMCRUT but converts to a standard CRUT upon a triggering event.
• Examples: Marriage, Divorce, Birth or Death.

Question 16

Planning Opps with a CRT

Answer 16

• Best when a donor owns an appreciated asset they would like to sell, and also has a desire to benefit charity.
• Also makes sense for a donor who intends to leave a substantial asset to charity at death, and would like to generate income tax deduction during lifetime.
• When combined with a wealth replacement trust (holding life insurance), it may be possible for a donor to provide for charity while taking little or nothing away from the family.

Question 17

The Charitable Toolbox

Answer 17

Direct gifts:
- Cash - Property of various classifications - Life Insurance - Real Estate:
Philanthropic Structures:
- DAF, Community foundation - supporting organizations
Split-interest Vehicles:
- CRT - CLT
Private Foundations:
- Private Family Foundation - Private Operating Foundations.

Question 18

Key features of select Charitable Structures

Answer 18

Question 19

Private Foundations

Answer 19

• Annual income distribution requirements
  -Limits on holdings in private businesses
  -Other taxes levied on net investment income.

Question 20

UBTI

Answer 20

• Occurs when income is generated from an unrelated trade of business activity (example: gains from the use of leveraged investments)
• Associated with activites within retirement plans or charitable orgs or structures.
• It may result in double taxation.

Question 21

Tax Ramifications of Gain, Loss & leveraged Prop Gifted to Charity

Answer 21

Gifted assets with unrealized gains:
- Gains are not taxed to donor if conditions are met.
Gifted assets with unrealized losses:
-If worth less than donors basis, the deductions is limited to fair mrkt value.
* It is usually more advantageous to sell property with unrealized losses before gifting.
Gifted assets that are leveraged:
- Donor deducts fair mrkt value of the appreciated asset at the date of gift minus debt.