Charitable Planning Flashcards
99% of our clients will not be paying the
federal gift or estate taxes because of what?
Increased exclusions from transfer
taxation
Define the term public charity
Have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities, (iii) receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or (iv) actively function in a supporting relationship to one or more existing public charities.
Define the term private charity
Typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.
True or False
Generous gifts to charities in a person’s
will create no tax benefit for most taxpayers
True
True or False
For those clients whose assets and estates exceed the applicable transfer tax exclusions, including charitable transfers in an estate plan continues to be an excellent tax-saving opportunity
True
True or False
For those clients whose assets and estates exceed the applicable transfer tax exclusions, including charitable transfers in an estate plan continue to be an excellent tax-saving opportunity
True
A CRT is an____________ that pays a ______________
or percentage of its initial value to
a non-charitable beneficiary for life or for a term of up to ______.
irrevocable trust
fixed dollar amount
20 years
The trust terminates in favor of
charity
These are three characteristics of what type of trust?
1. The trust must be irrevocable
It must be valid under state law.
2. The donor is entitled to a charitable deduction for income, gift and estate tax purposes for the present value of the remainder interest given to charity.
3. The trust is an entity is exempt from federal income taxes. However, there is an exception: a 100% excise tax is imposed if the CRT has unrelated trade or business
income (UBTI).
Characteristics of a CRT
These are three characteristics of what type of trust?
- Other than the annuity or unitrust payment, it can make no payment to or for the use of any person other than the charitable organization
- The trust cannot be subject to the power to invade, alter, amend or revoke the trust for the beneficial use of any person other than a qualified charitable
organization - The donor cannot retain the power to sprinkle payments
CRT- Charitable Remainder Trust
These elements are common to which trusts?
▪ The annual payout must be a minimum of 5%
▪ The annual payout may not exceed a maximum 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
Common Elements
of a CRAT and CRUT
What are the income tax advantages of CRTs
▪ 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
▪ The CRT is tax-exempt with the possible
exception of the UBTI
How to Calculate the Income Tax
Charitable Deduction
Value the asset(s) being transferred to the
Trust
Value the non-charitable income interest
actuarially
Reduce the value of the asset by the value of the income interest to determine what is
passing to charity
What is the value of the donor’s federal income tax deduction a function of?
The type of charitable remainderman i.e., public charity or private foundation;
The kind of property contributed to the CRT; and
Whether, at the end of the non-charitable term, the assets are distributed
▪ Outright to the charitable remainderman, or
▪ Held in trust for the benefit of the charitable remainderman
True or False
The donor’s charitable income tax deduction
for gifts to a CRT is subject to the same
percentage limitations and carry-forward
rules that apply to outright gifts.
True
True or False
To qualify for an income tax deduction, the charity must be described in §170(c)
(income tax), §2055(a) (estate tax), and
§2522(a) (gift tax)
True
To ensure an income tax deduction qualifies
for the 60% (100% for 2020-2021)or 30% of
AGI limitation for gifts to public charities, the
the charitable beneficiary should be further
limited to public charities described in
§170(b)(1)(A)
– Otherwise, the income tax deduction will
be limited to the AGI limitations for gifts to
a private foundation
A transfer to a CRT qualifies for the unlimited______________ to the extent of the present value of the __________).
Gift tax charitable deduction
remainder interest
There is no gift tax consequence if the donor or the donor’s ___________ spouse are the only ________________ of the trust
U.S. citizen
non-charitable beneficiaries
True or False
There may be a taxable gift consequence if there is a non-spouse beneficiary.
True
The decedent’s estate receives an estate tax ______________ for the present value of ________________ of a CRT.
charitable deduction
remainder interest.
If an interest in the CRTis given to a spouse, the
____________ applies.
marital deduction
Tue or False
A transfer to a CRT is a direct skip for GST
purposes
False
A distribution from a CRT to a grandchild or other skip person is a_______________.
taxable distribution
True or False
GST tax may be paid from the CRT
False
True or False
The donor must actually allocate GSTT exemption.
True
A CRT is not deemed a GST trust for purposes of
the automatic allocation rules
True or False
The donor to the CRT cannot dictate
the trust’s investment policies.
True
True or False
A CRT may limit a trustee to
investing in particular types of
securities e.g., municipal bonds
False
The CRT may be paid to “one or more persons,” at least one of which is not a charitable organization. If payable to a class of individuals, all members of the class must be alive and ascertainable at the time the trust is created. What is the exception to this rule?
If the CRT is for a term of years, the members of a class do not have to be alive and ascertainable
when the CRT is created.
A pet may be the beneficiary of a CRT.
False
True or False
A pet may be the beneficiary of a CRT.
False
The beneficiaries of a CRT may have consecutive or ______________
interests
concurrent
What is the order of the treatment of the four-tier system for determining the income tax
the character of the distributions made from a CRT, w
Ordinary income generated by the CRT in the current tax year, plus any ordinary income which was not distributed in prior years
– Capital gain income generated by the CRT in the current tax year, plus any capital gain income which was not distributed in prior years
– Other income (including tax-exempt income) generated by the CRT in the current tax year or a prior year
– Distribution of principal (not income)
The remainder must be
___________ paid to a charity.It can pass_______________or in trust
The trust can or cannot have more than
one charitable remainderman
irrevocably
outright
can
Do The Regulations require the CRT to
provide for an alternative
remainderman?
Who may substitute an alternate
charity as the remainderman- the donor or the charity?
require
donor
True or False
A trust that is taxable as a grantor
trust cannot qualify as a CRT
True
A CRT lost ___________where donor
did not need and did not take the CRT
_______________.
qualification
annual distributions
A testamentary CRT is deemed created as of
of what date?
date of the decedent’s death
The obligation to pay the annuity or unitrust
amount begins as of
the decedent’s death
The trust should contain a provision allowing
the executor to defer payments until the estate
administration is_________ and the trust is
_________________.
complete
fully funded
Typical CRT Scenario
The donor establishes the CRT
The donor contributes ________________ assets
– Typically, that have __________ in value
▪ The Trust sells the contributed assets
▪ The trust realizes ___________and is not
subject to the net __________________
▪ 100% of the sale proceeds are available for
reinvestment
Payments are then made to the ________ in
accordance with the terms of the trust, either
for ____ or for a period of time up to _______
_________receives the balance at the
termination of the trust
▪ No _______trusts are permitted
– The trust must be either a CRAT or a _______
– It cannot be a _________ of a CRAT and
a CRUT
The donor contributes appreciated assets.
The trust realizes no capital gain and is not
subject to the net investment income tax
Payments are then made to the beneficiary in
accordance with the terms of the trust, either
for life or for a period of time up to 20 years
Charity receives the balance at the
termination of the trust
▪ No hybrid trusts are permitted
– The trust must be either a CRAT or a CRUT
– It cannot be a combination of a CRAT and
a CRUT
What type of CRT is the below a requirement for? The annual payments to the non-charitable beneficiary must be at least 5% and not more than 50% of the initial fair market value of the property transferred to the trust
Charitable Remainder Annuity Trust Requirement
What type of CRT is the below a requirement for?
The annual payments to the non-charitable beneficiary must be at least 5% of fair market value of the assets in the trust — which
assets are to be valued annually.
Charitable Remainder Unitrust Requirement
What type of CRT is the below a requirement for?
The payments must stay fixed from year to year
Charitable Remainder Annuity Trust Requirement
What type of CRT is the below a requirement for?
The CRUT pays a variable amount, depending on the annual value of the CRUT
– The unitrust percentage cannot be changed
The CRUT is intended to provide a hedge against inflation
▪ The same valuation method must be used for the CRUT each
year
▪ With respect to the valuation date of the CRUT, the trust
assets must be valued at least once a year
Charitable Remainder Unitrust Requirement
What type of CRT is the below a requirement for?
The payments must be made for a term of years (not to exceed 20 years) or the life of the noncharitable beneficiary, based on the annuitant’s life.
The annuity must be paid annually.
Charitable Remainder Annuity Trust Requirement
What type of CRT is the below a requirement for?
Charitable Remainder Unitrust Requirement
What type of CRT is the below a requirement for?
Once funded, additional contributions to are not allowed
Charitable Remainder
Annuity Trust Requirement
What type of CRT is the below a requirement for?
If additional contributions are made (the CRUT can accept additional contributions), the 10% rule applies as of the date of the additional contribution
Charitable Remainder Unitrust Requirement
What type of CRT is the below a requirement for?
The non-charitable beneficiary is paid the lesser of the trust’s net accounting income or a fixed percentage of the value of the trust without a make-up provision.
Net Income Unitrust
NICRUT (aka a “Net Income CRUT”)
What type of CRT is the below a requirement for?
The trust provides that if there is a__________of annual income based on the fixed percentage expectation, that is acceptable, and the shortfall is to be made up in the __________.
– The NIMCRUT pays the __________ of the unitrust amount or the trust accounting income
– When the trust accounting income ________ the unitrust amount, the deficiency is made up
▪ The __________ is used to defer income into future years
▪ The Trustee controls the trust accounting income by the selection of ___________.
Net Income with Make-Up (NIMCRUT)
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
– The NIMCRUT pays the lower of the unitrust amount or the trust
accounting income
– When the trust accounting income exceeds the unitrust amount, the deficiency is made up
▪ The NIMCRUT is used to defer income into future years
▪The Trustee controls the trust accounting income by the
selection of investments
Funding of a Charitable Remainder
Trust- What types of assets are not ideal?
▪ Using a personal residence is not a good idea
– The donor may not live in the residence without self-dealing problems
▪ Using a non-personal residence real estate property is possible
▪ A CRT is not a qualified S corporation shareholder, so a donor cannot use subchapter S stock to fund a CRT
▪ A CRT can participate in an LLC
Planning Opportunities
with a CRT
The best situation for a CRT is when a donor owns an appreciated asset he or she would like to sell (to invest in a
higher rate of return), and also has a desire to benefit charity
▪ A CRT also makes sense for a donor who intends to leave
substantial assets to charity at death, and would like to
generate an income tax deduction during lifetime
▪ A CRT will be used to replace the stretch out of retirement
plan distributions taken away by the SECURE Act.
▪ 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
Planning Opportunities
with a CRT
With the proper precautions, it is also possible to use a CRT
as an effective means of transferring ownership in a
business from one generation to the next
▪ The Grantor can retain the right to change the charitable
beneficiary of a CRT, and this change can be made at any
time prior to the Grantor’s death
▪ A NIMCRUT can sometimes be used as a replacement for a
retirement plan, without all the normal limitations and
restrictions associated with a typical qualified retirement
plan
40
Funding of a Charitable Remainder Trust
Qualified _____- ______ _______can be
used to fund a CRT
▪ A CRT will not qualify as a ______________ ___________for minimum required
distribution purposes. Anticipate increased
use as the result of the ______________.
▪ A life insurance policy may be used to fund
an ________ CRT, subject to a number of
cautionary rules
Qualified retirement plan benefits can be
used to fund a CRT
▪ A CRT will not qualify as a “designated
beneficiary” for minimum required
distribution purposes. Anticipate increased
use as the result of the SECURE Act.
▪ A life insurance policy may be used to fund
an inter vivos CRT, subject to a number of
cautionary rules
Common Mistakes in Charitable Remainder Trust Planning
Careful making the contribution of an asset to the CRT “too
late” if the asset will be sold
▪ Observe the correct deductibility rules as a percentage of
AGI (*60%, 50%, 30% or 20%)
– If possible, limit transfers to public charities, rather than
private foundations to maximize the donor’s income tax
deduction
▪ Avoid using a CRT to satisfy a pledge to charity
▪ Careful of UBTI liability
▪ Pay attention to proper administration of the CRT
*Note: the 60% of AGI deduction limit was 100% for 2020-2021
41
The tax deductibility of a cash gift made to a public charity in 2022 is limited to _____ of one’s adjusted gross income in the year of the gift.
60%
The tax deductibility of a gift of tangible (long-term) personal property made to a public charity is limited to fair market value (if the charity employs in related use) up to _____ of one’s adjusted gross income in the year of the gift.
30%
The tax deductibility of a gift of long-term capital gain property made to a public charity is limited to _____ of one’s adjusted gross income in the year of the gift if one chooses to deduct based on basis and not fair market value.
50%
If FMV SGI Limitation would be 30%
The tax deductibility of a gift of long-term capital gain property made to a private charity is limited to _____ of one’s adjusted gross income in the year of the gift based on basis, assuming the property was not considered qualified appreciated stock.
20%
Use FMV for appreciated stock
A ________________ is an irrevocable trust that pays a fixed dollar amount or percentage of its initial value to a non-charitable beneficiary for life or for a term of up to 20 years with the remainder assets going to charity.
charitable remainder trust
For charitable remainder trusts, an income tax charitable deduction is available in __________________.
__________________ is realized by the trust on the sale of the contributed assets.
The CRT is tax-exempt with the possible exception of the ________________.
the year of the gift,
No capital gain,
UBTI
The donor’s charitable income tax deduction for gifts to a CRT is subject to ______________________________________________.
the same percentage limitations and carry-forward rules that apply to outright gifts
For estate tax purposes of the charitable remainder trust, the decedent’s estate receives an estate tax charitable deduction for the ________________________.
present value of remainder interest
Although the CRT is a tax-exempt entity for income tax purposes, any distributions from the CRT to the income beneficiary usually represent _________________.
taxable income
The CRT may last for a term of years (not to exceed ____ years) or for the life of one or more beneficiaries who are alive at the creation of the trust.
20
For a charitable remainder annuity trust, the annual payments to the non-charitable beneficiary must be at least _____% and not more than _____% of the initial fair market value of the property transferred to the trust.
5%
50%
The ________________ is used to defer income into future years. The Trustee controls the trust accounting income by the selection of investments. This trust pays the lower of the unitrust amount or the trust accounting income.
NIMCRUT
An individual donates 400 shares of stock worth $4,500 that he purchased ten months ago for $8,000. He also donates land currently worth $12,000 that he purchased two years ago for $10,000. Assuming no deduction limitations based on AGI are applicable, what is his charitable contribution deduction?
Issue-
Rule- Never Use FMV for STCG property
STCG See explanation
LTCG Property Land Public Charity Use either FMV or Basis
Application, 4,500+ 12,000
STCG 4,500
LTCG $12,000
Conclusion $16,500
The Johnsons donated appreciated stock (held for more than 1 year) to a medical research foundation. Their AGI is $725,000 and the value of their stock donation was $300,000. How much of this donation is deductible in the current tax year and, what is the carry-forward for any amount that cannot be deducted this year?
Issue- LTCG Property of Appreciated stock to a public charity
Rule- Always 30% AGI if using FMV
50% if using Basis
Application $725,000 * 30%
Conclusion Since this is a long term capital gain stock donated to a public charity, the Johnsons can deduct 30% of their AGI or $217,500. The carry-forward provision for disallowed qualified charitable deductions due to the AGI limitation is 5 years.
Alex, your long-time best friend and client, would like to make a gift to charity in which the charity receives income and Alex’s heirs receive any residual assets or property once some period of time is over or when Alex passes away. He’s ok with paying tax on any additional income earned from the gift but would like some kind of charitable deduction at the time of the gift. Which of the following charitable strategies or structures would serve these goals?
B) charitable lead trust
Your elderly client is considering making a contribution to a qualifying public charity and wants to compare the total savings between a lifetime gift and a testamentary gift to that charity. Your client is in the 35% ordinary income tax bracket and a marginal transfer tax bracket of 40%. She would like to make a $10,000 gift. Assuming charitable deduction limitations and gift/estate tax exclusions are not considered, which gift would provide the greater tax savings and what is/are the total tax savings?
A) testamentary gift with tax savings of $4,000
Lifetime Gift: $10,000 x 35% = $3,500 income tax savings
$10,000 x 40% = $4, 000 gift/estate tax savings
Total tax savings = $7, 500 Testamentary Gift:
$10,000 x 40% = $4, 000 estate tax savings
Total tax savings: $4, 000
A donor giving a cash donation to the local veteran’s group can deduct this donation up to what percentage of her AGI?
30%
Issue- Is a veteran’s group a public or private charity
Rule- Cash- 60% public 30% private
Application
Conclusion
Which of the following is NOT true regarding NIMCRUTs (net income make-up charitable remainder unitrusts)?
?
Your client, Mark, would like to donate property he bought more than a decade ago that he thinks the local YMCA would greatly benefit from using as a summer camp for kids. His primary objective is to maximize the tax benefits of the gift. Mark bought the property for $800,000 and made improvements to various property structures of $400,000. He has claimed $100,000 in depreciation. The fair market value of the property today is $900,000. Which of the following actions should Mark take?
C) sell the property and claim the capital loss; give cash or appreciated assets to the charity
A taxpayer donates qualified appreciated stock to a private family foundation. Which of the statements below is true?
The stock cannot be more than 10% of the corporation’s shares.
Issue- AGI Limitation for appreciated stock to a private charity
Rule- Cash- 20% always use FMV
Application
Conclusion
Which of the following charities is an example of a private charity?
veterans goup
Issue- Criterion private charity
Rule-
Application
Conclusion
Which of the following characteristics does NOT accurately describe a charitable remainder unitrust trust (CRUT)?
D) if trust income is more than required to make the payments to beneficiaries, the excess is paid as an excess dividend to beneficiaries
Taxpayer purchased stock on March 15 of the current year for $50,000. By October 15 of that same year, the stock was worth $120,000 and she donated it to her local church which is a qualified public charity. The taxpayer’s AGI that year was $300,000. Assuming there were no other charitable gifts that year, what is the taxpayer’s tax deduction for this gift?
$50,000
Issue- Tax deduction from STCG Property to a public charity
Rule- 50% AGI Threshold/ Ude Basis
Application AGI Threshold $150K Bass $50K
Conclusion
Ken Baxter sells ordinary income property to a church for $2,000. The property has a fair market value of $10,000. Ken’s basis is $4,000. The fair market value of the contributed part of the property is $8,000 ($10,000 - $2,000). The adjusted basis of the contributed part is $3,200 (($4,000 × ($8,000/$10,000)). Ken can deduct what amount as a tax-deductible charitable contribution?
$3,200
Issue- Tax deduction from STCG Property to a public charity
Rule- 50% AGI Threshold/ Use Basis
Application - Adjusted Basis $3,200
Conclusion
Matthew donates 400 shares of stock worth $4,500 that he purchased ten months ago for $8,000 to a public charity. He also donates land currently worth $12,000 that he purchased two years ago for $10,000 to the same charity. Assuming no deduction limitations based on AGI are applicable, what is Matthew’s charitable contribution deduction for tax purposes?
Conclusion $16,500
Issue-
Tax deduction from STCG Property to a public charity-
50% AGI Threshold/ Use Basis
Tax deduction from LTCG Property to a public charity
30% of AGI if FMV
50% of AGI if basis
Conclusion $20,000
Taylor, your longtime best friend and client, would like to make a gift to charity in which the charity receives income and Taylor’s heirs receive any residual assets or property once some period of time is over or when Taylor passes away. He’s ok with paying tax on any additional income earned from the gift but would like some kind of charitable deduction at the time of the gift. Which of the following charitable strategies or structures would serve these goals?
charitable lead trust
Which of the following characteristics does NOT properly describe a charitable remainder annuity trust (CRAT)?
Vicky bought 10,000 shares of a stock for $28 per share. The price of the stock is currently $25. She just sold all of her shares to a qualified public charity for $20. What are the tax ramifications?
Vicky may be able to claim a charitable contribution deduction of $50,000, the difference between the sale proceeds and fair market value.
The following accurately describes a Charitable Lead Trust (CLT):
I. Assets plus potential appreciation could pass to descendants or beneficiaries at a fraction of their value for gift tax purposes.
II. If the CLT is a grantor trust, the donor must pay income tax on any income generated in the trust and applicable capital gains tax when the charity sells trust assets for gain.
III. Grantors may not name unrelated individuals as trustees or beneficiaries.
IV. For a non-grantor CLT, the donor does not receive an income tax deduction the trust is taxed on income.
IV, I, and II only
Issue- Characteristics of grantor and not grantor CLT
Rule-
Application
Conclusion
Which of the following is NOT true regarding NIMCRUTs (net income makeup charitable remainder unitrusts)?
A makeup account is created in any year that income earned is less than the fixed percentage allowed.
Each of the following statements regarding private foundations are accurate except for:
I. Charitable contribution deduction limited to the fair market value up to 20% of AGI on most long-term capital gain property donated to a private foundation.
II. Private foundations are typically expensive to set up but are not typically expensive to manage.
III. Private foundations offer founders a high level of control.
IV. Private foundations include a “hassle factor” (referring to administrative, legal and financial matters) that some founders do not initially understand.
V. Charitable contribution deduction limited to 30% of AGI on cash donated to a private foundation.
I and II only
Issue- Characteristics of private foundations
Rule-
Application
Conclusion
What is the main distinction between private foundation and public charity?
Support base
Public- broad support base
Private- - narrow support base
