GS 849 Practice Exam Flashcards
A qualified appraisal is required for a charitable gift of nonpublicly traded stock, if the deduction is greater than which of the following?
A) $3,000
B) $5,000
C) $7,500
D) $10,000
D) $10,000
Upon his mother’s death, John receives a bequest of stock valued at $50,000. The basis at her death was $10,000. John sells the stock immediately. What is his gain?
A) $10,000
B) $50,000
C) $40,000
D) $0
D) $0
The correct answer is D. The stock receives stepped-up basis in passing to him through his mother’s estate. The basis steps-up to the fair market value, and so there is no gain when John sells it.
Meg has the following four assets: $100,000 IRA; $100,000 piece of land, with basis of $5,000; $100,000 face amount insurance policy; stock worth $100,000, with basis of $75,000. She has three heirs whom she wants to receive $100,000 each, and she wants $100,000 to go her house of worship. Which asset, from an overall tax perspective, would be best to give to charity at death?
A) IRA
B) Appreciated land
C) Appreciated stock
D) Insurance death benefit
A) IRA
The correct answer is A. The IRA is not taxed when it goes directly to charity at death, but the money inside would be taxed to her heirs when it comes out. Hence, the IRA is better going to charity. The other assets are either received income tax-free by the heirs (insurance), or the heirs receive stepped-up basis (land and stock). With stepped-up basis, the heirs can sell those assets at that stepped-up value without income tax.
Which gift(s) is (are) deductible when given to a public charity?
I. Gift of a partial interest
II. Gift of an undivided partial interest
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. The general rule is that gifts of a partial interest are not deductible. However, a gift of an undivided partial interest is deductible. For example, a gift of land with the owner retaining mineral rights is not deductible. But a gift of a one-half interest in the property, including all the rights to that half, would be deductible.
Assume that a long-term capital gain asset, with basis of $10,000 and fair market value of $1,000,000, and which generates $100,000 of UBTI a year, has been donated to a CRT whose beneficiary is a public charity. What are the tax consequences?
A) The donor receives a deduction for $1 million, reduced by the $100,000 of UBTI.
B) The donor receives a deduction for basis only.
C) The trust pays a 100% tax on the $100,000 of UBTI.
D) The trust is disqualified.
C) The trust pays a 100% tax on the $100,000 of UBTI.
The correct answer is C. The donor should get a fair market value deduction, but the trust will pay tax on the UBTI at a tax rate of 100%. UBTI does not, however, disqualify the trust. Years ago, the rule was even more harsh, the trust disqualified if even one dollar of UBTI was earned.
Your donor wants to make a gift now and receive income later. What tool(s) would be worthy of consideration?
I. Flip CRUT
II. CRAT
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. A Flip CRUT can flip from paying no income to paying income upon a triggering event beyond the control of the donor, such as the sale of an asset or the donor’s turning a particular age. A CRAT, by contrast, starts paying out a percentage of the original gift value in the first year. There is no provision for a deferral.
Leonard sets up a CRUT with a 10% payout. He funded the CRUT with $1 million, and in the first year, he received $100,000. Now, five years later, he is receiving only $60,000. He is very unhappy. What did he not understand?
I. A CRUT’s payout is based on the value of the assets in the trust, as re-valued annually.
II. By setting a high initial payout, he took the risk that trust assets would decline, as money is paid out in excess of the growth and income earned.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. CRUTs pay a percentage based on the asset value, as revalued each year. Thus, if a donor sets a payout rate that exceeds the actual growth inside the trust, then the assets will be depleted, and the income will fall.
A donor who is considering a gift annuity wants to give money now, and receive an income starting at retirement. The donor is not sure when she will retire, but wants to trigger the income at that date, whenever it might be. Which kind of gift annuity is most appropriate for her?
A) Immediate
B) Flexible
C) Deferred
D) Stepped
B) Flexible
The correct answer is B. The flexible annuity allows the donor to decide later when the income will start. The longer she waits, the higher the income, but she decides when the income is to start.
With a charitable annuity, which statement(s) below is (are) true?
I. The basis returns to the donor and spreads out over his/her life expectancy.
II. If the donor outlives his/her life expectancy, then all income subsequent to that point is taxed as ordinary income.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true. If the donor outlives his/her life expectancy, all basis will have been returned (as well as any capital gain in the original gifted asset), and subsequent income will all be ordinary income.
For a significant gift to succeed, which of these must be present?
I. Donor’s goals must be addressed
II. The gift must be aligned with the charity’s mission, priorities, and capacity to perform
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are essential, particularly when the gift is restricted by the donor for a particular purpose. The donor’s intentions and dream are certainly important, but, as “The Case of Jill Donor” shows, it is equally important that the gift support the mission, priorities, and capacities of the charity. Thus, it is important that advisors and fundraisers get on the same page with working with a high-capacity donor like Jill.
A planner trained in the method used by the Fithians is working with a donor, age 57, with net worth of $5 million. She is single, with a grown daughter. She is closely involved with an environmental group to which she is a loyal donor. She is considering a major or planned gift to that organization. The gift may be a significant percentage of her net worth. Having understood the donor’s goals, where would such a planner start the planning process?
A) Discussing gift options via various tools
B) Assessing the adequacy of the donor’s ability to cover her personal cash flow needs throughout her life expectancy
C) Providing an appropriate legacy for the heir
D) Determining the most appropriate asset from which a gift could be made
B) Assessing the adequacy of the donor’s ability to cover her personal cash flow needs throughout her life expectancy
The correct answer is B. A legacy advisor trained in a Fithians-based method will be guided by a “pyramid” of needs and wants. At the base is financial adequacy for the donor herself. Will she have enough for herself? That is the first concern of an advisor with respect to the client. Next comes family legacy. How much should she designate for the heirs? And then, from what remains, how best can she give to meet her charitable goals? Sometimes, nonprofit gift planners call this “philanthropy by the subtraction method” or “philanthropy from the leftovers.” But it is important to realize that advisors are committed first and foremost to a client’s well-being. They cannot endorse a plan that might ultimately leave the client in financial difficulties. Hence, when a significant gift is being considered–a gift that will impact the donor’s finances and the heir’s inheritance–the advisor will and should run drills like those used by the Fithians.
Jack is 45, is married to Samantha, and has two children in college. He has been asked for a major gift by the hospital in which his mother recently had life-saving surgery. Working with a CPA who does personal financial planning, Jack discovers that, after paying for his children’s college education and continuing to work and save until he turns 65, his assets are projected to dwindle in retirement until they become exhausted at age 73. Under various alternative assumptions, his assets might last until he is 77 or exhaust as early as when he is 69. The CPA recommends that Jack reduce consumption, increase savings, and postpone any significant gift. The fundraiser whose gift request is rejected says, “CPAs are the dark side. They are always killing my gifts!” Which statement(s) below is (are) correct?
I. Jack’s CPA has provided appropriate counsel as the client’s financial advisor
II. The CPA’s process works against an appropriate gift
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The CPA is aligned with the client’s financial well-being. In computing financial adequacy to do all the client wishes, the CPA finds a shortage of funds. It is up to the client to determine how to address that shortage or gap, but in counseling the client to take care of himself or herself first, the CPA is doing the job expected of a client’s financial advisor. The process may seem “anti-gift,” but it can work the other way, too. The CPA may discover that the client’s personal goals are covered by current and future resources, and that the client’s goals for heirs are also covered. In that case, with a client who is planning for abundance, the CPA can compute “charitable capacity.” From a gift-planning perspective, the client is likely be conservative regarding gifts, unless the client is reassured by his/her financial advisors that he/she is in a position to make a big gift without jeopardizing financial security and family legacy.
Among the reasons that advisors and fundraiser collide in “The Case of Jill Donor” is (are) which of these?
I. The fundraiser does not talk with the advisors.
II. The fundraiser works for the charity, not the client.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The fundraiser and advisors usually do not connect, and this will make it difficult to come an agreement as to appropriate strategies. The mere fact that the fundraiser works for a charity does not mean that he/she must or will collide with advisors. The donor knows that the fundraiser is a fundraiser. The question is whether there is good communication among those, including the fundraiser, who are making recommendations.
With respect to a C-Corporation making charitable gifts, which statement(s) is (are) correct? Assume that the CARES Act does not apply.
I. Gifts are deductible up to 10% of corporate earnings.
II. Unused deduction may be carried forward up to 5 more years.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are correct. Generally, the corporate limitations on deductions for charitable contributions is 10%. If the gift is made in calendar year 2020 and to a qualified charity, Sections 2104 and 2105 of the CARES Act make temporary changes to the tax law to encourage the donation of charitable contributions. Specifically, during 2020, the limitations on deductions for charitable contributions increase for corporations, with the 10% limitation increasing to 25% of taxable income.
With respect to CRTs, all of these statements are true, EXCEPT:
A) All CRTS must have at least a 10% remainder interest as calculated at inception using IRS actuarial factors.
B) CRTs cannot last for more than 20 years.
C) A CRUT can accept additional contributions.
D) A CRAT may not accept new contributions.
B) CRTs cannot last for more than 20 years.
The correct answer is B. A CRT can be set up for life, lives, a term of up to 20 years, or a combination of a life or lives and a term up to 20 years.
For a client who wishes to make a gift now and receive an income in ten years, all of the following tools would work, except
A) a CRAT
B) a Flip-CRUT
C) a Deferred Gift Annuity
D) a Net Income with Make-Up CRUT
A) a CRAT
The correct answer is A. All except the CRAT would work for a client or donor wanting a gift now and income later. With a CRAT, income starts within the year the gift is made. With a Flip CRUT, the income starts when a triggering event beyond the control of the donor occurs–for example, the sale of an asset in the trust, or the donor’s reaching a given age. As the name implies, with a Deferred Gift Annuity, the income starts later, at a preordained date. (With a Flexible Gift Annuity, the donor can choose a starting date in the future, leaving open what that date will be.)
Assume that a CRUT has a payout rate of 7%. Also assume that the trust earns 5% a year, every year, for the life of the trust. Which statement or statements below is (are) correct?
I. The trust income to the donor will decline.
II. The trust may eventually exhaust.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The income to donor will decline. This being a CRUT, the payout, in this case 7%, is based on a declining trust balance. The trust will never quite exhaust. Even if it has only, say, $1,000 in it at some future date, the 7% would be taken against that, and there would still be some money left in the trust.
Which of the statements below is (are) correct?
I. A DAF must pay out at least 5% a year.
II. A DAF complex (as offered by a particular sponsor) must have an aggregate payout of 5% of the assets in its DAFs.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
D) Neither I nor II
The correct answer is D. There are no DAF payout requirements for either the individual DAF or the aggregated DAFs under a sponsor.
Which statement(s) below is (are) correct?
I. A private nonoperating foundation must pay out at least 5% of its corpus annually.
II. Included in the required payout for private nonoperating foundations are reasonable and necessary administration expenses.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are correct. Although grants, salaries, rent, consulting fees, etc., are included in the five percent calculation, investment management fees are not.
With respect to a CLT, which statement(s) below is (are) true?
I. The present value of the charitable interest must be no less than 10% of assets donated to the trust, as computed using IRS-provided factors at the trust’s inception.
II. The charitable payout may not be less than 5% per year.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
D) Neither I nor II
The correct answer is D. Neither is correct. A CLT has neither a required payout to charity nor any required minimum actuarial amount going to charity. By contrast, a CRT does have a minimum charitable remainder interest of 10% computed with IRS factors at trust inception, and it must pay non-charitable income beneficiaries not less than 5%.
With respect to a conduit foundation established by a living donor, all of the following are correct, EXCEPT:
A) It must distribute all income to charity annually
B) It must distribute all contributions to the trust to charity annually
C) There may be no undistributed income or corpus
D) It does not qualify for an income tax deduction
D) It does not qualify for an income tax deduction
The correct answer is D. All the other statements are true. Conduit foundations are sometimes called “pass-through foundations.”
For a gift to a private foundation of closely held stock, which statement(s) below is (are) true?
I. The value of the gift is measured by basis, or by fair market value if less.
II. The deduction is limited to 20% of AGI, with a five-year carry forward.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true, and the planning point is important. Clients often have business interests, land, and other appreciated property. They may want a private foundation. They need to know how limited the tax benefits of a private foundation are for any gift other than cash or “qualified public stock” (which is essentially publicly traded stock). When in this situation, the planner can shift the conversation to a direct gift to a public charity, to a donor-advised fund, to a supporting organization, or to a private operating foundation. All of these have their nuances, but may allow the donor to get a deduction for fair market value and get the higher public charity deduction limits. But a gift of anything other than cash or public stock to a private foundation is generally not a good idea, unless, perhaps, the asset has no appreciation in it. Even then, the 20% of AGI limitation comes into play. Further complicating matters are the foundation rules, which render it very difficult for a private foundation to make use of privately held business interests. What should be recommended to the client? It’s best to get a qualified attorney or CPA involved. But a gift of anything other than cash or public stock in a private foundation can almost always be ruled out quickly.
When a client has a closely held business that he or she gives to a CRT whose remainder beneficiary is a public charity, all of the following statements are true, EXCEPT:
A) The donor gets a deduction for the remainder interest based on the fair market value of the asset donated.
B) The donor can take a deduction for the remainder interest up to 30% of AGI for a gift of appreciated closely held stock, if the CRT’s beneficiary is a public charity.
C) The sale of the appreciated stock inside the trust to a buyer (assuming no pre-arranged sale) will avoid capital gain to the donor when the stock is sold inside the trust.
D) The sale of assets from inside the company itself to a buyer will result in no taxable income to the company, since it is inside the CRT.
D) The sale of assets from inside the company itself to a buyer will result in no taxable income to the company, since it is inside the CRT.
The correct answer is D. This question draws attention to a potential tax trap. The company itself is a taxable entity, even though it is inside a CRT. The sale of the company will result in capital gain inside the trust, if the stock is appreciated. But if the buyer wants to buy not the stock but the assets owned in the company, then the company itself will pay a tax on any gain. This could surprise the owner(s) of the company.
Which statement(s) below is (are) true, based on all you have learned in this course?
I. The ideal bequest donor is older, richer, married, and has no children or grandchildren.
II. The ideal bequest donor is an excellent candidate for multi-generational wealth planning.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. CAP encourages advisors and gift planners to collaborate. It is always worth considering, however, why gift planners and advisors often do not collaborate. One reason may be that their “ideal prospects” for gift-planning differ. The nonprofit gift planner sees (via data compiled by Dr. Russell James) that most planned gifts are bequests, that most bequests are set up by donors approaching death, and that most come in after age 80; they also see that the likelihood of getting a bequest goes up when the donor, even if married, has no heirs. The wealth advisor working with an 80-year-old without heirs may have hard time maintaining assets under management after the client’s death. A DAF advised by a nephew or niece, say, is not necessarily a strong sale. An insurance advisor is unlikely to see a client age 80, approaching death, with no heirs as a good prospect. So, the ideal prospects for advisors and traditional planned gift officers are different. This may be why we tend to go our separate ways in practice. Ideally, however, fundraisers taking CAP see how vast are the opportunities to plan (with the help of advisors) gifts for prospects with, say, a closely held business who are planning to exit (like Jill Donor) and for families with heirs who want to use philanthropy to pass on more than the money.
A client has $10,000 to give, wants a current deduction, and would like to set up a deferred giving account. The client plans to add about $3,000 a year for several more years. The client does not need income back, and would like to benefit several nonprofits. Which of these tools is a good recommendation?
A) DAF
B) PIF
C) Private non-operating foundation
D) Private operating foundation
A) DAF
The correct answer is A. This client is an excellent prospect for a DAF. The client has far too little money to justify creating a private foundation. An operating foundation would also be too large a commitment, and generally does the charitable work itself rather than make grants. A Pooled Income Fund does pay the donor an income back, and is not a grant-making tool.
Jim, age 80, donates $1 million to a CRAT. He receives an annual 7% payout. Trust assets grow at 5%. Which statement or statements below is (are) true?
I. Jim’s payout will be a level $70,000 a year.
II. The charitable beneficiary will receive $1 million at his death.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The CRAT always makes a level payout, regardless of how the assets in the trust rise or fall. In this case, because the trust earns less than the payout rate, the trust assets will decline, and the charity will receive less than the full million.
Miranda, age 70, donates $1 million to a CRUT. She gets an annual 10% payout. The trust earns 5% each year. Which statement or statements below is (are) true?
I. Miranda will receive $100,000 in year 1.
II. Miranda will receive less and less income as the years go by.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true because this is a CRUT. The payout is calculated in year one, based on the assets in the trust–$1 million. Since the trust earns less than the payout, the trust assets will gradually dwindle. As a result, she will receive less and less each year. For gift planners, this is an important point to communicate to donors who may wish to get the highest payout possible. With a CRUT, that high initial payout may lead to a lower payout later, unless the assets in the trust grow fast enough to offset the payout. Also, dwindling trust assets mean the charity will receive less at trust termination.
Meg inputs CRAT data into a charitable remainder trust illustration program. She learns from the printout that the trust has failed “the 5% probability test.” What does this mean?
A) The trust has a greater than 5% chance of exhausting over its term.
B) The trust is calculated to have a less than 5% remainder interest.
C) The trust has less than a 5% chance of paying the original gift amount to the charity.
D) The trust payout is less than the required 5%.
A) The trust has a greater than 5% chance of exhausting over its term.
The correct answer is A. “The five percent probability test,” as that phrase is used, refers to the IRS rule that the trust have a less than 5% chance (computed using actuarial factors) of running dry during its term. There is also, by the way, a rule that a CRT payout be not less than 5%.
Each of the following charitable tools can create deferred income to donor, except
A) a flexible gift annuity
B) a deferred gift annuity
C) a CRAT
D) a Flip CRUT
C) a CRAT
The correct answer is C. A CRAT must always pay out an income in year one. It cannot be used for deferred income. A flexible gift annuity allows the donor to make a gift now, and decide later when the income will begin. A deferred gift annuity allows a gift now, with income starting at a later time that is determined when the gift is made. A Flip CRUT is often used when deferred income is desired. A gift is made to the CRUT, often of an appreciated asset. The trust initially operates as a Net Income Unitrust, paying income only. Since there may be no income from the appreciated asset, if such an asset has been given, no income is paid out. Then, when the asset is sold, or upon some other qualifying triggering event that is specified in the trust document, the trust “flips” to being a Standard CRUT, paying out a predetermined percentage of the corpus each year.
Julie, age 77, is single. She wants to have a CRT that will pay her an income for life and, after her death continue making payments to her 45-year-old daughter. Which statement(s) below is (are) true?
I. A CRT may not name anyone other than the donor or the donor’s spouse as income beneficiary.
II. A CRT with a non-spousal beneficiary will cause transfer tax consequences.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. Yes, the donor can name a non-spousal successor income beneficiary, but doing so amounts to making a transfer to that person of the actuarial benefit of the income received. If the trust is set up so that this actuarial benefit can be computed at the inception of the trust, the benefit will be treated as a gift subject to gift tax. If the trust is set up so that the value of the income interest is not computable until death, then it would be considered a transfer subject to estate tax. Either way, the donor should recognize that there are potentially adverse transfer tax consequences to having a non-spousal successor income beneficiary.
With respect to charitable gift annuity payout rates, which statement or statements below is (are) true?
I. Binding rates are set by The American Council on Gift Annuities (ACGA)
II. Rates by the ACGA are calculated to provide an actuarial expected remainder interest to charity of 50% of the original gift.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. Charities generally follow the rates set by The American Council on Gift Annuities (ACGA), but they are not required to do so. In fact, having the rates be required might lead to charges of price-fixing. The rates set by ACGA are calculated to produce a remainder to charity of 50% of the original gift based on actuarial assumptions. In recent years, ACGA has added a second provision: that the rate produce a remainder interest whose present value is not less than 20% of the initial gift.
Steve wants to name his brother Mike as the trustee of a CRT which will provide income to Steve, with the remainder going to the Salvation Army. Which statement or statements below is (are) true of Mike’s responsibilities?
I. Mike has a fiduciary responsibility to manage the trust to benefit his brother, Steve.
II. Mike has a fiduciary responsibility to manage the trust to benefit Salvation Army.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both statements are true. This is important in counseling Steve and Mike. They may naively think that the trustee has a responsibility only to the income beneficiary. In fact, the trustee has the difficult job of balancing responsibilities to two parties (income beneficiary and remainder beneficiary) whose interests may not coincide completely. For example, Mike may be very conservative and want the trust assets to equal the payout, say, 5%, while taking little risk. The charity may wish the trust assets to grow at least equal to inflation after the trust payout. Such considerations may suggest that the best trustee will be a bank or other professional third party with experience managing complex trusts.
Each of these is a tax-exempt trust, except
A) a CLT
B) a Standard CRUT
C) a CRAT
D) a Flip CRUT
A) a CLT
The correct answer is A. All CRTS are tax-exempt trusts. CLTs are not exempt. With a CLT, the trust is taxable (it pays its own tax), or, if it is a grantor CLT, then taxable events in the trust flow back to the grantor.
With a nongrantor CLT, which of these statements is (are) true?
I. The grantor of the trust gets an income tax deduction for the present value of payments going to charity, as computed by IRS-provided actuarial factors.
II. The trust may be written to make payments of either a straight amount (sum certain) each payment period based on the original gift, or it may be written to pay out a variable amount determined by a fixed percentage applied to the trust assets as they rise and fall.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. The second statement is true: a CLT can be set up as a CLAT with a straight, level dollar amount payout, or it can be a CLUT whose payout is determined by the trust corpus times a payout percentage, with the dollar payout rising and falling as trust assets rise and fall. The first statement is false. The donor must know that he or she with a nongrantor CLT will not get an income tax deduction. The nongrantor CLT will provide transfer tax relief, but will not provide income tax benefits.
For which of these vehicles does a) the donor get an income tax deduction for the present value of payments made from the vehicle to the charity, and b) the donor pays income tax on all income earned inside the trust over its term?
A) Grantor CLT
B) Non-grantor CLT
C) CRUT
D) CRAT
A) Grantor CLT
The correct answer is A. A Grantor CLT is taxed to the grantor, meaning that the grantor gets a partial income tax deduction going in, but also pays income tax on all income inside the trust over its term.
Which statement or statements below is (are) true of a Grantor CLT?
I. A Grantor CLT is an entity that pays its own income tax.
II. A Grantor CLT is allowed an income tax deduction for payments made to charity.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
D) Neither I nor II
The correct answer is D. Neither statement is true of the Grantor CLT. With the Grantor CLT, the income tax deduction is taken by the donor for the present value of future payments to the charity. The donor is then taxed on all income earned inside the trust.
With respect to CLTs, which statement below is true?
A) An interest-bearing note between an inter vivos CLT and the donor is considered an act of self-dealing under the foundation rules that apply to CLTs.
B) A CLT that reverts to the grantor at the end of its term is taxed as a Non-Grantor CLT.
C) Under no circumstances may a CLT pay its charitable income interest into a Donor-Advised Fund.
D) A nongrantor CLAT provides an income tax deduction when funded.
A) An interest-bearing note between an inter vivos CLT and the donor is considered an act of self-dealing under the foundation rules that apply to CLTs.
The correct answer is A. It is true that an interest-bearing note between a CLT and the donor is considered an act of self-dealing under the foundation rules that apply to CLTs. (A limited exception, per the article by Brunner and Leibell, may be possible for a testamentary CLT.) The other statements are false. A CLT reverting to grantor is deemed a grantor trust. It may be possible for a CLT to pay to a DAF, if they are not deemed to be under any common control. (Care should be taken to engage qualified counsel to opine on these arrangements.) A non-grantor trust does not allow the donor an income tax deduction going in. The grantor trust does.
Which statement below is correct, with respect to CLTs?
A) The CLT must have a remainder interest, which is calculated using actuarial factors provided by the IRS when the trust is set up, of not less than 10%.
B) The maximum length of a CLT measured by a term of years may not exceed 20.
C) Charitable payments from a CLT in a given year may not exceed 50% of trust assets.
D) The term of a CLT may be for a fixed number of years or for the life or lives of specific living individuals.
D) The term of a CLT may be for a fixed number of years or for the life or lives of specific living individuals.
The correct answer is D. The CLT can be measured by any term of years (up to the term allowed under the rule against perpetuities). The CLT can also be measured by a life or lives in being. There is no minimum nor maximum payout to charity. There is no minimum or maximum remainder interest.
Which statement(s) below is (are) true of a qualified CLT?
I. The trust may be revocable.
II. The trust may be used to diversify assets without tax consequences.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
D) Neither I nor II
The correct answer is D. Neither is true. A qualified CLT (that is, a CLT qualified to count as a CLT for tax purposes) is irrevocable, but unlike a CRT, it is not used to sell assets and diversify assets in a tax-favored way. The CLT, unlike the CRT, is either taxed itself (in the non-grantor format) or passes tax on the sale of appreciated assets back to the grantor (in the grantor format).
A donor would like to make a gift to be used to provide ongoing funding for a nonprofit. But the donor does not want the charity to have direct control of the money. Rather, the donor wants the money held outside the charity, but for the benefit of that charity. All of these would be appropriate tools to consider, except
A) a CLT
B) a PIF
C) a supporting organization
D) a designated fund at a community foundation
B) a PIF
The correct answer is B. A pooled income fund is held by the charity, with income going back to the donor. The other tools would maintain the corpus outside the charity, with the charity’s getting the benefit of the money via a stream of payments or grants. With a CLT, the charity could get some or all of these payments. With a supporting organization, the charity and the donor, donor’s heirs, or other designated persons jointly manage the foundation for the benefit of the supported charity. (Typically, with a supporting organization, the balance of control rests with the organization supported, while the supporting organization remains a separate entity.) With a designated fund at a community foundation, the principal amount is held at the community foundation in a fund for the benefit of the charity. If the charity fails to perform or goes out of existence, then the designated fund by its terms may then be used to support other charities with a similar purpose.
