Week 3

Question 1

What is the minimum required payout rate of a charitable remainder trust (CRT)?

A) 3%

B) 5%

C) 6%

D) There is no minimum.

Answer 1

B) 5%

Question 2

A donor establishes a charitable remainder annuity trust (CRAT) with $1,000,000. The payout rate is 7%. How much is paid out in the second year, if the trust has grown to $1,100,000?

A) $70,000

B) $77,000

C) $33,000

D) $44,000

Answer 2

A) $70,000

The correct answer is A. With a CRAT, the income is level based on the initial contribution to the trust and the payout rate. The income is paid, regardless of whether assets in the trust grow or decline in value, and regardless of the type of gain or loss.

Question 3

A donor contributes publicly traded stock worth $100,000 to a charitable remainder annuity trust (CRAT) with a payout rate of 5%. Basis in the stock is $10,000. The trustee sells the stock and invests wholly in tax-free bonds paying 3%. With regard to the income taxation of the charitable trust payout to the donor, what is the result?

A) Trust will pay out 3%, tax-free.

B) Trust will pay out 5%, of which 3% is tax-free.

C) Trust will pay out 5%, all of which is capital gain.

D) Trust will pay out 5%, 3% of which is tax-free income, and the rest of which is return of principal.

Answer 3

C) Trust will pay out 5%, all of which is capital gain.

The correct answer is C. Under four-tier accounting, ordinary income comes out first, then capital gain, then tax free income, then basis. When the original funding asset is sold, the capital gain in that asset is booked to the capital gain account inside the trust. Thus, when the trust pays out, the income will be characterized as capital gain until the entire amount of that gain is exhausted.

Question 4

A donor establishes a flip charitable remainder unitrust (FLIP CRUT) with $1,000,000 of land. The payout rate is 7%. How much is paid out in the second year, if the land, which is the trust’s only asset, has increased in value to $1,100,000 and remains unsold? (Assume that sale of the land is treated in the trust document as the triggering event for the trust to flip.)

A) $70,000

B) $77,000

C) $44,000

D) $0

Answer 4

D) $0

The correct answer is D. Until the FLIP CRUT, the trust pays out only income. There is no income at this time.

Question 5

Additional contributions may be made from time to time into which of these CRTs?

I. CRUT

II. CRAT

A) I only

B) II only

C) Both I and II

D) Neither I nor II

Answer 5

A) I only

The correct answer is A. Only CRUTs allow for additional contributions.

Question 6

You recommend that the client contribute a parcel of raw land worth $1,000,000 to a charitable remainder annuity trust (CRAT). The trust payout is 5%. The trustee seeks a buyer but cannot find one. Which solution(s) is (are) feasible?

I. The donor must contribute cash or negotiable securities to the trust in order to create the liquidity needed to pay to the income beneficiary the required income.

II. Payments to the income beneficiary will be deferred until the sale of the land.

A) I only

B) II only

C) Both I and II

D) Neither I nor II

Answer 6

D) Neither I nor II

The correct answer is D. Sadly, neither will work. The trustee may have to deed out a piece of the land back to the income beneficiary. Or perhaps the trustee can go to court to have the document reformed. The first option would work, if this is a CRUT. The second option would be possible for a NIMCRUT or a flip trust. With a CRAT, however, the payment is required.

Question 7

Which statement or statements is true of charitable gift annuities (CGAs)?

I. A charitable gift annuity can be set up for the life or lives of one or two people living when the annuity is established.

II. A charitable gift annuity can be for a term of years.

A) I only

B) II only

C) Both I and II

D) Neither I nor II

Answer 7

A) I only

The correct answer is A. CGAs cannot be set for a term of years.

Question 8

All of the following are red flags in creating a CRT, EXCEPT:

A) The donor has debt against the asset he or she wishes to contribute.

B) The donor has a buyer waiting in the wings for a closely held business that he or she wishes to contribute to the CRT prior to its sale.

C) The donor wants to contribute S-Corporation interest.

D) The donor has publicly traded securities with low basis and low dividends.

Answer 8

D) The donor has publicly traded securities with low basis and low dividends.

The correct answer is D. Debt can cause recognition of income to the donor, may cause the trust to pay tax, or may disqualify the trust. A buyer waiting in the wings may lead the IRS to say that the asset was effectively sold before the property was contributed, the result being that taxes are due from the donor while the asset is locked up inside the trust. S-Corporation election is revoked, if the S-Corporation is contributed to a CRT. The ideal asset is D.

Question 9

Each of the following statements with regard to charitable gift annuities (CGAs) is true, EXCEPT:

A) The donor gets income tax deduction for the remainder interest.

B) Income beneficiary receives an income specified in the contract.

C) Charitable gift annuities are simple to set up for the donor.

D) Income to the income beneficiary from a charitable gift annuity is taxed under the four-tier accounting system.

Answer 9

D) Income to the income beneficiary from a charitable gift annuity is taxed under the four-tier accounting system.

The correct answer is D. Income from a CGA includes principal, ordinary income, and capital gains prorated over the life expectancy of the income beneficiary–a “blend.” Four-tier accounting (“worst first”) under which ordinary income comes out first until exhausted, and so on down the tiers, applies to CRTs but not to CGAs.

Question 10

All of the following statements concerning charitable remainder trusts (CRTs) are correct, EXCEPT:

A) They must provide for a specified distribution that is paid at least annually.

B) They can take the form of a hybrid trust, with elements from both a CRAT and a CRUT.

C) They must have an irrevocable remainder interest held for the benefit of, or paid over to, charity.

D) They must have at least one beneficiary that is not a charity.

Answer 10

B) They can take the form of a hybrid trust, with elements from both a CRAT and a CRUT.

The correct answer is B. The trust can be a CRUT or a CRAT; there is no such thing as hybrid CRUT/CRAT.

Question 11

All of the following statements concerning the income tax deduction limitations for contributions to a charitable remainder trust (CRT) are correct, EXCEPT:

A) The donor is permitted a deduction up to 20 percent of his or her contribution base (AGI), if the donation to the CRT is long-term capital gain property that benefits a private charity.

B) The donor is permitted a deduction equal to 40 percent of his or her contribution base (AGI), if the donor gives long-term capital gain property to the CRT whose remainder interest goes to a public charity.

C) The donor is permitted a deduction up to 60 percent of his or her contribution base (AGI), if the donation to the CRT is cash if the trust benefits a public charity.

D) The donor is permitted a deduction equal to present value of the remainder interest, subject to the AGI limits.

Answer 11

B) The donor is permitted a deduction equal to 40 percent of his or her contribution base (AGI), if the donor gives long-term capital gain property to the CRT whose remainder interest goes to a public charity.

The correct answer is B. There is no 40% limitation. The correct AGI limitation for long-term capital gain property given via a CRT to a public charity is 30%. For cash to a CRT benefiting a public charity, it is 60%. And, yes, the permitted deduction is based on the present value of actuarially determined remainder interest, using factors supplied by the IRS.

Question 12

All of the following statements concerning a charitable gift annuity are correct, EXCEPT:

A) It should be considered when the donor has appreciated property to contribute.

B) It can be created by the donor, with the assistance of the charity.

C) It is taxed under four-tier accounting.

D) Its valuation takes into account mortality factors related to the annuitant’s age.

Answer 12

C) It is taxed under four-tier accounting.

The correct answer is C. A CGA is taxed under the normal annuity rules, with capital gains, ordinary income, and basis all coming back prorated over the life expectancy of the annuitant(s). Four-tier accounting applies to CRTs.

Question 13

All of the following statements regarding the multi-tier accounting applicable to CRTs are accurate, EXCEPT:

A) Whenever a CRT purchases only tax-exempt bonds, only tax-exempt income will ever be distributed to income beneficiaries.

B) Ordinary income–to the extent there is accumulated ordinary income from the current year or undistributed ordinary income from previous years–will be distributed to income beneficiaries prior to the distribution of any other CRT holdings.

C) When an appreciated funding asset is sold by the CRT trustee, any long-term capital gains realized from that sale will be distributed to income beneficiaries before any distribution of tax-exempt bond interest or trust principal.

D) If there are multiple income beneficiaries in a CRT, each will have taxable income under the four-tier rules.

Answer 13

A) Whenever a CRT purchases only tax-exempt bonds, only tax-exempt income will ever be distributed to income beneficiaries.

The correct answer is A. Tax-free income is paid out only after all other income has been exhausted, including pre-contribution capital gain.

Question 14

The donor makes her grandchild the income beneficiary of a charitable remainder trust. Which of these statements is (are) true?

I. A grandchild is a permissible income beneficiary for a CRT.

II. Inclusion of a grandchild as an income beneficiary will have generation-skipping transfer tax implications.

A) I only

B) II only

C) Both I and II

D) Neither I nor II

Answer 14

C) Both I and II

The correct answer is C.

Question 15

In computing the deduction that a donor may take on the tax return for the year he or she makes a gift into a CRT, which of the following items are factors?

I. The type and term of the trust; the payout rate; the value of the asset contributed to the trust; and the 7520 rate

II. The donor’s prior giving history and any other charitable gifts made this year

A) I only

B) II only

C) Both I and II

D) Neither I nor II

Answer 15

C) Both I and II

The correct answer is C. The first statement covers the factors in computing the deduction. The second addresses the reality that the donor’s deduction will be limited in any given year as a percentage of AGI. To know the deduction, as limited, the advisor would need to know AGI, what else has been given to what kind of charity this year, and what carryforwards, if any, are being taken from earlier years. The point is that it is good to be careful in telling donors what their deduction is.

Question 16

The benefits of a commercial life income single-premium immediate annuity include all of the following, EXCEPT:

A) The basis is returned to the client pro-rata over life expectancy.

B) Payments to the client are guaranteed by an insurance company.

C) Payments to the client are significantly higher than with a charitable gift annuity.

D) Client can give appreciated assets to the insurance company in return for the income stream.

Answer 16

D) Client can give appreciated assets to the insurance company in return for the income stream.

The correct answer is D. All the other statements are true. With a charitable gift annuity, a donor can give a charity an appreciated asset in return for the income stream. With a commercial single-premium immediate annuity, by contrast, the insurance company will only accept cash.

Question 17

All the following are permissible gift annuity formats, except

A) an immediate annuity for one life or for two lives in succession

B) an immediate annuity for a term of years

C) a deferred annuity for one or two lives (joint and survivor)

D) a flexible annuity, with the gift made now and the income starting later, at a date determined later by the donor, paid for one or two lives

Answer 17

B) an immediate annuity for a term of years

The correct answer is B. All are permitted, except an annuity measured by a term of years.

Question 18

Which statement or statements about gift annuity regulation is (are) correct?

I. Gift annuities are regulated at the state level.

II. The Philanthropy Protection Act of 1995 lays out certain Federal requirements for gift annuities.

A) I only

B) II only

C) Both I and II

D) Neither I nor II

Answer 18

C) Both I and II

The correct answer is C. Gift annuities are regulated at the state level–and state laws vary widely. In addition, the Philanthropy Protection Act of 1995 stipulates that the charity offering a gift annuity will provide a disclosure statement to all annuitants in a Gift Annuity Fund and also provide the same to all prospective donors at the time of solicitation, using a letter or pamphlet format. If the charitable organization commingles investment assets, it must provide a disclosure statement to all annuitants in a Gift Annuity Fund and also provide the same to all prospective donors at the time of solicitation, using a letter or pamphlet format. The Act also prohibits the payment of commissions or other remuneration to anyone based on the value of a charitable gift annuity.

Question 19

Which split interest gift type would make the most sense for a donor, age 69, with $2 million in appreciated public stock, who wants an immediate income and wants to name several charities as beneficiary? The donor’s personality is controlling.

A) CRT

B) Deferred charitable gift annuity

C) Immediate charitable gift annuity

D) Flexible gift annuity

Answer 19

A) CRT

The correct answer is A. A CRT would allow the donor to name several charities that would receive the remainder at the end of the trust term. A charitable gift annuity would, likewise, be offered by a specific organization. A community foundation could, perhaps, offer gift annuities benefiting more than one organization. Generally, though, for a gift of $2 million, a trust would be an appropriate recommendation, particularly for a donor who likes as much control as possible. With a CRT, the donor sets it up, the donor’s attorney can draft the document, and the donor can choose the administrator and trustee. With a charitable gift annuity, the donor signs a short agreement, and the charity handles the rest.

Question 20

An elderly donor has little income and only a $50,000 CD she has been saving for emergencies. She needs cash for a medical procedure. Given inflation and ever-lower CD rates, she will also need more income soon. She loves her house of worship. She trusts their gift officer, and will do as the gift officer suggests. The gift officer, in possession of these facts, suggests an immediate charitable gift annuity for the $50,000. What is the best description of what the gift officer has done?

A) The gift officer has simply done her job.

B) The gift officer has made what may well be an inappropriate suggestion.

C) The gift officer has helped the donor and the charity.

D) Gift officer is not a financial advisor and need not be concerned about the good or harm done the donor.

Answer 20

B) The gift officer has made what may well be an inappropriate suggestion.

The correct answer is B. Although the gift officer is not a financial advisor, yet the donor relies on the gift officer. The gift officer knows the relevant facts. The donor will need cash to pay medical bills. The donor needs income and might at least want to consider a commercial contract for at least some of that income. Admittedly, the gift officer can claim that he or she represents the charity, and that the donor does have some philanthropic intent. However, if the donor has heirs and the heirs say the gift officer made a bad suggestion, and that the gift officer had great influence, even undue influence, it is hard to see how the gift officer could respond. A CAP operating as gift officer in this case might well want to ask if the donor has an advisor, even a family member, who could help her make the best possible decision.

Question 21

A year ago, Donor gave $300,000 in appreciated public stock to a charitable tool. His basis in the stock was $100,000. He is receiving an income back. His annual statement says that his total income of $16,000 consists of $12,000 in long-term capital gain and $4,000 of ordinary income. Which tool or tools might he have?

I. Charitable Remainder Trust (CRT)

II. Charitable Gift Annuity (CGA)

A) I only

B) II only

C) Both I and II

D) Neither I nor II

Answer 21

A) I only

The correct answer is A. A CRT could produce this result. The trust apparently earned $4,000 in ordinary income (dividends, rent, interest). That would come out first. Any additional payment due from the trust would dip into the capital gains earned by the trust and (trust provisions and state law permitting) the pre-contribution capital gain in the asset originally given. With a charitable gift annuity, by contrast, every payment from the beginning will include a return of principal, or basis, prorated over the actuarial life of the donor. Once the donor outlives that life expectancy, the whole payment would be capital gain and ordinary income.

Question 22

A donor setting up a charitable gift annuity gets all the of following benefits, except

A) the ability to specify assets backing the income stream

B) a partial income tax deduction

C) income for life

D) the ability to gift noncash assets, if the charity accepts it

Answer 22

A) the ability to specify assets backing the income stream

The correct answer is A. With a charitable gift annuity, the charity makes the decision, subject to state regulation, as to how the income stream will be funded.