AEP Advanced Estate Planning Techniques 3 — Questions and Answers
Question 1: A Charitable Remainder Unitrust (CRUT) differs from a Charitable Remainder Annuity Trust (CRAT) primarily because the CRUT pays:
- A fixed dollar amount each year
- A fixed percentage of the trust's annually revalued assets (Correct answer)
- Income only, never principal
- Payments only to the charitable remainder beneficiary
Correct answer: A fixed percentage of the trust's annually revalued assets
A CRUT pays a fixed percentage (at least 5%) of the trust's fair market value as revalued annually, so distributions fluctuate with asset performance, unlike the fixed dollar payments of a CRAT.
Question 2: What is the minimum required payout rate for a Charitable Remainder Trust to qualify under IRC Section 664?
- 3% of initial net fair market value
- 5% of net fair market value (Correct answer)
- 7.5% of net fair market value
- 10% of net fair market value
Correct answer: 5% of net fair market value
IRC §664 requires that a CRT pay at least 5% of net fair market value annually to qualify as a charitable remainder trust.
Question 3: A Charitable Lead Annuity Trust (CLAT) is most effective for wealth transfer when the IRS Section 7520 rate is:
- High, because it increases the charitable deduction
- Low, because the charity's interest is worth more and the remainder is larger (Correct answer)
- High, because it minimizes the charitable remainder
- At exactly 5%, because that is the statutory threshold
Correct answer: Low, because the charity's interest is worth more and the remainder is larger
A low §7520 rate means less is assumed to be earned by the trust, so more value is attributed to the annuity payments to charity, leaving a larger remainder to pass to heirs at a reduced gift tax value.
Question 4: Which trust structure allows a donor to contribute assets, receive a current charitable deduction, and recommend (but not direct) grants to charities over time?
- Private foundation
- Charitable remainder trust
- Donor-advised fund (Correct answer)
- Pooled income fund
Correct answer: Donor-advised fund
A donor-advised fund provides an immediate charitable deduction at contribution while allowing the donor to recommend grants to qualifying charities over time, without the administrative burden of a private foundation.
Question 5: The 'estate inclusion' problem unique to private foundations involves which transfer tax issue?
- Contributions to the foundation are subject to gift tax
- Retained control by the founder can cause estate inclusion under §2036 (Correct answer)
- Foundation assets are subject to a separate estate tax at the founder's death
- Deductions for foundation contributions are limited to 20% of AGI
Correct answer: Retained control by the founder can cause estate inclusion under §2036
If a foundation founder retains significant control over foundation assets, the IRS may argue that §2036 requires inclusion of those assets in the founder's taxable estate.
Question 6: A Pooled Income Fund differs from a donor-advised fund because contributions to a Pooled Income Fund must be:
- Held only in cash equivalents
- Commingled with other donors' contributions and invested collectively (Correct answer)
- Used exclusively for educational charities
- Distributed within five years of the initial gift
Correct answer: Commingled with other donors' contributions and invested collectively
A Pooled Income Fund commingles contributions from multiple donors, similar to a mutual fund, with each donor receiving a pro-rata share of fund income for life before the remainder passes to the charity.
Question 7: In a 'net income with makeup charitable remainder unitrust' (NIMCRUT), accumulated deficiencies from prior years when income was insufficient may be:
- Carried forward and paid to the non-charitable beneficiary in a later year when income exceeds the unitrust percentage (Correct answer)
- Deducted by the charitable beneficiary against future income
- Added to the trust principal permanently
- Forgiven and not payable in any subsequent year
Correct answer: Carried forward and paid to the non-charitable beneficiary in a later year when income exceeds the unitrust percentage
A NIMCRUT includes a 'makeup' provision that allows accumulated shortfalls from years when trust income was below the unitrust amount to be paid out in future years when income exceeds the unitrust percentage.
AEP Advanced Estate Planning Techniques 3
A Charitable Remainder Unitrust (CRUT) differs from a Charitable Remainder Annuity Trust (CRAT) primarily because the CRUT pays: