AEP Charitable Planning & Philanthropy 1 — Questions and Answers
Question 1: A donor transfers appreciated stock worth $500,000 (cost basis $50,000) to a charitable remainder unitrust (CRUT). What is the immediate income tax consequence to the donor?
- The donor recognizes a $450,000 capital gain immediately
- The donor receives a charitable income tax deduction for the present value of the remainder interest (Correct answer)
- The donor receives a deduction equal to the full $500,000 fair market value
- No tax consequence occurs until distributions are made from the CRUT
Correct answer: The donor receives a charitable income tax deduction for the present value of the remainder interest
When appreciated property is transferred to a CRUT, the donor avoids immediate capital gain recognition and receives a charitable deduction equal to the present value of the remainder interest going to charity.
Question 2: Which type of charitable trust pays a fixed dollar amount to the income beneficiary each year regardless of the trust's investment performance?
- Charitable Remainder Unitrust (CRUT)
- Charitable Remainder Annuity Trust (CRAT) (Correct answer)
- Charitable Lead Annuity Trust (CLAT)
- Charitable Lead Unitrust (CLUT)
Correct answer: Charitable Remainder Annuity Trust (CRAT)
A CRAT pays a fixed annuity amount determined at inception, making it independent of the trust's actual investment returns each year.
Question 3: A Charitable Lead Annuity Trust (CLAT) differs from a Charitable Remainder Annuity Trust (CRAT) primarily in that:
- A CLAT provides the annuity stream to the charity first, with the remainder passing to heirs (Correct answer)
- A CLAT eliminates all estate taxes on the transferred assets
- A CLAT requires the grantor to be at least 60 years old
- A CLAT must be funded only with cash, not appreciated property
Correct answer: A CLAT provides the annuity stream to the charity first, with the remainder passing to heirs
In a CLAT, the charitable organization receives the annuity payments for the trust term, and any remainder passes to the grantor's heirs—opposite of a CRAT's structure.
Question 4: Under IRC Section 170, what is the AGI limitation for a cash contribution to a public charity by an individual taxpayer in a typical tax year?
- 30% of AGI
- 50% of AGI
- 60% of AGI (Correct answer)
- 100% of AGI
Correct answer: 60% of AGI
Post-TCJA, cash contributions to public charities are deductible up to 60% of AGI, with excess amounts carried forward for up to five years.
Question 5: A donor-advised fund (DAF) allows the donor to:
- Retain legal control over the assets and direct specific investments
- Take an immediate charitable deduction and recommend grants to charities over time (Correct answer)
- Receive an income stream from the fund for life before distributions to charity
- Avoid gift tax on transfers exceeding the annual exclusion amount
Correct answer: Take an immediate charitable deduction and recommend grants to charities over time
A DAF allows donors to contribute assets, claim an immediate tax deduction, and then advise the sponsoring organization on charitable grants over time, though legal control passes to the sponsor.
Question 6: Which of the following is a key advantage of using a private foundation rather than a donor-advised fund for charitable giving?
- Private foundations have lower administrative costs
- Private foundations allow greater control and the ability to employ family members (Correct answer)
- Private foundations offer a higher AGI deduction limit for cash contributions
- Private foundations are not subject to self-dealing rules
Correct answer: Private foundations allow greater control and the ability to employ family members
Private foundations allow the donor and family to maintain greater control, set grantmaking strategy, and employ family members as staff, providing a legacy governance structure not available with DAFs.
Question 7: For a Qualified Charitable Distribution (QCD) from an IRA to qualify for exclusion from gross income, which requirement must be met?
- The IRA owner must be at least 59½ years old
- The distribution must not exceed $100,000 per year per taxpayer (Correct answer)
- The charity must be a private foundation
- The IRA must have been open for at least five years
Correct answer: The distribution must not exceed $100,000 per year per taxpayer
To qualify as a QCD, the distribution to an eligible public charity must not exceed $100,000 per taxpayer per year (adjusted for inflation in subsequent years), and the owner must be at least 70½.
AEP Charitable Planning & Philanthropy 1
A donor transfers appreciated stock worth $500,000 (cost basis $50,000) to a charitable remainder unitrust (CRUT).
What is the immediate income tax consequence to the donor?