CAP Charitable Giving Strategies 2 — Questions and Answers
Question 1: Which charitable giving vehicle allows a donor to make a large gift in one year, receive an immediate deduction, and distribute grants to charities over time?
- Charitable remainder trust
- Donor-advised fund (Correct answer)
- Private foundation
- Charitable lead trust
Correct answer: Donor-advised fund
A donor-advised fund (DAF) allows donors to make an irrevocable contribution, take an immediate tax deduction, and then recommend grants to qualified charities at any future time.
Donor-advised funds are sponsored by community foundations or financial institutions. The donor receives an immediate charitable deduction for contributions (up to 60% of AGI for cash), while retaining advisory privileges over future grant recommendations. This decouples the tax event from the distribution event, making DAFs especially useful for bunching deductions in high-income years.
Question 2: A charitable remainder annuity trust (CRAT) differs from a charitable remainder unitrust (CRUT) primarily in that a CRAT:
- Pays a fixed percentage of annually revalued trust assets
- Pays a fixed dollar amount determined at inception (Correct answer)
- Allows additional contributions after funding
- Uses a net-income-with-makeup provision
Correct answer: Pays a fixed dollar amount determined at inception
A CRAT pays a fixed annuity amount set at the trust's creation, whereas a CRUT pays a fixed percentage of assets revalued annually.
Under IRC 664, a CRAT must pay a fixed dollar amount—at least 5% of initial fair market value—to the income beneficiary each year. Because the payment is fixed, additional contributions are prohibited. A CRUT, by contrast, pays a fixed percentage of annually revalued assets, allowing additional contributions and creating a self-adjusting payout tied to investment performance.
Question 3: Under the CAP curriculum, which factor most directly determines the philanthropic capacity of a client?
- The client's estate tax bracket
- The client's wealth, income, and existing charitable commitments relative to lifestyle needs (Correct answer)
- The number of charities the client has donated to previously
- The client's age and health status
Correct answer: The client's wealth, income, and existing charitable commitments relative to lifestyle needs
Philanthropic capacity is assessed by evaluating total wealth, current income, existing obligations, and lifestyle needs to determine how much a client can sustainably give.
CAP advisors use a holistic financial picture—net worth, cash flow, existing charitable commitments, taxes, and future needs—to establish a sustainable giving level. This philanthropic balance sheet approach ensures recommended strategies align with the client's long-term financial security, not just current enthusiasm for giving.
Question 4: Which of the following best describes the concept of bunching charitable contributions?
- Donating to multiple charities simultaneously
- Concentrating two or more years of planned donations into one tax year to exceed the standard deduction threshold (Correct answer)
- Splitting donations between a DAF and a private foundation
- Making monthly recurring gifts to a single charity
Correct answer: Concentrating two or more years of planned donations into one tax year to exceed the standard deduction threshold
Bunching accelerates multiple years of planned giving into a single year so the total itemized deductions exceed the standard deduction, maximizing the tax benefit.
After the Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction, many donors could no longer itemize annually. Bunching addresses this by compressing two or more years of charitable giving into one year—often via a DAF—so that itemized deductions clearly surpass the standard deduction in the bunching year, while the donor continues making grants from the DAF in subsequent years.
Question 5: A donor contributes $500,000 of long-term appreciated stock to a public charity. Assuming AGI is $600,000, what is the maximum deductible amount in the contribution year?
- $300,000 (50% of AGI)
- $360,000 (60% of AGI)
- $180,000 (30% of AGI) (Correct answer)
- $500,000 (full fair market value)
Correct answer: $180,000 (30% of AGI)
Contributions of long-term capital gain property to public charities are deductible at fair market value but limited to 30% of AGI, yielding a $180,000 deduction.
Under IRC 170(b)(1)(C), gifts of long-term capital gain property to public charities are limited to 30% of AGI (not 60% as for cash). The remaining $320,000 carries forward for up to five years. This limit reflects Congress's policy of allowing fair market value deductions without requiring the donor to recognize the embedded gain, balanced by the reduced AGI ceiling.
Question 6: Which charitable vehicle is best suited for a client who wants to make a large gift, pass the remainder to heirs after a fixed term of charity payments, without an income tax deduction at funding?
- Charitable remainder unitrust
- Charitable lead annuity trust (CLAT) (Correct answer)
- Donor-advised fund
- Supporting organization
Correct answer: Charitable lead annuity trust (CLAT)
A CLAT pays an annuity to charity for a fixed term; the remainder then passes to heirs. A non-grantor CLAT generates a gift/estate tax deduction but not an income tax deduction for the grantor.
In a non-grantor CLAT, no income deduction is available, but the gift/estate tax deduction reduces transfer taxes. CLATs are often used in low-interest-rate environments because the remainder to heirs can be significantly larger than the present value of the charitable annuity stream used to calculate the deduction.
CAP Charitable Giving Strategies 2
Which charitable giving vehicle allows a donor to make a large gift in one year, receive an immediate deduction, and distribute grants to charities over time?