CAP Risk Assessment & Underwriting 3

Question 1

Under the American Council on Gift Annuities (ACGA) guidelines, what is the primary purpose of the suggested maximum payout rates?

Accepted Answer

To ensure the charity retains a projected residuum of approximately 50% of the gift

Answer

ACGA rates are designed so that, based on actuarial assumptions, the charity will retain roughly 50 cents on the dollar after all annuity payments are made.

Question 2

A real estate gift to a charitable remainder trust poses which underwriting challenge not present with publicly traded securities?

Accepted Answer

Difficulty valuing and liquidating the asset to fund distributions

Answer

Real estate is illiquid and requires appraisal; the trustee may struggle to generate cash for required trust distributions until the property is sold.

Question 3

The 10% minimum remainder rule for charitable remainder trusts means:

Accepted Answer

The present value of the charitable remainder must be at least 10% of the initial contribution

Answer

IRC §664 requires that the present value of the charity's remainder interest, calculated at inception using the applicable federal rate, must equal at least 10% of the initial contribution.

Question 4

When assessing the suitability of a charitable lead annuity trust (CLAT) for a donor, the advisor's primary risk consideration is:

Accepted Answer

The risk that trust assets underperform the Section 7520 rate, leaving little for heirs

Answer

A CLAT passes remainder to heirs; if the trust earns less than the §7520 rate used to calculate the charitable deduction, heirs receive a diminished inheritance.

Question 5

Which of the following BEST describes 'unrelated business income tax' (UBIT) risk within a charitable remainder trust?

Accepted Answer

Income from debt-financed property or certain business activities may be taxed inside the trust

Answer

CRTs lose their tax-exempt status for any year they have UBIT, which can arise from debt-financed assets or active business income within the trust.

(CAP) Certified Philanthropic Advisor Practice Test

(CAP) Certified Philanthropic Advisor Practice Test

CAP Risk Assessment & Underwriting 3