CEA Charitable Giving Strategies 3 — Questions and Answers
Question 1: A Charitable Gift Annuity (CGA) differs from a Charitable Remainder Trust primarily because:
- A CGA is a contract between the donor and the charity, not a trust arrangement (Correct answer)
- A CGA pays a variable annuity based on portfolio performance
- A CGA requires a minimum gift of $1 million
- A CGA is administered by a bank trustee
Correct answer: A CGA is a contract between the donor and the charity, not a trust arrangement
A CGA is a simple contractual arrangement directly between the donor and the charity, whereas a CRT is a separate trust entity with its own legal existence.
Question 2: What is the primary difference between a Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder Unitrust (CRUT)?
- A CRAT pays a fixed dollar amount annually; a CRUT pays a fixed percentage of assets revalued each year (Correct answer)
- A CRAT benefits charity first; a CRUT benefits the donor first
- A CRAT requires a 10-year minimum term; a CRUT has no minimum term
- A CRAT allows additional contributions; a CRUT does not
Correct answer: A CRAT pays a fixed dollar amount annually; a CRUT pays a fixed percentage of assets revalued each year
A CRAT pays a fixed annuity amount established at inception, while a CRUT pays a fixed percentage of the trust's fair market value as revalued annually, making CRUT payments variable.
Question 3: The 'Five Percent Test' applicable to Charitable Remainder Trusts requires that:
- The charitable remainder interest must have a present value of at least 5% of the initial contribution
- The annual payout to the income beneficiary must be at least 5% of initial net fair market value (Correct answer)
- At least 5% of trust assets must be distributed to charity each year
- The trust must earn at least 5% annually to maintain tax-exempt status
Correct answer: The annual payout to the income beneficiary must be at least 5% of initial net fair market value
IRC Section 664 requires that the annual payout rate for a CRT must be at least 5% of the initial net fair market value of the trust assets.
Question 4: Under the bargain sale rules, when a donor sells property to a charity for less than fair market value, the donor must recognize gain based on:
- The difference between the sale price and the full fair market value
- A pro-rata allocation of basis between the charitable and sale portions (Correct answer)
- The full fair market value of the property regardless of sale price
- Only the cash actually received from the charity
Correct answer: A pro-rata allocation of basis between the charitable and sale portions
In a bargain sale, the donor's adjusted basis is allocated pro-rata between the gift portion and the sale portion, and gain is recognized on the sale portion based on the allocated basis.
Question 5: Which of the following best describes the 'Flip CRUT' (Flip Charitable Remainder Unitrust)?
- A CRUT that converts from a net income unitrust to a standard unitrust upon a triggering event (Correct answer)
- A CRUT that distributes assets to charity first before paying the donor
- A CRUT that flips between charitable and non-charitable beneficiaries annually
- A CRUT funded exclusively with real estate that flips to cash equivalents
Correct answer: A CRUT that converts from a net income unitrust to a standard unitrust upon a triggering event
A Flip CRUT operates as a net income unitrust until a specified triggering event (such as sale of illiquid assets), then converts to a standard unitrust paying the full unitrust percentage.
Question 6: For a private foundation to avoid the excise tax on failure to distribute income under IRC Section 4942, it must distribute at least what percentage of its assets annually?
- 3%
- 4%
- 5% (Correct answer)
- 10%
Correct answer: 5%
Private foundations must distribute at least 5% of their net investment assets annually for charitable purposes to avoid the Section 4942 excise tax on undistributed income.
Question 7: A donor who contributes long-term capital gain property to a public charity generally may deduct up to what percentage of AGI?
- 20%
- 30% (Correct answer)
- 50%
- 60%
Correct answer: 30%
Contributions of long-term capital gain property (such as appreciated stock held over one year) to public charities are limited to 30% of AGI, with a 5-year carryforward.
CEA Charitable Giving Strategies 3
A Charitable Gift Annuity (CGA) differs from a Charitable Remainder Trust primarily because: