CES Charitable Planning & Philanthropy 2 — Questions and Answers
Question 1: Which charitable arrangement involves a donor transferring assets directly to a charity in exchange for fixed annuity payments for the donor's lifetime?
- Charitable Remainder Unitrust
- Pooled Income Fund
- Charitable Gift Annuity (Correct answer)
- Donor Advised Fund
Correct answer: Charitable Gift Annuity
A Charitable Gift Annuity (CGA) is a contract between the donor and the charity; the donor transfers assets, and the charity agrees to pay a fixed annuity for the donor's (and/or a second beneficiary's) lifetime.
Question 2: In a Pooled Income Fund, contributions from multiple donors are:
- Held in separate sub-trusts for each donor
- Commingled in a fund managed by the charity, with each donor receiving a pro-rata share of income (Correct answer)
- Used to purchase individual annuity contracts from insurance companies
- Placed into a Donor Advised Fund for future grant recommendations
Correct answer: Commingled in a fund managed by the charity, with each donor receiving a pro-rata share of income
A Pooled Income Fund commingles gifts from multiple donors into a single fund managed by the charity; each donor receives a proportionate share of the fund's actual net income.
Question 3: The key advantage of a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT) for donors contributing illiquid assets is:
- The trust can accumulate income in low-income years and distribute accumulated amounts in later high-income years (Correct answer)
- It guarantees a fixed payment regardless of trust income or asset performance
- It eliminates estate taxes on all assets transferred to the trust
- It provides an immediate income tax deduction equal to the full fair market value of contributed assets
Correct answer: The trust can accumulate income in low-income years and distribute accumulated amounts in later high-income years
A NIMCRUT distributes the lesser of net income or the unitrust amount, and the 'makeup' provision allows accumulated deficiencies to be paid out in future years when trust income exceeds the unitrust amount.
Question 4: A 'bargain sale' to a charity occurs when:
- A donor sells property to a charity for less than its fair market value (Correct answer)
- A donor contributes mortgaged property to a charity
- A donor sells appreciated stock to a charity at a gain
- A donor contributes cash that exceeds the AGI deduction limit for the year
Correct answer: A donor sells property to a charity for less than its fair market value
In a bargain sale, the donor sells property to a charity at below fair market value; the excess of fair market value over the sale price is treated as a charitable contribution, and the sale portion triggers partial gain recognition.
Question 5: When a donor receives a tangible benefit (quid pro quo) in exchange for a charitable contribution, the deductible amount is:
- The total contribution amount minus the fair market value of the benefit received (Correct answer)
- Zero, because any benefit received disqualifies the entire deduction
- The full contribution amount, with the benefit reported as income
- The contribution amount minus the cost basis of the benefit received
Correct answer: The total contribution amount minus the fair market value of the benefit received
Under quid pro quo contribution rules, only the amount exceeding the fair market value of the benefit received qualifies as a charitable deduction.
Question 6: For non-cash charitable contributions valued over $5,000 (other than publicly traded securities), donors must generally obtain:
- An IRS pre-approval letter confirming the valuation
- A qualified appraisal from a qualified appraiser (Correct answer)
- Written acknowledgment from the charity alone
- Notarized documentation from the donor's legal counsel
Correct answer: A qualified appraisal from a qualified appraiser
IRS regulations require donors to obtain a qualified appraisal by a qualified appraiser and attach Form 8283 for non-cash contributions over $5,000, ensuring an independent valuation.
Question 7: A 'Flip CRUT' is best characterized as a trust that:
- Converts from a fixed annuity trust to a unitrust format upon a triggering event
- Begins as a net income unitrust and converts to a standard unitrust upon a triggering event such as a property sale (Correct answer)
- Redirects the remainder interest from charity to family members after a specified period
- Converts non-income-producing trust assets to income-producing assets on an annual basis
Correct answer: Begins as a net income unitrust and converts to a standard unitrust upon a triggering event such as a property sale
A Flip CRUT begins as a Net Income CRUT (NICRUT or NIMCRUT) and 'flips' to a standard unitrust upon a triggering event — typically the sale of an illiquid asset — allowing full unitrust distributions thereafter.
CES Charitable Planning & Philanthropy 2
Which charitable arrangement involves a donor transferring assets directly to a charity in exchange for fixed annuity payments for the donor's lifetime?