STEP Charitable Planning & Philanthropy 1 — Questions and Answers
Question 1: In a Charitable Remainder Trust (CRT), what happens to the trust assets at the end of the trust term?
- Assets pass to the income beneficiary's estate
- Assets are liquidated and distributed equally among all beneficiaries
- The remaining assets pass to the designated charitable beneficiary (Correct answer)
- Assets revert to the original grantor
Correct answer: The remaining assets pass to the designated charitable beneficiary
A CRT is designed so that a non-charitable beneficiary receives income for a period, after which the remaining corpus passes irrevocably to the designated charitable remainder beneficiary.
Question 2: What distinguishes a Charitable Remainder Annuity Trust (CRAT) from a Charitable Remainder Unitrust (CRUT)?
- A CRAT pays a fixed percentage of trust assets annually, while a CRUT pays a fixed dollar amount
- A CRAT pays a fixed dollar amount annually, while a CRUT pays a fixed percentage of trust assets valued each year (Correct answer)
- A CRAT benefits multiple charities, while a CRUT can benefit only one
- A CRAT is irrevocable, while a CRUT can be revoked by the grantor
Correct answer: A CRAT pays a fixed dollar amount annually, while a CRUT pays a fixed percentage of trust assets valued each year
A CRAT distributes a fixed dollar amount each year regardless of asset performance, whereas a CRUT distributes a fixed percentage of the trust's fair market value as revalued annually.
Question 3: What is the primary planning advantage of a Donor-Advised Fund (DAF) compared to making direct charitable gifts each year?
- The donor retains legal ownership and control of donated assets
- DAF contributions are permanently exempt from all federal taxes
- The donor receives an immediate income tax deduction and can recommend grant distributions to charities over time (Correct answer)
- DAFs provide the donor with a lifetime income stream
Correct answer: The donor receives an immediate income tax deduction and can recommend grant distributions to charities over time
A DAF allows a donor to make an irrevocable, deductible contribution in a high-income year and then advise the sponsoring organization on grants to charities over future years.
Question 4: For a private foundation, which of the following counts as a 'qualifying distribution' toward the mandatory 5% annual payout requirement?
- Contributions to a donor-advised fund held by a community foundation
- Federal excise taxes paid on investment income
- Grants to public charities and reasonable operating expenses for charitable purposes (Correct answer)
- Investment management fees paid to manage foundation assets
Correct answer: Grants to public charities and reasonable operating expenses for charitable purposes
Qualifying distributions include grants to public charities and reasonable and necessary administrative expenses directly for charitable purposes; contributions to DAFs generally do not count unless special rules are met.
Question 5: Under IRC Section 4941, which of the following is a recognized exception to the self-dealing rules for private foundations?
- Selling investment property to a substantial contributor at fair market value
- Lending foundation funds to a disqualified person without interest
- Paying reasonable compensation to a disqualified person for necessary personal services rendered to the foundation (Correct answer)
- Renting office space from a foundation board member at below-market rates
Correct answer: Paying reasonable compensation to a disqualified person for necessary personal services rendered to the foundation
IRC Section 4941(d)(2)(E) provides an exception permitting payment of reasonable and necessary compensation to disqualified persons for personal services that are necessary for carrying out the foundation's exempt purposes.
Question 6: Under current federal tax law, what is the adjusted gross income (AGI) limitation for cash contributions to public charities?
- 30% of AGI
- 50% of AGI
- 60% of AGI (Correct answer)
- 100% of AGI
Correct answer: 60% of AGI
The Tax Cuts and Jobs Act of 2017 permanently increased the AGI limitation for cash contributions to public charities from 50% to 60%, with excess amounts carried forward for up to five years.
Question 7: A Charitable Gift Annuity (CGA) is best described as:
- A government-backed annuity product where payments are guaranteed by a federal agency
- A contract in which a donor transfers assets irrevocably to a charity in exchange for fixed periodic payments for life, with the residual benefiting the charity (Correct answer)
- A pooled trust vehicle that distributes income to multiple charities on a pro-rata basis
- A revocable agreement that allows the donor to reclaim donated assets within three years
Correct answer: A contract in which a donor transfers assets irrevocably to a charity in exchange for fixed periodic payments for life, with the residual benefiting the charity
A CGA is a bilateral contract between a donor and a charity; the charity provides the annuity from its general assets and retains the remainder after the annuitant's death.
STEP Charitable Planning & Philanthropy 1
In a Charitable Remainder Trust (CRT), what happens to the trust assets at the end of the trust term?