Charitable Lead Trusts

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Charitable Lead Trusts

This quiz is part of the curriculum for the graduate course Personal Financial Planning 5325 "Introduction to Charitable Planning" from Texas Tech University. For free downloads of the audio lectures and PowerPoint slides for this course, or to learn about the online Graduate Certificate in Charitable Financial Planning at Texas Tech University, go to www. EncourageGenerosity. Com


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Questions and Answers
  • 1. 
    The distributions from a CLT are similar to the distributions from a CRT where the charitable and non-charitable beneficiaries have switched places.
    • A. 

      True

    • B. 

      False

  • 2. 
    Neither CLTs nor CRTs can make payments for a fixed period of more than 20 years
    • A. 

      True

    • B. 

      False

  • 3. 
    CLTs and CRTs must both pay from 5% to 50% of initial trust assets (CRAT or CLAT) or ongoing trust assets (CRUT or CLUT).
    • A. 

      True

    • B. 

      False

  • 4. 
    CLTs and CRTs are both tax exempt entities.
    • A. 

      True

    • B. 

      False

  • 5. 
    On average, CLTs will hold significantly more assets than a CRT.
    • A. 

      True

    • B. 

      False

  • 6. 
    There are more CRTs than CLTs and all CRTs combined hold more assets than all CLTs combined.
    • A. 

      True

    • B. 

      False

  • 7. 
    CLTs are much more likely than CRTs to be set up for a “public benefit” charity rather for a specific cause charity such as those focused on the arts, education, environment, or religion.
    • A. 

      True

    • B. 

      False

  • 8. 
    Grantor CLTs often pay the remainder interest back to the donor, but Non-Grantor CLTs do not.
    • A. 

      True

    • B. 

      False

  • 9. 
    When a Grantor CLT earns income it is taxed to the donor, but when a Non-Grantor CLT earns income it is taxed to the trust itself.
    • A. 

      True

    • B. 

      False

  • 10. 
    When a donor creates a Non-Grantor CLT he receives an immediate income tax deduction for the present value of all future distributions to the charity, but he receives no income tax deduction for gifts made to a Grantor CLT.
    • A. 

      True

    • B. 

      False

  • 11. 
    If the donor dies while the CLT is still in existence, the donor’s estate will include the value of the CLT if it is a Grantor CLT, but not if it is a Non-Grantor CLT.
    • A. 

      True

    • B. 

      False

  • 12. 
    The consequences of a CLT having significant amounts of unrelated business taxable income are much less serious than the consequences of a CRT having significant amounts of unrelated business taxable income.
    • A. 

      True

    • B. 

      False

  • 13. 
    Jochebed regularly makes $10,000 annual gifts to her favorite charity.  She plans to continue making such gifts for the next 10 years.  She would like to take an immediate tax deduction for the present value of these 10 years of future gifts that she plans to make.  Which of the following methods will allow her to do so?   I.                 Funding a Grantor Charitable Lead Trust paying $10,000 per year for 10 years to the charity II.               Funding a Non-Grantor Charitable Lead Trust paying $10,000 per year for 10 years to the charity III.              Signing a legally enforceable contract with the charity promising to deliver $10,000 each year for the next ten years IV.              Simply deducting the present value of all ten years worth of future gifting on her tax return this year, so long as she actually makes the gifts and doesn’t deduct those contributions in future years
    • A. 

      I only

    • B. 

      II only

    • C. 

      I or II

    • D. 

      I, II, or III

    • E. 

      I, II, III, or IV

  • 14. 
    Rhoda establishes a Grantor Charitable Lead Annuity Trust (CLAT) paying $10,000 per year for 10 years to her local church and a Non-Grantor Charitable Lead Annuity Trust (CLAT) paying $10,000 per year for 10 years to The Unopened Door, a local 501(c)3 religious charity.  How will the §7520 rate affect her current charitable income tax deduction received for establishing these two CLATs?
    • A. 

      A low §7520 rate will increase the size of her charitable deduction for both CLATs

    • B. 

      A low §7520 rate will increase the size of her charitable deduction for the Grantor CLAT, but not the Non-Grantor CLAT

    • C. 

      A high §7520 rate will increase the size of her charitable deduction for both CLATs

    • D. 

      A high §7520 rate will increase the size of her charitable deduction for the Grantor CLAT, but not the Non-Grantor CLAT

    • E. 

      The §7520 rate will not affect the size of her charitable deduction

  • 15. 
    Chloe is a wealthy retiree who regularly makes large charitable gifts out of her assets.  Her accountant informs her that, as in past years, she is continuing to exceed the maximum deductible contributions allowed for her level of income.  In fact, even if she stopped making gifts, her expected income still would not allow her to deduct all of the charitable deductions she will be carrying over for the next 5 years.  Ultimately, she would like her estate to go to her children, not to charity.  Chloe is frustrated because she has to pay taxes on her investment income, but then can’t deduct when she gives that income to charity because of her past gifts.  Assuming her investments generate 5% per year, which of the following arrangements would allow Chloe to avoid paying taxes on the income generated by her assets if that income is given to charity, but still preserves the ability for her children to inherit her assets?
    • A. 

      Chloe transfers assets to a Non-Grantor Charitable Lead Trust paying 5% of trust assets to charity each year for her life with remainder to her children

    • B. 

      Chloe transfers assets to a Grantor Charitable Lead Trust paying 5% of trust assets each year to charity each year for her life with remainder to her estate

    • C. 

      Chloe writes a check for all of the income earned from the assets to charity each year

    • D. 

      Chloe transfers assets to a Charitable Remainder Trust paying 5% of trust assets to charity each year with remainder to her children

    • E. 

      None of these arrangements can accomplish her stated goals

  • 16. 
    Abishag married a very wealthy older man when she was young.  He passed away and she is now very wealthy.  She doesn’t want to leave a gift to charity at death, but would like to give money while she is alive, so she can actually see the impact of her giving.  She would also like transfer wealth to her children while avoiding estate taxes.  Currently the §7520 rate is at 2%, but many of her assets will grow at 8%.  Which of the following techniques best fits her goals?
    • A. 

      Transfer the fast growing assets to a non-grantor charitable lead trust, with a fixed annuity paid to charity and remainder to her children

    • B. 

      Transfer the fast growing assets to a grantor charitable lead trust, with a fixed annuity paid to charity and remainder to her children

    • C. 

      Transfer the fast growing assets to a charitable remainder trust, with a fixed annuity paid to her children for her lifetime and remainder to charity

    • D. 

      Hold the assets in her name, write annual checks to the charity, and then leave her estate to her children in her will

    • E. 

      Transfer the fast growing assets to a charity in exchange for a charitable gift annuity payable to her children

  • 17. 
    Ada transfer $10 million to a 15 year Non-Grantor CLT with the remainder going to her two children Jabal and Jubal.  Using the §7520 rate on the date of transfer, the present value of the remainder going to her children is $100,000.  During the 15 year period of the Non-Grantor CLT, the assets increase in value much faster than the initial §7520 rate.  Consequently, the children actually receive $8 million in assets at the end of the trust period.  Assuming Ada is still alive at the end of the trust period, on what amount does she pay gift taxes?
    • A. 

      $0

    • B. 

      $74,000 ($100,000 less two $13,000 per year annual present interest gift exclusions)

    • C. 

      $100,000

    • D. 

      $8,000,000

    • E. 

      $8,100,000

  • 18. 
    Naomi, a widow, learns that her son’s 30-year-old wife Orpah has contracted a largely untreatable form of cancer.  The doctors indicate that she is expected to live for 2 years.  Upon hearing this, Naomi sees a potential opportunity to reduce estate taxes.  She places $10 million in a Non-Grantor Charitable Lead Trust paying $300,000 per year to a charity for the life of Orpah, with the remainder to her son.  Using current §7520 rates, and the life expectancy of a healthy 30 year old female, the projected remainder value is $1.  Orpah dies 18 months later, after the trust has paid $450,000 to the charity.  Due to good investment returns during the 18 months, her son receives $10.2 million dollars.  Assuming Naomi is still alive, on what amount will she have to pay gift taxes?
    • A. 

      $0

    • B. 

      $1

    • C. 

      $10,000,000

    • D. 

      $10,200,000

    • E. 

      The remainder value of $10 million CLT calculated based upon a 24 month life expectancy

  • 19. 
    Which of the following rules applies to which kind of charitable trust with regards to holding S-corporation stock?   I.  Holding S-corporation stock is always allowed. II. Holding S-corporation stock is never allowed. III. Holding S-corporation stock is allowed only if the trust makes a special ESBT election that eliminates its ability to take future charitable deductions
    • A. 

      Grantor CLT (rule I), Non-Grantor CLT (rule III), CRT (rule II)

    • B. 

      Grantor CLT (rule II), Non-Grantor CLT (rule III), CRT (rule II)

    • C. 

      Grantor CLT (rule III), Non-Grantor CLT (rule I), CRT (rule II)

    • D. 

      Grantor CLT (rule I), Non-Grantor CLT (rule II), CRT (rule III)

    • E. 

      Grantor CLT (rule I), Non-Grantor CLT (rule II), CRT (rule I)

  • 20. 
    The CLT “Defective Grantor Trust” (aka “Super Trust”) attempts to produce a trust that is
    • A. 

      A Non-Grantor CLT for income tax purposes and a Grantor CLT for estate tax purposes

    • B. 

      A Grantor CLT for income tax purposes and a Non-Grantor CLT for estate tax purposes

    • C. 

      A Non-Grantor CLT for income tax purposes and a Grantor CLT for capital gains tax purposes

    • D. 

      A Grantor CLT for income tax purposes and a Non-Grantor CLT for capital gains tax purposes

    • E. 

      A CLT for income tax purposes and a CRT for estate tax purposes

  • 21. 
    Thanks for taking the quiz!  The rest of the free online curriculum, including slides and audio lectures, is at www.EncourageGenerosity.com.  Our ability to create and post new curriculum depends on being able to prove that it is actually being used by professionals in nonprofits or financial advising.  It would help us tremendously if you would write your name and the name of your organization below, so that we will have evidence that this product is being used.  Thanks!