Charitable Remainder Trusts

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Charitable Remainder 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. 
    Which of the following are NOT allowable for the current payout benefit of a charitable remainder trust?
    • A. 

      Providing annual fixed payments to a friend, relative, or the donor for their life or lives

    • B. 

      Providing annual fixed payments to a friend, relative, or the donor for 25 years

    • C. 

      Providing 5% of the trust assets to a friend, relative, or the donor for their life or lives

    • D. 

      Providing 45% of the trust assets to a friend, relative, or the donor for 2 years

    • E. 

      Providing 10% of the trust assets, or the total income from the trust, whichever is less, to a friend, relative, or the donor

  • 2. 
    Which of the following are allowable for the ongoing payout benefit of a charitable remainder trust?I.                 Providing payments of the lesser of the net income of the trust or 4% of trust assetsII.               Providing payments of 20% of trust assets or all trust income, whichever is less, with the provision that anytime payments are less than 20% they should later be made up whenever income exceeds 20%III.              Providing payments of 60% of trust assets for two yearsIV.             Providing payments of the net income of the trust, not to exceed 8% of all trust assets, until the sale of a piece of real estate by the trust, after which time the trust must pay 8% of all trust assets, regardless of the net income of the trustV.               Providing a payment of 5% of all trust assets, with the payment to be divided equally between the donor and a charitable organizationVI.              Providing payouts of between 5% and 10% of trust assets, with the donor retaining the right to choose the payout rate on an annual basis  
    • A. 

      Only II is allowed

    • B. 

      Only II, IV & V are allowed

    • C. 

      Only I, II, IV, & V are allowed

    • D. 

      Only II, III, IV, & V are allowed

    • E. 

      Only II, IV, V, & VI are allowed

  • 3. 
    If a trust is drafted to allow it, a donor that sets up a CRT is allowed to do all of the following except
    • A. 

      Act as the trustee of the CRT and continue to manage the trust assets

    • B. 

      Choose his friend, the charity, or a trust company as the CRT trustee

    • C. 

      Change which charity will receive the remainder interest

    • D. 

      Give all of his rights in future payments to the charity that is the remainder beneficiary, which would result in the CRT terminating and all assets being immediately delivered to the charity if the donor is the only income beneficiary

    • E. 

      Modify the original rules of a charitable remainder trust after it is established

  • 4. 
    Which of the following planning goals could NOT be accomplished using a Charitable Remainder Trust?
    • A. 

      “I want to control my own investments and spend about 5% of my assets each year. After death I want it all to go to charity.”

    • B. 

      “I would like to use $50,000 per year from my assets. The rest, I want to go to my favorite charity.”

    • C. 

      “I want to retire today, but my pension doesn’t start paying for 9 more years. I want to give assets to charity, but I still need $65,000 per year for the next 9 years.”

    • D. 

      “I want to leave my assets to charity at death. Prior to my death I think I will want 10% of the value of the assets each year, unless I or one of my family members has unexpected medical expenses, in which case I need to have access to enough of the trust principal to pay for reasonable and necessary medical expenses.”

    • E. 

      “I have a $1,000,000 asset from which I would like to provide an income of $50,000 per year for my nephew – assuming he submits to and passes random drug tests, and the rest, I want to go to my favorite charity.”

  • 5. 
    A donor with $1,000,000 in developable raw land with a basis of $100,000 plans to sell the land, invest in income producing securities, spend 8% of the remaining value each year for the rest of her life, and leave the rest to charity.  Which of the following is NOT a potential tax advantage of doing this through a Charitable Remainder Trust as compared with keeping the assets and giving to charity through her will?
    • A. 

      The donor can receive an immediate income tax deduction for the present value of the projected remainder interest that will go to charity at death with the CRT.

    • B. 

      No capital gains tax will be due at the sale of the land if the property is sold by the CRT

    • C. 

      The donor will not need to pay income taxes on any income earned beyond the 8% being taken annually to the donor.

    • D. 

      The donor will receive a charitable estate tax deduction for the value of any property that is transferred to the charity.

    • E. 

      Because the donor pays no capital gains tax, the entire $1,000,000 value can be invested to generate income rather than only the amount left over after paying taxes on the $900,000 of gain.

  • 6. 
    Abimelek has developable raw land with a basis of $100,000.  He sells the land for $1,000,000 and invests in income producing securities.  If the Abimelek pays capital gains tax at a combined rate of 20% (state plus federal), how much will be left to invest after paying all capital gains taxes?
    • A. 

      $900,000

    • B. 

      $1,000,000

    • C. 

      $800,000

    • D. 

      $820,000

    • E. 

      $860,000

  • 7. 
    Asher has developable raw land with a basis of $100,000.  He gives the land to a Charitable Remainder Unitrust paying him 8% of all trust assets per year for life.  The Charitable Remainder Trust sells the land for $1,000,000 and invests in income producing securities.  If the Asher pays capital gains tax at a combined rate of 20% (state plus federal), how much will be left to invest after paying all capital gains taxes?
    • A. 

      $900,000

    • B. 

      $1,000,000

    • C. 

      $800,000

    • D. 

      $820,000

    • E. 

      $860,000

  • 8. 
    Jael owns a historically important archeological artifact in the form of an ancient hammer and slightly used matching wooden peg that she expects to sell as a set to one of the top international museums for about $500,000.  She has no basis in the property and she would like to place it in a Charitable Remainder Trust before it sells.  However, it is likely that such a sale may take up to three years to complete because of the difficulties and delays involved in such transactions.  During this period of time, there will be no other assets in the trust, and the artifact will generate no income.  Which of the following would NOT likely be a reasonable planning approach?
    • A. 

      She can place the artifact in an 8% NICRUT. Before the artifact sells, the CRUT will not need to make payments because payments are limited to 8% of trust assets or net income, whichever is lower.

    • B. 

      She can place the artifact in an 8% NIMCRUT. Before the artifact sells, the CRUT will not need to make payments because payments are limited to 8% of trust assets or net income, whichever is lower. After the artifact sells, whenever trust income exceeds 8% these funds can be used to make-up the previous 8% payments that were not paid due to lack of income

    • C. 

      She can place the artifact in a FlipCRUT that changes from an 8% NICRUT to an 8% CRUT upon the sale of the artifact. Before the artifact sells, the CRUT will not need to make payments because payments are limited to 8% of trust assets or net income, whichever is lower. After the artifact sells, the trust will be required to pay 8% of net assets, even in years when income was lower than 8%

    • D. 

      She can place the artifact in an 8% CRUT. Before the artifact sells, the CRUT can borrow money against the artifact to make the annual payments. After the sale, the CRUT can use the proceeds to pay off the loan.

    • E. 

      All of the approaches are reasonable planning approaches for this asset.

  • 9. 
    In what circumstances will there be a difference in payments between an 8% Net Income Charitable Remainder Unitrust (NICRUT) and an 8% Net Income Makeup Charitable Remainder Unitrust (NIMCRUT) over the course of the life of the trust?
    • A. 

      If net income always exceeds 8% of trust assets

    • B. 

      If net income never exceeds 8% of trust assets

    • C. 

      If net income is 9% of trust assets in odd years and 7% of trust assets in even years

    • D. 

      If net income is always 7% of trust assets

    • E. 

      If net income is always 9% of trust assets

  • 10. 
    Which of the following is a potential advantage of a Charitable Gift Annuity over a Charitable Remainder Trust?
    • A. 

      Donor can receive rights to a fixed amount of annual income for life

    • B. 

      Donor can benefit a charity at his death, but receive a current income tax deduction

    • C. 

      Donor can transfer highly appreciated property and avoid paying capital gains tax at the sale of the property

    • D. 

      The donor will receive payments regardless of his or her life span or the returns on the original money invested so long as the charity does not go bankrupt

    • E. 

      Donor can receive income, some part of which may be tax free return of capital.

  • 11. 
    Which of the following is a NOT a potential advantage of a Charitable Remainder Trust over a typical Charitable Gift Annuity?
    • A. 

      The donor can choose an unlimited number of income beneficiaries

    • B. 

      The donor can receive rights to income for the life of the donor and the donor’s spouse

    • C. 

      The donor can retain the ability to change the charitable beneficiary

    • D. 

      The donor can choose income payments for a fixed number of years, rather than for life

    • E. 

      The donor can require that the income payments be made to a child, but will be withheld if the child drops out of school before obtaining a college degree

  • 12. 
    A donor transfers $100,000 to a Charitable Remainder Unitrust scheduled to last for 10 years.  It will pay equal shares to all 12 grandchildren of the donor for 10 years.  However, if one of the children drops out of school before completing a college degree, their share will be given to the other grandchildren (unless all 12 drop out).  The charity is projected to receive $10,000 when the trust terminates at the end of 10 years.  Why is this trust disqualified such that the donor will receive no income tax deduction for the transfer?
    • A. 

      This trust will violate the rule that there must be no greater than a 5% chance that the charity will receive no charitable gift at the termination of the trust

    • B. 

      This trust will violate the rules for Generation Skipping Tax because of the transfers to grandchildren, thus causing disqualification of the trust

    • C. 

      This trust will violate the “10% rule” where the present value of the projected amount going to charity must be at least 10% of the transfer

    • D. 

      This trust violates public policy by penalizing a beneficiary for his educational/career choices

    • E. 

      This trust will violate the trust distribution rules because, the income beneficiaries are not irrevocably determined at the beginning of the trust, but could change over time

  • 13. 
    A donor completes his charitable transfer when market returns and interest rates averaged 15%, after which market returns and interest rates averaged only 2%.  In which of the following circumstances is the donor MOST likely to stop receiving any payments during his life?
    • A. 

      The donor placed $100,000 in a CRUT paying 10% of all trust assets for life to the donor

    • B. 

      The donor placed $100,000 in a NICRUT paying 10% of all trust assets for life to the donor

    • C. 

      The donor placed $100,000 in a NIMCRUT paying 10% of all trust assets for life to the donor

    • D. 

      The donor placed $100,000 in a CRAT paying $10,000 of all trust assets for life to the donor

    • E. 

      The donor placed $100,000 in a CGA from Yale University paying $10,000 of all trust assets for life to the donor

  • 14. 
    Sheerah gives $100,000 of stock (she originally paid $95,000 for it) to her Charitable Remainder Unitrust. The trustee immediately sells the stock for $100,000 and invests half in corporate bonds that pay $2,000 of annual ordinary interest income and half in municipal bonds that pay $1,000 of annual tax exempt interest income.  At the end of the first year, Sheerah receives her annual payment from the unitrust.  What is the smallest of the following annual payments that will result in part of her payment being tax-free return of principal?
    • A. 

      $1

    • B. 

      $2,001

    • C. 

      $3,001

    • D. 

      $7,001

    • E. 

      $8,001

  • 15. 
    Salome gives $100,000 of stock (she originally paid $95,000 for it) to her Charitable Remainder Unitrust. The trustee immediately sells the stock for $100,000 and invests half in corporate bonds that pay $2,000 of annual ordinary interest income and half in municipal bonds that pay $1,000 of annual tax exempt interest income.  At the end of the first year, Salome receives her annual payment from the unitrust.  What is the smallest of the following annual payments that will result in part of her payment being tax-exempt income?
    • A. 

      $1

    • B. 

      $2,001

    • C. 

      $3,001

    • D. 

      $7,001

    • E. 

      $8,001

  • 16. 
    Serah gives $100,000 of stock (she originally paid $95,000 for it) to her Charitable Remainder Unitrust. The trustee immediately sells the stock for $100,000 and invests half in corporate bonds that pay $2,000 of annual ordinary interest income and half in municipal bonds that pay $1,000 of annual tax exempt interest income.  At the end of the first year, Serah receives her annual payment from the unitrust.  What is the smallest of the following annual payments that will result in part of her payment being capital gain income?
    • A. 

      $1

    • B. 

      $2,001

    • C. 

      $3,001

    • D. 

      $7,001

    • E. 

      $8,001

  • 17. 
    Many years ago, Drusilla purchased shares of a publicly traded company for $100,000 that today are worth $1,100,000.  She places these shares into her Charitable Remainder Annuity Trust that pays her $50,000 per year for 20 years.  Her trustee sells the shares and spends the proceeds to purchase a 30 year corporate bond with a face value of $1,100,000 paying exactly $50,000 per year in interest.  Over the course of twenty years, if the relevant capital gains tax rate was 20%, how much capital gains tax is paid on this initial transaction and the subsequent income payments?
    • A. 

      $0

    • B. 

      $8,000

    • C. 

      $16,000

    • D. 

      $160,000

    • E. 

      $200,000

  • 18. 
    Which of the following assets can be held by a charitable remainder trust and create no accompanying tax problems?
    • A. 

      A 5% share of a profitable dog-grooming business held as subchapter S corporation shares

    • B. 

      A 5% share of a profitable dog-grooming business held as a general partnership

    • C. 

      A 100% share of a profitable dog-grooming business held as a sole proprietorship

    • D. 

      A 5% share of a profitable dog-grooming business held as shares in a standard C-corporation

    • E. 

      A $150,000 building with a $50,000 mortgage rented to a dog grooming business for $1,000 per month.

  • 19. 
    Cozbi and Zimri, a married couple, transfer their $1,000,000 home with a $100,000 basis into a charitable remainder annuity trust paying them $50,000 at the end of each twelve month period as long as either one of them is alive.  The trustee borrows $100,000 against the home to make improvements to the home in preparation for sale.  Within three months of the establishment of the CRT, the house is sold for $1,200,000 and the $100,000 loan is paid off with the proceeds of the sale.  After receiving two $50,000 annual payments, Cozbi and Zimri are both stabbed to death by an assailant.  Assuming that the proceeds from the sale were held in a non-interest bearing savings account subsequent to the sale, how much money will be available for the charity at their death.
    • A. 

      $0

    • B. 

      $100,000

    • C. 

      $1,000,000

    • D. 

      $1,100,000

    • E. 

      $1,200,000

  • 20. 
    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!