AEP Charitable Planning & Philanthropy 2 — Questions and Answers
Question 1: Which of the following best describes a 'flip CRUT'?
- A CRUT that converts to a CRAT upon the death of the income beneficiary
- A net income CRUT that flips to a standard CRUT upon a triggering event such as asset sale (Correct answer)
- A CRUT that distributes income to two separate charities simultaneously
- A CRUT funded with non-income-producing assets that immediately converts on funding
Correct answer: A net income CRUT that flips to a standard CRUT upon a triggering event such as asset sale
A flip CRUT begins as a net income CRUT (NICRUT) and converts to a standard CRUT upon a defined triggering event (e.g., sale of illiquid assets), at which point it pays the fixed unitrust percentage.
Question 2: Under the self-dealing rules of IRC Section 4941, which transaction between a private foundation and a disqualified person is PROHIBITED?
- Granting scholarships to unrelated students
- The foundation paying a disqualified person's salary for reasonable compensation
- A disqualified person selling property to the foundation at fair market value (Correct answer)
- Making grants to public charities selected by the disqualified person
Correct answer: A disqualified person selling property to the foundation at fair market value
IRC §4941 prohibits virtually all sales or exchanges of property between a private foundation and a disqualified person, even at fair market value, because the rule is absolute rather than based on fairness.
Question 3: A private foundation must distribute at least what percentage of its net investment assets annually to avoid the excise tax on failure to distribute income under IRC Section 4942?
- 3%
- 5% (Correct answer)
- 7%
- 10%
Correct answer: 5%
Private foundations must make qualifying distributions of at least 5% of their net investment assets annually to avoid the excise tax imposed under IRC §4942.
Question 4: A Charitable Gift Annuity (CGA) differs from a Charitable Remainder Annuity Trust (CRAT) primarily because:
- A CGA is a direct contract between the donor and the charity, not a separate trust (Correct answer)
- A CGA provides a larger charitable deduction than a CRAT for the same gift amount
- A CGA assets are segregated from the charity's general assets
- A CGA requires a minimum transfer of $100,000
Correct answer: A CGA is a direct contract between the donor and the charity, not a separate trust
A CGA is a simple bilateral contract between the donor and the charity where the charity promises annuity payments from its general assets; it does not create a separate trust entity like a CRAT.
Question 5: When a donor contributes appreciated long-term capital gain property to a public charity, the AGI deduction limit is:
- 20% of AGI
- 30% of AGI (Correct answer)
- 50% of AGI
- 60% of AGI
Correct answer: 30% of AGI
Contributions of long-term capital gain property (such as appreciated stock) to public charities are limited to 30% of AGI, with a five-year carryforward for any excess.
Question 6: Which estate planning tool allows a donor to make a large irrevocable gift to a pooled fund managed by a charity while retaining the right to income for life, with the remainder passing to the charity?
- Charitable Lead Trust
- Donor-Advised Fund
- Pooled Income Fund (Correct answer)
- Supporting Organization
Correct answer: Pooled Income Fund
A Pooled Income Fund (PIF) pools contributions from multiple donors, each retaining a pro-rata income interest based on investment earnings, with the remainder passing to the sponsoring charity at the donor's death.
Question 7: A supporting organization under IRC Section 509(a)(3) differs from a private foundation because it:
- Must distribute at least 10% of assets annually
- Is treated as a public charity due to its close operational relationship with supported public charities (Correct answer)
- Is exempt from all self-dealing restrictions
- Can accept anonymous contributions without disclosure
Correct answer: Is treated as a public charity due to its close operational relationship with supported public charities
A §509(a)(3) supporting organization qualifies as a public charity (not a private foundation) because it maintains a specified relationship with one or more publicly supported charities, avoiding most private foundation excise taxes.
AEP Charitable Planning & Philanthropy 2
Which of the following best describes a 'flip CRUT'?