CES Charitable Planning & Philanthropy 1 — Questions and Answers
Question 1: Under a Charitable Remainder Trust (CRT), after the income interest period ends, the remaining trust assets pass to:
- The grantor's estate
- The grantor's heirs
- A qualified charity (Correct answer)
- A successor trust
Correct answer: A qualified charity
In a CRT, the 'remainder' interest is irrevocably designated to pass to a qualified charity after the non-charitable income interest period ends.
Question 2: A Charitable Lead Trust (CLT) differs from a Charitable Remainder Trust (CRT) in that:
- The charity receives the income interest first, with the remainder passing to non-charitable beneficiaries (Correct answer)
- Non-charitable beneficiaries receive income first, with the remainder passing to charity
- Only public charities may receive distributions from a CLT
- A CLT must be revocable while a CRT must be irrevocable
Correct answer: The charity receives the income interest first, with the remainder passing to non-charitable beneficiaries
In a CLT, the 'lead' interest (income stream) goes to charity first, and the remainder passes to non-charitable beneficiaries such as family members.
Question 3: Which of the following best describes a Donor Advised Fund (DAF)?
- An irrevocable trust that pays income to a charity for a stated term
- A charitable giving account administered by a sponsoring organization where donors can recommend grants over time (Correct answer)
- A pooled investment vehicle exclusively available to private foundations
- A government-sponsored retirement account with embedded charitable giving features
Correct answer: A charitable giving account administered by a sponsoring organization where donors can recommend grants over time
A DAF is a charitable vehicle sponsored by a public charity; the donor makes an irrevocable contribution, receives an immediate deduction, and then recommends grants to qualifying charities over time.
Question 4: For a Charitable Remainder Annuity Trust (CRAT), the required minimum payout rate is:
- 3% of the initial fair market value of trust assets
- 5% of the initial fair market value of trust assets (Correct answer)
- 5% of the annually revalued fair market value of trust assets
- 10% of the initial fair market value of trust assets
Correct answer: 5% of the initial fair market value of trust assets
IRC Section 664 mandates that a CRAT must distribute an annuity of at least 5% (and no more than 50%) of the net fair market value of assets at the time of contribution.
Question 5: The primary distinction between a Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder Unitrust (CRUT) is:
- A CRAT pays a fixed dollar annuity; a CRUT pays a fixed percentage of annually revalued trust assets (Correct answer)
- A CRAT pays a fixed percentage of annually revalued assets; a CRUT pays a fixed dollar annuity
- A CRAT benefits public charities; a CRUT benefits private foundations
- A CRAT is revocable; a CRUT is irrevocable
Correct answer: A CRAT pays a fixed dollar annuity; a CRUT pays a fixed percentage of annually revalued trust assets
A CRAT distributes a fixed annuity determined at inception, while a CRUT distributes a fixed percentage of trust assets recalculated each year based on current fair market value.
Question 6: To qualify as a valid Charitable Remainder Trust, the present value of the remainder interest passing to charity must be at least:
- 5% of the initial net fair market value of assets transferred
- 10% of the initial net fair market value of assets transferred (Correct answer)
- 15% of the initial net fair market value of assets transferred
- 20% of the initial net fair market value of assets transferred
Correct answer: 10% of the initial net fair market value of assets transferred
Under IRC Section 664, the charitable remainder interest must equal at least 10% of the net fair market value of property transferred to the trust at the time of contribution.
Question 7: Under IRC Section 4942, private foundations must distribute for charitable purposes at least what percentage of their net investment assets each year?
- 3%
- 5% (Correct answer)
- 10%
- 15%
Correct answer: 5%
IRC Section 4942 imposes an excise tax on private foundations that fail to distribute at least 5% of the fair market value of their net investment assets annually for charitable purposes.
CES Charitable Planning & Philanthropy 1
Under a Charitable Remainder Trust (CRT), after the income interest period ends, the remaining trust assets pass to: