CTFA Charitable Planning and Philanthropy 1 — Questions and Answers
Question 1: What is the primary characteristic of a Charitable Remainder Trust (CRT)?
- It distributes all trust income directly to charity upon formation
- It provides income payments to non-charitable beneficiaries for a term, with the remainder passing to charity (Correct answer)
- It transfers assets to charity only upon the grantor's death without providing interim income
- It requires equal distribution between charitable and non-charitable beneficiaries
Correct answer: It provides income payments to non-charitable beneficiaries for a term, with the remainder passing to charity
A CRT pays income to one or more non-charitable beneficiaries for a specified term, after which the remaining trust assets pass to a qualified charity.
Question 2: Which type of Charitable Remainder Trust pays a fixed percentage of the trust's fair market value, revalued annually?
- Charitable Remainder Annuity Trust (CRAT)
- Net Income Makeup Unitrust (NIMCRUT)
- Charitable Remainder Unitrust (CRUT) (Correct answer)
- Charitable Lead Annuity Trust (CLAT)
Correct answer: Charitable Remainder Unitrust (CRUT)
A CRUT pays a fixed percentage (minimum 5%) of the trust's net fair market value as revalued each year, so payment amounts fluctuate with investment performance.
Question 3: What is the minimum payout rate required for a qualified Charitable Remainder Trust under IRC Section 664?
- 3% of the initial or annual fair market value, depending on trust type
- 5% of either the initial net FMV (CRAT) or the annually revalued FMV (CRUT) (Correct answer)
- 7% to ensure sufficient benefit to income beneficiaries
- 10% to satisfy the IRS charitable intent requirement
Correct answer: 5% of either the initial net FMV (CRAT) or the annually revalued FMV (CRUT)
IRC Section 664 requires CRTs to distribute at least 5% of the applicable trust value annually — the initial net FMV for CRATs and the annually revalued FMV for CRUTs.
Question 4: How does a Charitable Lead Trust (CLT) differ structurally from a Charitable Remainder Trust (CRT)?
- In a CLT, the donor receives income first and charity receives the remainder
- In a CLT, charity receives income payments first and the remainder passes to heirs or back to the donor (Correct answer)
- A CLT does not generate a charitable deduction while a CRT always does
- A CLT must be established during the grantor's lifetime while a CRT is exclusively testamentary
Correct answer: In a CLT, charity receives income payments first and the remainder passes to heirs or back to the donor
A CLT is the structural inverse of a CRT — the charitable interest is the 'lead' income stream paid first to charity, with the remainder ultimately passing to non-charitable beneficiaries.
Question 5: Which charitable giving vehicle allows donors to make an irrevocable contribution to a sponsoring organization and recommend grants to charities over time?
- Donor Advised Fund (DAF) (Correct answer)
- Private Operating Foundation
- Pooled Income Fund
- Charitable Lead Unitrust
Correct answer: Donor Advised Fund (DAF)
A DAF allows donors to make an irrevocable, tax-deductible contribution to a sponsoring organization and then recommend (not legally direct) grants to qualified charities over time.
Question 6: Under IRC Section 170, which requirement must an organization meet to be a qualified recipient of tax-deductible charitable contributions?
- The organization must be incorporated as a nonprofit corporation under state law
- The organization must be exempt under IRC Section 501(c)(3) with no private inurement to shareholders (Correct answer)
- The organization must distribute 100% of contributions received within the same tax year
- The organization must have at least 50% of its board composed of unrelated public representatives
Correct answer: The organization must be exempt under IRC Section 501(c)(3) with no private inurement to shareholders
IRC Section 170 requires donee organizations to be exempt under Section 501(c)(3), organized and operated exclusively for charitable purposes, with no private inurement to any individual.
Question 7: After initial funding, which type of Charitable Remainder Trust permits additional contributions?
- Charitable Remainder Annuity Trust (CRAT) only
- Both CRAT and CRUT equally permit subsequent contributions
- Neither CRAT nor CRUT allows additional contributions after formation
- Charitable Remainder Unitrust (CRUT) only (Correct answer)
Correct answer: Charitable Remainder Unitrust (CRUT) only
Only a CRUT may receive additional contributions after initial funding; a CRAT is prohibited from accepting additional assets because the annuity amount is fixed at the time of creation.
CTFA Charitable Planning and Philanthropy 1
What is the primary characteristic of a Charitable Remainder Trust (CRT)?