1. The distributions from a CLT are similar to the distributions from a CRT where the charitable and non-charitable beneficiaries have switched places. True or False?
2. Neither CLTs nor CRTs can make payments for a fixed period of more than 20 years. True or 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). True or False?
4. CLTs and CRTs are both tax exempt entities. True or False?
5. On average, CLTs hold significantly more assets than a CRT. True or False?
6. There are more CRTs than CLTs and all CRTs combined hold more assets than all CLTs combined. True or 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. True or False?
8. Grantor CLTs often pay the remainder interest back to the donor, but Non-Grantor CLTs do not. True or 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. True or 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. True or 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. True or 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. True or 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 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 to 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 Annuity 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 transfers $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 ½ 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" (a.k.a. "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
Answers
1/ Answer: True. Explanation: Although many characteristics are different between the two kinds of trusts, the essential distribution difference is that in a CLT the charity is the current beneficiary and the non-charitable beneficiary is the remainder beneficiary whereas in the CRT the non-charitable beneficiary is the current beneficiary and the charity is the remainder beneficiary.
2/ Answer: False. Explanation: CRTs are limited to a maximum of 20 years for fixed period payments, but CLTs are not.
3/ Answer: False. Explanation: CRTs are bound by this rule, but CLTs are not.
4/ Answer: False. Explanation: CRTs are tax exempt. CLTs are not. Ongoing income taxes from income generated by a CLT must be paid either by the donor (grantor CLT) or the trust itself (non-grantor CLT).
5/ Answer: True. Explanation: In a 2007 IRS study, the average CLT had $2,930,990 in assets while the average CRT had $840,640 in assets.
6/ Answer: True. Explanation: Although CRTs are, on average, smaller than CLTs, there are far more CRTs. A 2007 IRS study showed 115,754 CRTs in existence and only 6,377 CLTs in existence. Consequently, all CRTs combined hold far more assets ($97.3 billion) than all CLTs combined ($18.7 billion).
7/ Answer: True. Explanation: This is likely because of the increased propensity to have family foundations (which are rarely cause-specific entities) as the charitable beneficiary for a CLT. Family foundations are much more common among the very wealthy as are CLTs.
8/ Answer: True. Explanation: The idea of a grantor CLT is that the grantor/donor keeps enough rights in the trust that the trust is treated for many tax purposes as if the donor still owned the property. One example of a right that will cause this treatment is where a donor keeps the right to get the remainder of the property at the end of the term of the CLT.
9/ Answer: True. Explanation: The idea of a grantor CLT is that the grantor/donor keeps enough rights in the trust that the trust is treated for many tax purposes as if the donor still owned the property. (One example of a right that will cause this treatment is where a donor keeps the right to get the remainder of the property at the end of the term of the CLT.) Because of the retention of these rights, any income earned by the Grantor CLT is taxed as if it were earned by the donor himself or herself. The Non-Grantor CLT is treated as a separate taxpayer. Because of this, the Non-Grantor CLT trust itself pays income taxes on any income earned by the trust.
10/ Answer: False. Explanation: When a donor creates a 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 Non-Grantor CLT. Instead, the Non-Grantor trust is treated as a separate taxpayer and it deducts each ongoing charitable transfer in the year in which the payment to charity is actually made.
11/ Answer: True. Explanation: The idea of a grantor CLT is that the grantor/donor keeps enough rights in the trust that the trust is treated for many tax purposes as if the donor still owned the property. This includes estate taxes, which treat the donor as if he still owns the property in the CLT.
12/ Answer: True. Explanation: Unrelated business taxable income in a Grantor CLT is treated like any other form of income and taxed to the donor. (The assets of the trust are still treated as the donor's assets for income tax purposes.) A non-grantor CLT with unrelated business taxable income cannot deduct the income if given to charity beyond the income deduction limits applied to regular taxpayers. A CRT with unrelated business taxable income will have all of that income taken by means of a 100% excise tax.
13/ Answer: A. Explanation: Only a grantor Charitable Lead Trust allows the donor to take an immediate charitable income tax deduction for the present value of 10 years of future gifting at $10,000 per year. The non-grantor Charitable Lead Trust allows no deduction (although the trust itself can deduct when the payments to charity are actually made). Signing a legally enforceable contract with the charity promising to deliver $10,000 each year for the next ten years is the same thing as a pledge to charity. Although the charity must record a charitable pledge as current asset, like an account receivable, there is no deduction to the donor until he actually makes the gift.
14/ Answer: B. Explanation: Only a Grantor CLAT will create a charitable deduction for the donor. This deduction will grow larger as the interest rate used to calculate the deduction moves lower. In essence, the deduction is equal to the amount we would have to set aside today that would be large enough to pay these future gifts, assuming the money grew at the §7520 rate. If the money is assumed to grow at a high rate, then we have to set aside less money at the beginning to meet the obligation of paying $10,000 per year for 10 years. If it is assumed the money won't grow much at all, then we have to set aside a larger amount at the beginning to pay $10,000 to the charity each year for 10 years.
15/ Answer: A. Explanation: The non-grantor CLT is considered a separate taxpayer. Chloe would receive no tax deduction for making the transfer to the non-grantor CLT. That creates no disadvantage in this case because Chloe is already over the limit for deducting charitable gifts anyway. However, the non-grantor CLT can deduct the payments made to charity from its earnings and it is not bound by the income limitations of human taxpayers (so long as the CLT isn't generating unrelated business taxable income). If the trust earns 5% each year, the trust can deduct all of the earnings when they are paid to the charity. Writing checks or using a Grantor CLT is not helpful, because the deductions would go to Chloe personally, and she cannot use them because she is already over the limit for deducting charitable gifts. Finally, CRTs do not allow the remainder to go to children, and require at least one non-charitable current beneficiary.
16/ Answer: A. Explanation: By transferring the fast growing assets to a non-grantor Charitable Lead Trust with a fixed annuity paid to charity and remainder to her children, she can pay a low gift tax based upon what the children would receive if the assets grew at 2%, but the children will actually receive much more because the assets will grow at 8%. The charity receives money while she is alive (either for her life or a fixed term), so she gets to see the impact of her gifts. Transferring assets to a grantor CLT is not as helpful because she will still be treated as the owner for estate tax purposes, and thus she will pay estate taxes on the entire amount that is eventually transferred to her children. Neither the CRT nor CGA meets her desires because the charity will likely not use the funds until after her death. Finally, holding the assets in her name provides no estate or gift tax benefits unlike the non-grantor CLT.
17/ Answer: C. Explanation: Gift taxes are paid based upon the present value of the expected remainder using the §7520 rate. Thus, Ada would pay gift taxes on $100,000 at the creation of the trust. The $8,000,000 amount actually transferred to the children is irrelevant for gift tax calculations. This $100,000 initial gift does not qualify for the annual present interest gift exclusion, because it is a future interest, not a present interest.
18/ Answer: B. Explanation: Gift taxes are paid based upon the present value of the expected remainder using the §7520 rate and, if the charitable payment is to be made for life, the standard life tables provided by the IRS. These tables may not be used if there is at least a 50 percent probability that the individual used as the measuring life will die within one year unless the person actually lives at least 18 months. Because Orpah was the spouse of a remainder beneficiary, and she lived for 18 months, there is no prohibition against using her life as a measuring life. Thus, the estimated remainder value of $1 is valid and Naomi will pay gift taxes on the $1 transfer even though her son ultimately received $10,200,000.
19/ Answer: A. Explanation: CRTs are not qualified to hold subchapter S-corporation shares. Grantor CLTs are qualified because they are treated as if the donor/grantor still owns all of the assets. Non-Grantor CLTs are not normally qualified to hold S-corporation stock but can make a special ESBT election to become qualified, although this is rarely done because it eliminates the ability of the trust to take future charitable deductions.
20/ Answer: B. Explanation: The CLT "Defective Grantor Trust" (a.k.a. "Super Trust") attempts to produce a trust that is a Grantor CLT for income tax purposes and a Non-Grantor CLT for estate tax purposes. The goal is to create a CLT where the donor can deduct the present value of the charitable gift from his or her income taxes, as in a Grantor CLT, but not be treated as the owner of the assets for estate tax purposes. There are existing private letter rulings suggesting that this arrangement may work, but no definitive authority on the question.