ExpertHard1 markMultiple Choice
CPA · Question 29 · Area 2: Financial Planning
A taxpayer contributes $50,000 to a Charitable Remainder Annuity Trust (CRAT). The trust pays the taxpayer an annuity for life, with the remainder going to charity. The present value of the remainder interest is calculated to be $4,000. Does this trust qualify as a CRAT?
A taxpayer contributes $50,000 to a Charitable Remainder Annuity Trust (CRAT). The trust pays the taxpayer an annuity for life, with the remainder going to charity. The present value of the remainder interest is calculated to be $4,000. Does this trust qualify as a CRAT?
Answer options:
A.
No, because the remainder interest is less than 10% of the contribution.
B.
Yes, as long as the annuity is at least 5%.
C.
Yes, because there is a charitable intent.
D.
No, because the contribution is too small.
How to approach this question
1. Identify CRAT Requirements: <br/> - Annuity 5% to 50%.<br/> - Remainder interest must be at least 10% of initial FMV.<br/> - Probability of exhaustion test.<br/>2. Check 10% Test: Contribution $50,000. Remainder $4,000.<br/>3. Calculation: $4,000 / $50,000 = 8%.<br/>4. Conclusion: 8% < 10%. Fails test.
Full Answer
A.No, because the remainder interest is less than 10% of the contribution.✓ Correct
A trust does not qualify as a CRAT unless the value of the charitable remainder interest is at least 10% of the initial net fair market value of the property placed in the trust. Here, 8% ($4k/$50k) is insufficient.
Common mistakes
Focusing only on the annuity payout rate.
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