1. The tax code provides a special exception for charitable gifts of remainder interests in homes and farms. This is an exception from what general rule?
a) Charitable gifts of partial interests, where the donor retains a portion of the property rights, may not normally be deducted.
b) Charitable gifts of future interests must be valued based upon the current §7520 interest rate
c) Valuation of gifts of future interests in houses must include a factor for the estimated depreciation of the property
d) The gift of a home or farm to a charitable organization is not normally deductible
e) The rental value of property given for the use of a charitable organization may not be deducted
2. A charitable gift of a partial interest may NOT be deducted if it is
a) A remainder interest in a home
b) An "undivided portion" of a property interest
c) A Charitable Remainder Trust
d) The direct gift of a farm where the donor retains the mineral rights
e) A qualified conservation easement
3. Which of the following is a charitable gift that generates an income tax charitable deduction?
a) I give a charity the right to use my home for one month
b) I sign and deliver a deed giving a remainder interest in 100 acres of farmland to a charity which will transfer full ownership of the property at my death
c) I leave my farm to a charity in my will
d) I sign an irrevocable trust agreement (not a Charitable Remainder Trust) giving the cash equivalent of 100 acres of farmland to a charity effective at my death
e) I give to charity a remainder interest in only the mineral rights to my farmland
4. Which of the following arrangements would not be considered a deductible remainder interest in a farm?
a) Donor gifts by deed to charity the right to own the farm following donor's death
b) Donor gifts by deed to charity the right to own the farm after 20 years
c) Donor gifts by deed to charity the right to own the farm following the death of the donor and the donor's spouse
d) Donor gifts by deed to charity the right to own the farm following the death of the donor's 4 year old grandson Bob.
e) Donor gifts by deed to charity the right to use the farm until the donor's death
5. In what ways is a remainder interest in real estate similar to a will?
a) A remainder is irrevocable
b) A remainder creates an immediate property right in the named recipient
c) A remainder can be immediately sold by the holder to another person
d) A remainder can be recorded by a deed
e) A remainder can be used to transfer real property to a charity at death
6. After recording a deed giving a remainder interest in my home, effective at my death, to a charity, I learn that my child would like to live in the home after my death. How do I alter the remainder interest gift so that my child can live in the home after my death?
a) Add a codicil to my last will and testament directing that the home must not be sold unless agreed to by my child
b) Record a life estate deed in favor of my child giving the right to the child to live in the home for the child's life
c) Transfer my property ownership interest into a trust with instructions to the independent trustee to permit the child to live in the home after my death
d) Revoke the remainder interest by recording a revocation in the recorder of deeds office
e) Remainder interests are not revocable, so the gift cannot be altered
7. Which of the following would qualify as farmland for purposes of making a deductible remainder interest charitable gift?
a) 20 acres of tillable land that the donor currently uses as an airport runway for private planes
b) A 100 acre industrial park housing manufacturing and shipping companies
c) A 100 acre dairy farm purchased by the donor 13 months ago that has been out of use for two years, but which can be placed back into agricultural production at any time
d) A 10 acre segment from a 1,000 acre cotton farm where the 10 acres consists of land covered by an electric power line right-of-way, none of which can be used to raise crops or livestock
e) A 10 acre segment consisting of pasture land and a dairy barn leased to a corporation that uses it to graze and milk cattle, where the 10-acre segment is part of a 1,000 acre farm.
8. Which of the following remainder interests in a farm would not be deductible if given to a charity?
a) A remainder interest giving a 10 acre segment of pastureland taken from a 300 acre cattle ranch
b) A remainder interest giving a right to use the property for 20 years following the death of the donor
c) A remainder interest where, following the death of the donor, the charity will own a 20% undivided interest in the farm as a tenant in common with the donor's children
d) A remainder interest in 10 acres of a solid rock shelf (without any dirt or vegetation) which has been used as a feedlot to raise hogs for several years
e) A remainder interest in an operating farm where, after the death of the donor, the donor's children will receive the house, the barns, and all timber land and the charity will receive only 5 acres of pasture land
9. Mary Donor owns a 5,000 acre cotton farm in West Texas. Sarah Smith, an unrelated person, inherited the mineral rights to the farm many years ago. Both Mary and Sarah are interested in benefiting Texas Tech University. Which of the following would not generate a deductible charitable gift?
a) Mary gives a remainder interest in the farm, without the mineral rights, to Texas Tech University
b) Sarah gives a remainder interest in the mineral rights to Texas Tech University
c) Mary purchases Sarah's mineral rights and gives a remainder interest in the farm, including mineral rights, to Texas Tech University
d) Sarah purchases Mary's farm and gives a remainder interest in the farm, including mineral rights, to Texas Tech University
e) Mary gives a remainder interest that will transfer the farm, without mineral rights, 50% to Texas Tech University and 50% to her son Joshua, to be held as tenants in common.
10. Calculating the deduction for a remainder interest in farmland following the donor's life estate would involve all of the following except
a) Finding the applicable §7520 interest rate
b) Identifying the donor's age
c) Locating the remainder valuation percentage or ratio from IRS publication 1457
d) Estimating the useful life of the farmland itself
e) Estimating the current fair market value of the farmland
11. You hear the announcement that the §7520 rates are lower than they have ever been in history. The impact of this on the deduction value of a remainder interest charitable gift of a home is
a) Negative as the deduction will now be lower due to the cheap availability of money
b) Positive in that it decreases the mortgage costs for refinancing a home
c) Positive as the value of charitable deductions for remainder interests varies inversely with interest rates (they move in opposite directions)
d) Positive as the estimated life expectancy tables for donors will decrease, thus increasing the value of the charitable deduction
e) Positive as the value of charitable deductions for remainder interests is positively correlated with interest rates (they move in the same direction)
12. The charitable deduction for a remainder interest gift in farmland (with retained life interest) made by a 59 year old donor when valued at the 1.0% §7520 rate of January 2013, as compared with the 11.6% rate of May 89 would increase by
a) About 2%
b) About 8-9%
c) About 11. 6%
d) About 100%
e) About 400%
13. What are some potential advantages of leaving farmland to charity by a remainder interest instead of leaving farmland to charity in a will?
a) The donor can receive a large income tax deduction when giving a remainder interest, but not when giving by will
b) The donor can receive a large estate tax deduction when giving a remainder interest, but not when giving by will
c) Prior to death, the donor can change which charity will receive the farmland after giving a remainder interest gift
d) Deductible gifts of remainder interests can be completed by means of a simple contract agreement
e) The donor can continue to use the farmland during his or her life after giving a remainder interest to charity
14. Which of the following is NOT a reason why a donor might choose to give separate remainder interests in portions of farmland over several years rather than making a single gift of a remainder interest in the entire farm immediately?
a) Gifting in portions each year allows for larger deductions to the extent that the farmland has increased in value each year
b) Gifting in portions may allow the donor to avoid exceeding the income limit maximum thresholds for charitable giving in a particular year
c) Gifting in portions could allow the donor to gift only to the point where remaining income is taxed at a lower marginal tax rate
d) Gifting in portions could avoid the risk of losing the carryover deduction at death if a carryover deduction would otherwise be created due to exceeding the income limitations on charitable giving
e) Gifting in portions allows the donor to take the charitable income tax deduction earlier than making a single gift of the remainder interest in the entire farm
15. Why might a child benefit from a wealthy parent who gives a remainder interest in a farm to a charity and uses the value of the tax benefit to pay for life insurance in an Irrevocable Life Insurance Trust (ILIT) instead of simply leaving a gift to the charity in the will?
a) Life insurance from an ILIT passes to the children estate tax free, but the farm would not
b) The family farm will pass to the child estate tax free
c) Life insurance will always appreciate faster than farmland
d) With a remainder interest, but not a will, the farm will pass to the charity estate tax free
e) Farmland will always appreciate faster than life insurance
16. Which of the following would NOT qualify for a deductible charitable gift of a remainder interest in a personal residence?
a) A boat with bathroom, cooking, and sleeping facilities where the donor resides two weeks per year
b) A second home on a lake where the donor live four weeks per year
c) A vacation home in the mountains owned by the donor and used only by the donor's children six weeks per year
d) A condominium owned by the donor that is her primary residence
e) A co-op apartment home owned by the donor in New York City where the donor resides every other weekend
17. A 59 year old donor is considering giving the remainder interest (and retaining the life estate) in $200,000 of unimproved farmland or in her $200,000 personal residence to her favorite charity. Which of the following is true?
a) The remainder interest gift in the farmland will generate a greater deduction because it has fewer depreciable elements
b) The remainder interest gift in the farmland will generate a greater deduction because it has more depreciable elements
c) The remainder interest gift in the farmland will generate a deduction equal to the remainder interest gift in the house
d) The remainder interest gift in the house will generate a greater deduction because it has fewer depreciable elements
e) The remainder interest gift in the house will generate a greater deduction because it has more depreciable elements
18. In calculating the useful life of a personal residence for purposes of estimating depreciation, which of the following is probably NOT a reasonable approach?
a) Use a qualified appraiser to estimate the useful life of the house
b) Use a qualified structural engineer to estimate the useful life of the house
c) Use the IRS example of 45 year life span for a personal residence if the home is new
d) Use the IRS depreciation tables for residential rental property indicating a useful life of 27.5 years
e) Use examples of antebellum homes to show the residential property can last over two centuries if properly maintained and assume a similar future for the personal residence at issue
19. A 59 year old donor is giving a life estate in his $100,000 of farmland to a charity while retaining the remainder interest which he plans to distribute to his children (his life is the measuring life). Assuming a §7520 interest rate of 2.4%, IRS Table S reflects the following numbers for age 59: Annuity = 16.4213, Life Estate = .39411, Remainder = .60589. What is the correct charitable deduction for this gift?
a) $0
b) $39,411
c) $60,589
d) $100,000
e) $160,000
20. Which of the following would not be an available option for the donor and the nonprofit if she gives a remainder interest in her home to a charitable organization and later decides to leave the home?
a) Rent the property
b) Sell the life estate to an investor or property manager
c) Agree with the charity to a joint sale and divide the proceeds
d) Give the life estate to the charity in exchange for a gift annuity
e) Complete a bargain sale where the charity sells the remainder interest back to the donor for 50% of its current value, thereby allowing the donor to sell the property with a fee simple title.
21. Which of the following is NOT a common law requirement that a donor who gives a remainder interest in a home, but retains the life estate, is required to follow?
a) The donor ("life tenant") must maintain the home
b) The donor ("life tenant") must insure the home
c) The donor ("life tenant") must pay taxes the home
d) The donor ("life tenant") must improve the home
e) The donor ("life tenant") must have leaks in the roof of the home repaired
22. Which of the following is an expense that the donor could deduct a portion of as a charitable gift after making a transfer of a remainder interest in a home to a charitable organization?
a) Payments for fire insurance on the home
b) Payments for local property taxes on the home
c) Payments for fixing a leak in the roof
d) Payments for building an additional bedroom onto the home
e) Payments to insure the home against wind damage
Answers
1/ Answer: A. Explanation: Charitable gifts of remainder interests in homes and farms may be deducted, even though partial interest gifts are generally not deductible. However, these gifts must still be valued using the §7520 rate and accounting for depreciation in houses. Direct gifts of homes and farms are deductible. The transfer of a remainder interest does not relate to deducting rental value for the use of property.
2/ Answer: D. Explanation: Giving a farm outright but retaining the mineral rights is a classic example of a retained interest gift and may not be deducted. The other choices are all exceptions to the general rule against deducting partial interest charitable gifts.
3/ Answer: B. Explanation: There is no deduction for giving a charity rent free use of property owned by the donor. Leaving the farm to a charity in a will does not generate an income tax deduction, although it does generate an estate tax deduction. Usually remainder interests are deductible only if transferred by deed not by trust (and in the rare exceptions to this, the charity must retain the right to take the property itself if desired). Mineral rights do not qualify as farmland because they are not used to raise agricultural products or livestock, and so a remainder interest is not deductible. A remainder interest in farmland conveyed by a deed is deductible.
4/ Answer: E. Explanation: The right to use property is not a deductible charitable gift, even if given in the form of a life estate. Remainder interest gifts can transfer the property after a period of years or after the death of any person or persons. Of course, the value of the remainder interest gift will change depending upon the period of time or life expectancy of the person or persons used.
5/ Answer: E. Explanation: Transferring a remainder interest in real estate is accomplished by recording a deed. At the point of transfer, the recipient immediately owns an irrevocable property interest, namely the right to receive the property at the death of the named life tenant. This property interest can be immediately sold, and the new purchaser will then have the right to the property at the death of the named person. A will, however, can be changed at any point, and thus creates no property right. However, both can be used to transfer real property to a charity at death.
6/ Answer: E. Explanation: Remainder interests cannot be revoked. All of the proposed changes will be ineffective as the transfer of the remainder interest has already taken place.
7/ Answer: E. Explanation: A farm is any land and improvements used (even by a tenant) to raise crops or livestock. The fact that a land could potentially be used to raise crops or livestock is not sufficient. It must actually be used for that purpose to qualify as a farm. Therefore property used as a runway or industrial park does not qualify, nor does land that is out of use or could not be used to raise crops or livestock.
8/ Answer: B. Explanation: The charity must become the owner of land (or an undivided share of the land) at the conclusion of the life estate. It is not enough for the charity to have a right to use the property.
9/ Answer: B. Explanation: A remainder interest in mineral rights does not qualify as a farm and would thus not be deductible. However, if the donor gives a remainder interest in a farm, it can include the mineral rights. If the donor doesn't own the mineral rights, the remainder gift of the farm is still deductible. A remainder interest where an undivided share of the farm goes to the charity is also deductible.
10/ Answer: D. Explanation: Estimating the useful life of the farmland itself is not necessary as land is not considered depreciable (i.e., it doesn't wear out). If the farm included improvements or attachments such as a barn or corral, those items would need to be depreciated, but not the farmland itself. All other components are necessary to estimate the value of a remainder interest in farmland.
11/ Answer: C. Explanation: As interest rates decrease, the value of a remainder interest increases, thus increasing the deduction for a gift of a remainder in a home or farm to a charitable organization. All other statements are false. The cheap availability of money (lower interest rates) increases the charitable deduction. The mortgage refinancing costs do not impact the deduction value and interest rates are unconnected with the IRS life expectancy tables.
12/ Answer: E. Explanation: The dollar value of the gift would change from $15,684 (per $100,000 of farmland fair market value) to $80,479 (per $100,000 of farmland fair market value), an increase of 413%
13/ Answer: A. Explanation: Only a remainder interest gift allows the donor to take an immediate income tax deduction. This is because the remainder interest, once transferred, is irrevocable and cannot be changed. Thus, the donor may not change which charity will receive the farmland after a transfer of a remainder interest is made. A gift to charity by either a will or remainder interest can generate an estate tax deduction. Deductible gifts of remainder interests must generally be completed by deed, rather than by a contract or trust (an exception has arisen where local law allowed the charity to take the property directly after death, however generally the transfer must be by deed). Although the donor can continue to use the farmland during his or her life after giving a remainder interest, this is not an advantage over a will as the same is true for a gift in a will.
14/ Answer: E. Explanation: Gifting in portions delays the taking of deductions, although this may at times be beneficial for various reasons such as increasing value of the underlying gifted asset and avoiding deduction carryover due to income limitations on charitable deductions.
15/ Answer: A. Explanation: The advantage is that life insurance from an ILIT passes to the children estate tax free. The other statements are false.
16/ Answer: C. Explanation: In order to qualify, the home must be a personal residence of the donor, although it need not be the primary residence of the donor. Therefore the vacation home used only by the donor's children would not qualify.
17/ Answer: A. Explanation: Depreciable elements reduce the size of the deduction because the estimated value of what is left after the death of the donor is lower. Depreciable elements are things that wear out and are consequently of less value over time. Land is not depreciable. It is assumed not to wear out. However the building components of a personal residence (aside from their salvage value) are depreciable because they can wear out. Thus, a remainder interest in the $100,000 residence is calculated as being worth less, because the depreciable elements are assumed to wear out.
18/ Answer: E. Explanation: It is not reasonable to assume that the home should be depreciated on a 200+ year time horizon. The other four approaches all fall within the realm of a potentially reasonable approach.
19/ Answer: A. Explanation: There is no deduction for giving a life estate to a charitable organization while retaining the remainder interest. This is a partial interest gift, which is generally not deductible, and it does not come under the exception for remainder interest gift in farmland because it is a gift of a life estate, not a remainder interest.
20/ Answer: E. Explanation: A charity may not sell a property interest for 50% of its current value to a donor (although a donor could do so for a charity) as this may be a form of "private inurement" meaning that the charity is being used to benefit a particular donor or manager rather than using its resources to accomplish its charitable purposes. All other options are available.
21/ Answer: D. Explanation: Life tenants are not required to improve the property, only to keep it in good condition. All other items are required under the MIT duties of Maintain, Insure, and Pay Taxes.
22/ Answer: D. Explanation: The donor can deduct the remainder value of major improvements as additional gifts. Only the bedroom addition would qualify as a major improvement. The other expenditures are required of the life tenant by common law under the MIT requirements of Maintenance, Insurance, and Taxes