Accredited Wealth Management Advisor Practice Exam

Which charitable transfer technique should Marvin utilize to maximize his income tax deduction while benefiting a charity?

1. Charitable remainder trust

2. Pooled income fund

3. Qualified conservation easement

4. Charitable lead trust

The correct answer is: Charitable lead trust

To maximize his income tax deduction while also benefiting a charity, Marvin should consider utilizing a charitable lead trust. This technique allows him to transfer assets into a trust that provides income to the charity for a specified period. At the end of this term, the remaining assets in the trust pass to non-charitable beneficiaries, such as Marvin’s heirs. One key advantage of a charitable lead trust is that it can significantly reduce estate and gift taxes. The present value of the income stream provided to the charity can be deducted from Marvin's taxable income, creating a substantial income tax deduction. This can be particularly beneficial if the assets in the trust are expected to appreciate in value, as Marvin can provide for his heirs while still leaving a meaningful gift to the charity. In contrast, other techniques like a charitable remainder trust primarily offer tax deductions based on the value of the remainder interest rather than an income stream to the charity, which may not optimize the immediate tax benefits as effectively for individuals focused on deduction maximization. Pooled income funds and qualified conservation easements also serve different purposes and may not provide the same level of tax benefits when compared to the charitable lead trust.