Paralegal Advanced Competency Exam (PACE) Practice Exam

What is a Charitable Remainder Trust?

1. A trust that distributes funds during the settlor's lifetime

2. A trust that benefits the settlor and family before charity

3. A trust established only for personal benefit

4. A trust that avoids all tax implications

The correct answer is: A trust that benefits the settlor and family before charity

A Charitable Remainder Trust (CRT) is designed to provide income to the settlor or other beneficiaries for a specified period, after which the remaining assets are distributed to a designated charity. The correct answer highlights that this trust allows the settlor and their family to benefit from the trust's assets before any charitable distributions occur. In a CRT, the settlor typically receives income during their lifetime or for a fixed term, allowing them to enjoy financial benefits before the remaining assets ultimately go to the charitable organization. This structured distribution aligns with the purpose of CRTs, which is to allow the settlor to generate income while also providing a charitable contribution in the long term. The other choices do not accurately reflect the nature of a Charitable Remainder Trust. For example, a trust that distributes funds during the settlor's lifetime (choice A) does not capture the charitable component central to a CRT. The option describing a trust that benefits the settlor and family before charity (choice B) accurately captures the essence of how CRTs function. A trust established only for personal benefit (choice C) ignores the charitable aspect entirely, which is key to CRTs. Lastly, a trust that avoids all tax implications (choice D) is misleading,