GS 849 Practice Exam Flashcards
A qualified appraisal is required for a charitable gift of nonpublicly traded stock, if the deduction is greater than which of the following?
A) $3,000
B) $5,000
C) $7,500
D) $10,000
D) $10,000
Upon his mother’s death, John receives a bequest of stock valued at $50,000. The basis at her death was $10,000. John sells the stock immediately. What is his gain?
A) $10,000
B) $50,000
C) $40,000
D) $0
D) $0
The correct answer is D. The stock receives stepped-up basis in passing to him through his mother’s estate. The basis steps-up to the fair market value, and so there is no gain when John sells it.
Meg has the following four assets: $100,000 IRA; $100,000 piece of land, with basis of $5,000; $100,000 face amount insurance policy; stock worth $100,000, with basis of $75,000. She has three heirs whom she wants to receive $100,000 each, and she wants $100,000 to go her house of worship. Which asset, from an overall tax perspective, would be best to give to charity at death?
A) IRA
B) Appreciated land
C) Appreciated stock
D) Insurance death benefit
A) IRA
The correct answer is A. The IRA is not taxed when it goes directly to charity at death, but the money inside would be taxed to her heirs when it comes out. Hence, the IRA is better going to charity. The other assets are either received income tax-free by the heirs (insurance), or the heirs receive stepped-up basis (land and stock). With stepped-up basis, the heirs can sell those assets at that stepped-up value without income tax.
Which gift(s) is (are) deductible when given to a public charity?
I. Gift of a partial interest
II. Gift of an undivided partial interest
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. The general rule is that gifts of a partial interest are not deductible. However, a gift of an undivided partial interest is deductible. For example, a gift of land with the owner retaining mineral rights is not deductible. But a gift of a one-half interest in the property, including all the rights to that half, would be deductible.
Assume that a long-term capital gain asset, with basis of $10,000 and fair market value of $1,000,000, and which generates $100,000 of UBTI a year, has been donated to a CRT whose beneficiary is a public charity. What are the tax consequences?
A) The donor receives a deduction for $1 million, reduced by the $100,000 of UBTI.
B) The donor receives a deduction for basis only.
C) The trust pays a 100% tax on the $100,000 of UBTI.
D) The trust is disqualified.
C) The trust pays a 100% tax on the $100,000 of UBTI.
The correct answer is C. The donor should get a fair market value deduction, but the trust will pay tax on the UBTI at a tax rate of 100%. UBTI does not, however, disqualify the trust. Years ago, the rule was even more harsh, the trust disqualified if even one dollar of UBTI was earned.
Your donor wants to make a gift now and receive income later. What tool(s) would be worthy of consideration?
I. Flip CRUT
II. CRAT
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. A Flip CRUT can flip from paying no income to paying income upon a triggering event beyond the control of the donor, such as the sale of an asset or the donor’s turning a particular age. A CRAT, by contrast, starts paying out a percentage of the original gift value in the first year. There is no provision for a deferral.
Leonard sets up a CRUT with a 10% payout. He funded the CRUT with $1 million, and in the first year, he received $100,000. Now, five years later, he is receiving only $60,000. He is very unhappy. What did he not understand?
I. A CRUT’s payout is based on the value of the assets in the trust, as re-valued annually.
II. By setting a high initial payout, he took the risk that trust assets would decline, as money is paid out in excess of the growth and income earned.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. CRUTs pay a percentage based on the asset value, as revalued each year. Thus, if a donor sets a payout rate that exceeds the actual growth inside the trust, then the assets will be depleted, and the income will fall.
A donor who is considering a gift annuity wants to give money now, and receive an income starting at retirement. The donor is not sure when she will retire, but wants to trigger the income at that date, whenever it might be. Which kind of gift annuity is most appropriate for her?
A) Immediate
B) Flexible
C) Deferred
D) Stepped
B) Flexible
The correct answer is B. The flexible annuity allows the donor to decide later when the income will start. The longer she waits, the higher the income, but she decides when the income is to start.
With a charitable annuity, which statement(s) below is (are) true?
I. The basis returns to the donor and spreads out over his/her life expectancy.
II. If the donor outlives his/her life expectancy, then all income subsequent to that point is taxed as ordinary income.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true. If the donor outlives his/her life expectancy, all basis will have been returned (as well as any capital gain in the original gifted asset), and subsequent income will all be ordinary income.
For a significant gift to succeed, which of these must be present?
I. Donor’s goals must be addressed
II. The gift must be aligned with the charity’s mission, priorities, and capacity to perform
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are essential, particularly when the gift is restricted by the donor for a particular purpose. The donor’s intentions and dream are certainly important, but, as “The Case of Jill Donor” shows, it is equally important that the gift support the mission, priorities, and capacities of the charity. Thus, it is important that advisors and fundraisers get on the same page with working with a high-capacity donor like Jill.
A planner trained in the method used by the Fithians is working with a donor, age 57, with net worth of $5 million. She is single, with a grown daughter. She is closely involved with an environmental group to which she is a loyal donor. She is considering a major or planned gift to that organization. The gift may be a significant percentage of her net worth. Having understood the donor’s goals, where would such a planner start the planning process?
A) Discussing gift options via various tools
B) Assessing the adequacy of the donor’s ability to cover her personal cash flow needs throughout her life expectancy
C) Providing an appropriate legacy for the heir
D) Determining the most appropriate asset from which a gift could be made
B) Assessing the adequacy of the donor’s ability to cover her personal cash flow needs throughout her life expectancy
The correct answer is B. A legacy advisor trained in a Fithians-based method will be guided by a “pyramid” of needs and wants. At the base is financial adequacy for the donor herself. Will she have enough for herself? That is the first concern of an advisor with respect to the client. Next comes family legacy. How much should she designate for the heirs? And then, from what remains, how best can she give to meet her charitable goals? Sometimes, nonprofit gift planners call this “philanthropy by the subtraction method” or “philanthropy from the leftovers.” But it is important to realize that advisors are committed first and foremost to a client’s well-being. They cannot endorse a plan that might ultimately leave the client in financial difficulties. Hence, when a significant gift is being considered–a gift that will impact the donor’s finances and the heir’s inheritance–the advisor will and should run drills like those used by the Fithians.
Jack is 45, is married to Samantha, and has two children in college. He has been asked for a major gift by the hospital in which his mother recently had life-saving surgery. Working with a CPA who does personal financial planning, Jack discovers that, after paying for his children’s college education and continuing to work and save until he turns 65, his assets are projected to dwindle in retirement until they become exhausted at age 73. Under various alternative assumptions, his assets might last until he is 77 or exhaust as early as when he is 69. The CPA recommends that Jack reduce consumption, increase savings, and postpone any significant gift. The fundraiser whose gift request is rejected says, “CPAs are the dark side. They are always killing my gifts!” Which statement(s) below is (are) correct?
I. Jack’s CPA has provided appropriate counsel as the client’s financial advisor
II. The CPA’s process works against an appropriate gift
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The CPA is aligned with the client’s financial well-being. In computing financial adequacy to do all the client wishes, the CPA finds a shortage of funds. It is up to the client to determine how to address that shortage or gap, but in counseling the client to take care of himself or herself first, the CPA is doing the job expected of a client’s financial advisor. The process may seem “anti-gift,” but it can work the other way, too. The CPA may discover that the client’s personal goals are covered by current and future resources, and that the client’s goals for heirs are also covered. In that case, with a client who is planning for abundance, the CPA can compute “charitable capacity.” From a gift-planning perspective, the client is likely be conservative regarding gifts, unless the client is reassured by his/her financial advisors that he/she is in a position to make a big gift without jeopardizing financial security and family legacy.
Among the reasons that advisors and fundraiser collide in “The Case of Jill Donor” is (are) which of these?
I. The fundraiser does not talk with the advisors.
II. The fundraiser works for the charity, not the client.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The fundraiser and advisors usually do not connect, and this will make it difficult to come an agreement as to appropriate strategies. The mere fact that the fundraiser works for a charity does not mean that he/she must or will collide with advisors. The donor knows that the fundraiser is a fundraiser. The question is whether there is good communication among those, including the fundraiser, who are making recommendations.
With respect to a C-Corporation making charitable gifts, which statement(s) is (are) correct? Assume that the CARES Act does not apply.
I. Gifts are deductible up to 10% of corporate earnings.
II. Unused deduction may be carried forward up to 5 more years.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are correct. Generally, the corporate limitations on deductions for charitable contributions is 10%. If the gift is made in calendar year 2020 and to a qualified charity, Sections 2104 and 2105 of the CARES Act make temporary changes to the tax law to encourage the donation of charitable contributions. Specifically, during 2020, the limitations on deductions for charitable contributions increase for corporations, with the 10% limitation increasing to 25% of taxable income.
With respect to CRTs, all of these statements are true, EXCEPT:
A) All CRTS must have at least a 10% remainder interest as calculated at inception using IRS actuarial factors.
B) CRTs cannot last for more than 20 years.
C) A CRUT can accept additional contributions.
D) A CRAT may not accept new contributions.
B) CRTs cannot last for more than 20 years.
The correct answer is B. A CRT can be set up for life, lives, a term of up to 20 years, or a combination of a life or lives and a term up to 20 years.
For a client who wishes to make a gift now and receive an income in ten years, all of the following tools would work, except
A) a CRAT
B) a Flip-CRUT
C) a Deferred Gift Annuity
D) a Net Income with Make-Up CRUT
A) a CRAT
The correct answer is A. All except the CRAT would work for a client or donor wanting a gift now and income later. With a CRAT, income starts within the year the gift is made. With a Flip CRUT, the income starts when a triggering event beyond the control of the donor occurs–for example, the sale of an asset in the trust, or the donor’s reaching a given age. As the name implies, with a Deferred Gift Annuity, the income starts later, at a preordained date. (With a Flexible Gift Annuity, the donor can choose a starting date in the future, leaving open what that date will be.)
Assume that a CRUT has a payout rate of 7%. Also assume that the trust earns 5% a year, every year, for the life of the trust. Which statement or statements below is (are) correct?
I. The trust income to the donor will decline.
II. The trust may eventually exhaust.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The income to donor will decline. This being a CRUT, the payout, in this case 7%, is based on a declining trust balance. The trust will never quite exhaust. Even if it has only, say, $1,000 in it at some future date, the 7% would be taken against that, and there would still be some money left in the trust.
Which of the statements below is (are) correct?
I. A DAF must pay out at least 5% a year.
II. A DAF complex (as offered by a particular sponsor) must have an aggregate payout of 5% of the assets in its DAFs.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
D) Neither I nor II
The correct answer is D. There are no DAF payout requirements for either the individual DAF or the aggregated DAFs under a sponsor.
Which statement(s) below is (are) correct?
I. A private nonoperating foundation must pay out at least 5% of its corpus annually.
II. Included in the required payout for private nonoperating foundations are reasonable and necessary administration expenses.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are correct. Although grants, salaries, rent, consulting fees, etc., are included in the five percent calculation, investment management fees are not.
With respect to a CLT, which statement(s) below is (are) true?
I. The present value of the charitable interest must be no less than 10% of assets donated to the trust, as computed using IRS-provided factors at the trust’s inception.
II. The charitable payout may not be less than 5% per year.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
D) Neither I nor II
The correct answer is D. Neither is correct. A CLT has neither a required payout to charity nor any required minimum actuarial amount going to charity. By contrast, a CRT does have a minimum charitable remainder interest of 10% computed with IRS factors at trust inception, and it must pay non-charitable income beneficiaries not less than 5%.
With respect to a conduit foundation established by a living donor, all of the following are correct, EXCEPT:
A) It must distribute all income to charity annually
B) It must distribute all contributions to the trust to charity annually
C) There may be no undistributed income or corpus
D) It does not qualify for an income tax deduction
D) It does not qualify for an income tax deduction
The correct answer is D. All the other statements are true. Conduit foundations are sometimes called “pass-through foundations.”
For a gift to a private foundation of closely held stock, which statement(s) below is (are) true?
I. The value of the gift is measured by basis, or by fair market value if less.
II. The deduction is limited to 20% of AGI, with a five-year carry forward.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true, and the planning point is important. Clients often have business interests, land, and other appreciated property. They may want a private foundation. They need to know how limited the tax benefits of a private foundation are for any gift other than cash or “qualified public stock” (which is essentially publicly traded stock). When in this situation, the planner can shift the conversation to a direct gift to a public charity, to a donor-advised fund, to a supporting organization, or to a private operating foundation. All of these have their nuances, but may allow the donor to get a deduction for fair market value and get the higher public charity deduction limits. But a gift of anything other than cash or public stock to a private foundation is generally not a good idea, unless, perhaps, the asset has no appreciation in it. Even then, the 20% of AGI limitation comes into play. Further complicating matters are the foundation rules, which render it very difficult for a private foundation to make use of privately held business interests. What should be recommended to the client? It’s best to get a qualified attorney or CPA involved. But a gift of anything other than cash or public stock in a private foundation can almost always be ruled out quickly.
When a client has a closely held business that he or she gives to a CRT whose remainder beneficiary is a public charity, all of the following statements are true, EXCEPT:
A) The donor gets a deduction for the remainder interest based on the fair market value of the asset donated.
B) The donor can take a deduction for the remainder interest up to 30% of AGI for a gift of appreciated closely held stock, if the CRT’s beneficiary is a public charity.
C) The sale of the appreciated stock inside the trust to a buyer (assuming no pre-arranged sale) will avoid capital gain to the donor when the stock is sold inside the trust.
D) The sale of assets from inside the company itself to a buyer will result in no taxable income to the company, since it is inside the CRT.
D) The sale of assets from inside the company itself to a buyer will result in no taxable income to the company, since it is inside the CRT.
The correct answer is D. This question draws attention to a potential tax trap. The company itself is a taxable entity, even though it is inside a CRT. The sale of the company will result in capital gain inside the trust, if the stock is appreciated. But if the buyer wants to buy not the stock but the assets owned in the company, then the company itself will pay a tax on any gain. This could surprise the owner(s) of the company.
Which statement(s) below is (are) true, based on all you have learned in this course?
I. The ideal bequest donor is older, richer, married, and has no children or grandchildren.
II. The ideal bequest donor is an excellent candidate for multi-generational wealth planning.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. CAP encourages advisors and gift planners to collaborate. It is always worth considering, however, why gift planners and advisors often do not collaborate. One reason may be that their “ideal prospects” for gift-planning differ. The nonprofit gift planner sees (via data compiled by Dr. Russell James) that most planned gifts are bequests, that most bequests are set up by donors approaching death, and that most come in after age 80; they also see that the likelihood of getting a bequest goes up when the donor, even if married, has no heirs. The wealth advisor working with an 80-year-old without heirs may have hard time maintaining assets under management after the client’s death. A DAF advised by a nephew or niece, say, is not necessarily a strong sale. An insurance advisor is unlikely to see a client age 80, approaching death, with no heirs as a good prospect. So, the ideal prospects for advisors and traditional planned gift officers are different. This may be why we tend to go our separate ways in practice. Ideally, however, fundraisers taking CAP see how vast are the opportunities to plan (with the help of advisors) gifts for prospects with, say, a closely held business who are planning to exit (like Jill Donor) and for families with heirs who want to use philanthropy to pass on more than the money.
A client has $10,000 to give, wants a current deduction, and would like to set up a deferred giving account. The client plans to add about $3,000 a year for several more years. The client does not need income back, and would like to benefit several nonprofits. Which of these tools is a good recommendation?
A) DAF
B) PIF
C) Private non-operating foundation
D) Private operating foundation
A) DAF
The correct answer is A. This client is an excellent prospect for a DAF. The client has far too little money to justify creating a private foundation. An operating foundation would also be too large a commitment, and generally does the charitable work itself rather than make grants. A Pooled Income Fund does pay the donor an income back, and is not a grant-making tool.
Jim, age 80, donates $1 million to a CRAT. He receives an annual 7% payout. Trust assets grow at 5%. Which statement or statements below is (are) true?
I. Jim’s payout will be a level $70,000 a year.
II. The charitable beneficiary will receive $1 million at his death.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The CRAT always makes a level payout, regardless of how the assets in the trust rise or fall. In this case, because the trust earns less than the payout rate, the trust assets will decline, and the charity will receive less than the full million.
Miranda, age 70, donates $1 million to a CRUT. She gets an annual 10% payout. The trust earns 5% each year. Which statement or statements below is (are) true?
I. Miranda will receive $100,000 in year 1.
II. Miranda will receive less and less income as the years go by.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true because this is a CRUT. The payout is calculated in year one, based on the assets in the trust–$1 million. Since the trust earns less than the payout, the trust assets will gradually dwindle. As a result, she will receive less and less each year. For gift planners, this is an important point to communicate to donors who may wish to get the highest payout possible. With a CRUT, that high initial payout may lead to a lower payout later, unless the assets in the trust grow fast enough to offset the payout. Also, dwindling trust assets mean the charity will receive less at trust termination.
Meg inputs CRAT data into a charitable remainder trust illustration program. She learns from the printout that the trust has failed “the 5% probability test.” What does this mean?
A) The trust has a greater than 5% chance of exhausting over its term.
B) The trust is calculated to have a less than 5% remainder interest.
C) The trust has less than a 5% chance of paying the original gift amount to the charity.
D) The trust payout is less than the required 5%.
A) The trust has a greater than 5% chance of exhausting over its term.
The correct answer is A. “The five percent probability test,” as that phrase is used, refers to the IRS rule that the trust have a less than 5% chance (computed using actuarial factors) of running dry during its term. There is also, by the way, a rule that a CRT payout be not less than 5%.
Each of the following charitable tools can create deferred income to donor, except
A) a flexible gift annuity
B) a deferred gift annuity
C) a CRAT
D) a Flip CRUT
C) a CRAT
The correct answer is C. A CRAT must always pay out an income in year one. It cannot be used for deferred income. A flexible gift annuity allows the donor to make a gift now, and decide later when the income will begin. A deferred gift annuity allows a gift now, with income starting at a later time that is determined when the gift is made. A Flip CRUT is often used when deferred income is desired. A gift is made to the CRUT, often of an appreciated asset. The trust initially operates as a Net Income Unitrust, paying income only. Since there may be no income from the appreciated asset, if such an asset has been given, no income is paid out. Then, when the asset is sold, or upon some other qualifying triggering event that is specified in the trust document, the trust “flips” to being a Standard CRUT, paying out a predetermined percentage of the corpus each year.
Julie, age 77, is single. She wants to have a CRT that will pay her an income for life and, after her death continue making payments to her 45-year-old daughter. Which statement(s) below is (are) true?
I. A CRT may not name anyone other than the donor or the donor’s spouse as income beneficiary.
II. A CRT with a non-spousal beneficiary will cause transfer tax consequences.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. Yes, the donor can name a non-spousal successor income beneficiary, but doing so amounts to making a transfer to that person of the actuarial benefit of the income received. If the trust is set up so that this actuarial benefit can be computed at the inception of the trust, the benefit will be treated as a gift subject to gift tax. If the trust is set up so that the value of the income interest is not computable until death, then it would be considered a transfer subject to estate tax. Either way, the donor should recognize that there are potentially adverse transfer tax consequences to having a non-spousal successor income beneficiary.
With respect to charitable gift annuity payout rates, which statement or statements below is (are) true?
I. Binding rates are set by The American Council on Gift Annuities (ACGA)
II. Rates by the ACGA are calculated to provide an actuarial expected remainder interest to charity of 50% of the original gift.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. Charities generally follow the rates set by The American Council on Gift Annuities (ACGA), but they are not required to do so. In fact, having the rates be required might lead to charges of price-fixing. The rates set by ACGA are calculated to produce a remainder to charity of 50% of the original gift based on actuarial assumptions. In recent years, ACGA has added a second provision: that the rate produce a remainder interest whose present value is not less than 20% of the initial gift.
Steve wants to name his brother Mike as the trustee of a CRT which will provide income to Steve, with the remainder going to the Salvation Army. Which statement or statements below is (are) true of Mike’s responsibilities?
I. Mike has a fiduciary responsibility to manage the trust to benefit his brother, Steve.
II. Mike has a fiduciary responsibility to manage the trust to benefit Salvation Army.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both statements are true. This is important in counseling Steve and Mike. They may naively think that the trustee has a responsibility only to the income beneficiary. In fact, the trustee has the difficult job of balancing responsibilities to two parties (income beneficiary and remainder beneficiary) whose interests may not coincide completely. For example, Mike may be very conservative and want the trust assets to equal the payout, say, 5%, while taking little risk. The charity may wish the trust assets to grow at least equal to inflation after the trust payout. Such considerations may suggest that the best trustee will be a bank or other professional third party with experience managing complex trusts.
Each of these is a tax-exempt trust, except
A) a CLT
B) a Standard CRUT
C) a CRAT
D) a Flip CRUT
A) a CLT
The correct answer is A. All CRTS are tax-exempt trusts. CLTs are not exempt. With a CLT, the trust is taxable (it pays its own tax), or, if it is a grantor CLT, then taxable events in the trust flow back to the grantor.
With a nongrantor CLT, which of these statements is (are) true?
I. The grantor of the trust gets an income tax deduction for the present value of payments going to charity, as computed by IRS-provided actuarial factors.
II. The trust may be written to make payments of either a straight amount (sum certain) each payment period based on the original gift, or it may be written to pay out a variable amount determined by a fixed percentage applied to the trust assets as they rise and fall.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. The second statement is true: a CLT can be set up as a CLAT with a straight, level dollar amount payout, or it can be a CLUT whose payout is determined by the trust corpus times a payout percentage, with the dollar payout rising and falling as trust assets rise and fall. The first statement is false. The donor must know that he or she with a nongrantor CLT will not get an income tax deduction. The nongrantor CLT will provide transfer tax relief, but will not provide income tax benefits.
For which of these vehicles does a) the donor get an income tax deduction for the present value of payments made from the vehicle to the charity, and b) the donor pays income tax on all income earned inside the trust over its term?
A) Grantor CLT
B) Non-grantor CLT
C) CRUT
D) CRAT
A) Grantor CLT
The correct answer is A. A Grantor CLT is taxed to the grantor, meaning that the grantor gets a partial income tax deduction going in, but also pays income tax on all income inside the trust over its term.
Which statement or statements below is (are) true of a Grantor CLT?
I. A Grantor CLT is an entity that pays its own income tax.
II. A Grantor CLT is allowed an income tax deduction for payments made to charity.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
D) Neither I nor II
The correct answer is D. Neither statement is true of the Grantor CLT. With the Grantor CLT, the income tax deduction is taken by the donor for the present value of future payments to the charity. The donor is then taxed on all income earned inside the trust.
With respect to CLTs, which statement below is true?
A) An interest-bearing note between an inter vivos CLT and the donor is considered an act of self-dealing under the foundation rules that apply to CLTs.
B) A CLT that reverts to the grantor at the end of its term is taxed as a Non-Grantor CLT.
C) Under no circumstances may a CLT pay its charitable income interest into a Donor-Advised Fund.
D) A nongrantor CLAT provides an income tax deduction when funded.
A) An interest-bearing note between an inter vivos CLT and the donor is considered an act of self-dealing under the foundation rules that apply to CLTs.
The correct answer is A. It is true that an interest-bearing note between a CLT and the donor is considered an act of self-dealing under the foundation rules that apply to CLTs. (A limited exception, per the article by Brunner and Leibell, may be possible for a testamentary CLT.) The other statements are false. A CLT reverting to grantor is deemed a grantor trust. It may be possible for a CLT to pay to a DAF, if they are not deemed to be under any common control. (Care should be taken to engage qualified counsel to opine on these arrangements.) A non-grantor trust does not allow the donor an income tax deduction going in. The grantor trust does.
Which statement below is correct, with respect to CLTs?
A) The CLT must have a remainder interest, which is calculated using actuarial factors provided by the IRS when the trust is set up, of not less than 10%.
B) The maximum length of a CLT measured by a term of years may not exceed 20.
C) Charitable payments from a CLT in a given year may not exceed 50% of trust assets.
D) The term of a CLT may be for a fixed number of years or for the life or lives of specific living individuals.
D) The term of a CLT may be for a fixed number of years or for the life or lives of specific living individuals.
The correct answer is D. The CLT can be measured by any term of years (up to the term allowed under the rule against perpetuities). The CLT can also be measured by a life or lives in being. There is no minimum nor maximum payout to charity. There is no minimum or maximum remainder interest.
Which statement(s) below is (are) true of a qualified CLT?
I. The trust may be revocable.
II. The trust may be used to diversify assets without tax consequences.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
D) Neither I nor II
The correct answer is D. Neither is true. A qualified CLT (that is, a CLT qualified to count as a CLT for tax purposes) is irrevocable, but unlike a CRT, it is not used to sell assets and diversify assets in a tax-favored way. The CLT, unlike the CRT, is either taxed itself (in the non-grantor format) or passes tax on the sale of appreciated assets back to the grantor (in the grantor format).
A donor would like to make a gift to be used to provide ongoing funding for a nonprofit. But the donor does not want the charity to have direct control of the money. Rather, the donor wants the money held outside the charity, but for the benefit of that charity. All of these would be appropriate tools to consider, except
A) a CLT
B) a PIF
C) a supporting organization
D) a designated fund at a community foundation
B) a PIF
The correct answer is B. A pooled income fund is held by the charity, with income going back to the donor. The other tools would maintain the corpus outside the charity, with the charity’s getting the benefit of the money via a stream of payments or grants. With a CLT, the charity could get some or all of these payments. With a supporting organization, the charity and the donor, donor’s heirs, or other designated persons jointly manage the foundation for the benefit of the supported charity. (Typically, with a supporting organization, the balance of control rests with the organization supported, while the supporting organization remains a separate entity.) With a designated fund at a community foundation, the principal amount is held at the community foundation in a fund for the benefit of the charity. If the charity fails to perform or goes out of existence, then the designated fund by its terms may then be used to support other charities with a similar purpose.
Which statement(s) below regarding private foundations is (are) true?
I. The private non-operating foundation makes grants to charities that perform the frontline charitable work.
II. The private operating foundation performs the charitable work itself, rather than making grants to others to do it.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both statements are true. The private non-operating foundation is the one most people have in mind when they say “private foundation” or “family foundation.” It is a grant-making entity. A private operating foundation is typically set up by one person or a family, and the foundation actually performs the work - for example running a museum, providing a home for orphans, working with battered women, or whatever the work might be.
A private foundation is overseen by which of the following?
I. The IRS
II. Secretary of State
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. The IRS has oversight, as does the Secretary of State. The Attorney General may also be involved.
You are working with a donor who wants to avail herself of the favorable deduction limits for gifts to a public charity. Which of these entities is (are) treated for these purposes as a public charity?
I. Donor-Advised Fund
II. Supporting Organization
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are treated as public charities for the purpose of the income tax deduction rules. Along with a direct gift to a public charity (e.g., a school, or a religious or civic organization), another option would be a gift to a private operating foundation. Often donors want to get as close to having a private foundation as they can, without falling under the less favorable income tax rules for private foundations. In these cases, the advisor may suggest exploring a DAF, a supporting organization, or a private operating foundation.
Your client or donor is considering giving closely held stock to a private foundation. Which statement or statements correctly state the tax consequences?
I. The Client gets a deduction only up to basis (or fair market value, if less), and limited to 20% of AGI with a five-year carryforward.
II. The client will owe very heavy excise taxes on this transaction because of the foundation rule prohibiting excess business holdings, unless the business interest is appropriately disposed of in a timely fashion.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true. As a CAP, you are not expected to be an expert in the nuances of tax, but you are very often the point of first contact for a donor or client considering gifts to a foundation. Certain proposed gifts to a private foundation will almost never work. This question flags a very common situation. “Family business does not go into family foundation” is an easy rule of thumb to remember. The only kind of stock or business interest that works well with a private foundation is publicly traded stock, or, as it is officially called, “qualified appreciated stock.” A donor might get private stock into a foundation, subject to the lower deduction limits and getting only a deduction for basis (or FMV, if lower), but even then, the transaction will fall under the foundation rules, one of which prohibits excess business holdings. That rule has an exception for stock that is appropriately sold (within five years), but by this point the CAP should be talking to qualified counsel. With the advice of counsel, almost never will this transfer of a private business into the client’s private foundation be deemed the best available option. Almost always, the donor wishing to give appreciated closely held interests will, in the end, choose a charitable vehicle that is treated as a public charity. The options to consider might include a direct gift to a public charity, a CRT with a public charity as beneficiary, a donor-advised fund, a supporting organization, or a private operating foundation.
With regard to community foundations, which statement or statements below is (are) correct?
I. Many, if not most, community foundations get the bulk of their gifts from advisor referrals.
II. The most rapidly growing vehicle for community foundations is the unrestricted endowment.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. Yes, most community foundations rely on advisor referrals, including money coming in from estates, for the bulk of their new assets. But the fastest-growing tool at community foundations today is the DAF. Before DAFs were popular, community foundations often got the bulk of their gifts from estates; these gifts were often unrestricted, and went into the community foundation’s endowment for distribution.
A donor wishes to give a paid-up $50,000 life insurance policy to a public charity. The policy has a replacement cost of $25,000, cash value of $22,000, and adjusted basis of $20,000. What is the income tax deduction?
A) $50,000
B) $20,000
C) $25,000
D) $22,000
B) $20,000
The correct answer is B. For a paid-up policy, the deduction is equal to the lesser of the replacement cost or adjusted basis.
A donor has a life policy in premium-paying status. The face amount is $50,000; adjusted basis is $20,000; interpolated terminal reserve is $21,000; cash value is $25,000. If the policy is given to a public charity, what is the deduction?
A) $50,000
B) $20,000
C) $22,000
D) $21,000
B) $20,000
The correct answer is B. The gift value for a policy in premium-paying mode is the lesser of the interpolated terminal reserve (cash value + unearned premiums – loans) or the donor’s adjusted basis.
For a gift of an in-force life insurance policy to a public charity, what is the AGI limit?
A) 20%
B) 30%
C) 50%
D) 100%
C) 50%
The correct answer is C. A policy is considered noncapital gain, ordinary income property, and is subject to a 50% of AGI limitation.
Generally, how is basis in a life insurance policy computed?
A) Basis is equal to cash value
B) Basis is equal to premiums paid
C) Basis is equal to interpolated terminal reserve
D) Basis is equal to premiums paid minus dividends, if any, received in cash
D) Basis is equal to premiums paid minus dividends, if any, received in cash
The correct answer is D. Essentially, basis is what the client paid minus what client has already received in cash by way of dividends, if any.
A gift of a cash value life insurance policy with a loan against it can have which of these adverse consequences?
I. It will be treated as a bargain sale.
II. It may be treated as a private benefit transaction, and the entire deduction may be eliminated.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true. The moral is that any loan should be paid back before the policy is gifted to the charity.
The XYZ Community Foundation of High Tech City, CA, was formed 20 years ago. Originally, their primary donors were Microsoft Millionaires. Now, they serve donors from Google, Facebook, and Apple, most of whom are under the age of 35. Which statement or statements below is (are) true?
I. The XYZ CF is most likely a Donor-Focused CF, in the terminology of Bryan Clontz.
II. The primary product or service of the foundation is most likely grants directed by the staff and board from unrestricted endowment.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The first is true: this is a Donor-Focused foundation that sees itself as serving living donors well, by using, most likely, donor-advised funds. A CF that makes grants at its own discretion from endowed, unrestricted funds (generally old money from dead donors) is what Bryan Clontz calls a “Grant-Focused CF.”
An S Corporation makes a gift to a public charity. Who and/or what may take the deduction?
I. The S Corporation itself
II. Shareholders
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. The deduction is not taken at the entity level; it flows through to the shareholders, who can take the deduction subject to the AGI limits otherwise applicable to them.
With respect to charitable gifts of S Corporation stock, which statement(s) below is (correct?
I. If given to a CRT, the S election will be revoked.
II. If given to a public charity, the S election will be revoked.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The S election is revoked when the stock is given to a CRT, but not when the stock is given to a public charity.
Liam gives to charity tangible personal property whose basis is $500,000. The fair market value is $400,000, as determined by a qualified appraiser in a qualified appraisal. Which statement(s) below is (are) correct?
I. If the charity simply sells Bart’s gift upon receipt, then his deduction is for $500,000.
II. If the charity uses Bart’s gift for a use related to the charity’s exempt purpose, then the deduction is for $500,000.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
D) Neither I nor II
The correct answer is D. In this case, fair market value is actually less than basis. So, the donor gets the lesser of basis ($500,000) or fair market value ($400,000) as a deduction, if the gift is not put to a related use. Likewise, if the charity sells the gift, the donor gets a deduction for basis only or for fair market value, if this is less than basis. Since fair market value is $400,000 and basis is $500,000, the donor gets a deduction for the lesser amount.
Laura purchased land for $400,000 in cash several years ago. The fair market value is now $800,000. The land is near a hospital that would like to purchase it. Laura sells the land to the hospital for $500,000. What is her deduction?
A) $300,000
B) $500,000
C) $400,000
D) $800,000
A) $300,000
The correct answer is A. This is a bargain sale. The deductible amount is what the charity gets ($800,000 of property) minus what the donor receives ($500,000).
In which situation below is there a “red flag” that could or should prevent the gift from going forward?
A) The donor wants to gift unencumbered raw land to a Flip-CRUT.
B) The donor wants to gift closely held C Corporation shares to a DAF.
C) The donor wants to donate his low basis, high-value commercial real estate to a private foundation.
D) The donor wants to donate her unencumbered vacation home to her university.
C) The donor wants to donate his low basis, high-value commercial real estate to a private foundation.
The correct answer is C. A gift of anything other than publicly traded stock to a private foundation will provide only a deduction for basis, and that deduction is limited to 20% of AGI. Other complications arise under the foundation rules designed to prevent a private foundation from holding a privately held business. The other gifts would work.
A client has four assets of equal value. She needs to sell one to get money for herself. She is also willing to give one to charity. Considering only the tax benefits, which asset would make the best gift, compared to selling it?
A) Short-term bonds, with basis equal to the value
B) Appreciated publicly traded securities, with basis equal to half the value
C) An unemcumbered apartment building that has been depreciated down to zero basis
D) A nonqualified, single-premium annuity, with basis equal to half the value
C) An unemcumbered apartment building that has been depreciated down to zero basis
The correct answer is C.
The short-term bonds can be used by the donor without having any taxable gain to her. Keeping them to use for current purposes makes sense. After tax, she will net 100 cents on the dollar.
Public securities, if sold by her, will generate a capital gain for the difference between the value at which they are sold and the basis, and will be taxed, perhaps at the highest Federal rate of 20%. She will net about 90% after tax.
The apartment building has zero basis, so if she sells it herself, she will pay capital gain of as much as 20% on the whole amount, and thus “net” only 80% of the proceeds after tax.
Ordinary income property, like a single-premium annuity, makes a poor choice of gift asset. The donor will, essentially, get a deduction only for the basis. If cashed in, the annuity will produce gain that will be taxed to the donor at ordinary income rates, which can near 40%. There may also be penalty taxes and surrender charges.
All in all, she should probably use the short-term bonds for current spending. She should not use the single-premium deferred annuity as a gift asset during her lifetime. And she should consider using the apartment as a gift.
This example simplifies the conversation concerning the tax issues. In an actual case, of course, we would also want to consider the convenience of giving one asset rather than another, and the marketing costs and appraisals that may be needed. The apartment makes the most tax sense, but it is also the gift that will require the most work to make it happen.
With respect to giving S Corporation appreciated interests to a DAF, which statement(s) below is (are) true?
I. There is no way to eliminate tax payable by the DAF on the flow-through income and on gain upon sale.
II. The tax paid by the DAF can be minimized, if the DAF sponsor is set up as a trust rather than as a corporation.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true. There is an old saying, “Make a law; make a business.” There are now providers of DAFs who specifically target gifts of S-Corporation stock. If such stock is given to a charity that is established as a corporation, the “shrinkage” due to tax paid by the charity upon sale can be 35% of the value of the stock. Likewise, any flow-through income is taxed at a high corporate rate. But if a DAF is under a charity that has been established as a trust, then the rates paid are much lower. Also, the DAF gets a deduction for payments made to charities. The point to remember for practical work with clients is that a direct gift to charity or to a DAF established under a corporate form can result in shrinkage up to 35% of the gain upon sale. Using a DAF set up under a trust can reduce that tax. And using a DAF, in any case, can be more efficient than a direct gift of the stock to charity because the DAF can get an offsetting deduction for gifts it makes to the charity.
While all this may seem “technical,” the points are worth reflecting upon by both nonprofit gift planners and advisors. If the charity is willing to “detour” the gift via a DAF, then the dollars received by the charity may be greater. The “detour” via the DAF also lets the charity outsource the hard work and the liability of accepting difficult-to-value assets like S-Corporation stock. The charity also avoids the hassle and expense of calculating the taxes due. And the charity can avoid the slow-motion process of convening the gift acceptance committee and making a decision. Often, donors contemplating a sale of a closely held business do not have a lot of time as the deal comes together. A DAF company that specializes in such transactions may be able to move faster. From an advisor’s point of view, it is easier to get paid on assets under management via a DAF than in a direct gift to charity. Will this emerge, then, as a focus for collaboration among CAPs? The case studies from Bryan Clontz are meant to highlight this potential opportunity.
For how many years may a donor carry forward unused charitable income tax deductions for a conservation easement?
A) 1 year
B) 5 years
C) 10 years
D) 15 years
D) 15 years
The correct answer is D. Generally, taxpayers can carry forward unused charitable deductions for only five years, but for conservation easements, the carryforward is fifteen years.
Tessa has a piece of property near her house of worship. The property was purchased years ago for $100,000. It is now worth $400,000. The house of worship wants to purchase the land to use as a parking lot. They offer $200,000. Tessa accepts. Which statement or statements below is (are) correct?
I. Tessa has made a tax-deductible gift of $200,000.
II. Tessa will have a reportable capital gain of $150,000.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are correct. She gave the property at half-price. It was worth $400,000. She got only $200,000. So the other $200,000 of value was the gift. But she did receive $200,000 herself. She had total basis of $100,000. Half that basis is allocated to the half given. Half is allocated to the part sold. So half of $100,000 basis is $50,000. And $200,000 received – $50,000 allocated basis is $150,000 of capital gain.
Years ago, Tina gave $100,000 of stock that had a basis of $25,000 using a charitable tool that produced income. For years, she has received a level income back that is part ordinary income, part tax-free, and part capital gain. Now, at age 86, she calls to say her income from the tool is now all ordinary income. What tool does Tina have?
A) CGA
B) CRUT
C) CRAT
D) NICRUT
A) CGA
The correct answer is A. Charitable Gift Annuity. For these, the donor gets basis and capital gain backspread out evenly over the donor’s actuarial lifetime. Once the donor reaches his/her life expectancy, the basis and capital gain have all been paid back out. Thus, all future income is ordinary income.
Each of these is considered a public charity, except
A) a Private Operating Foundation
B) a Donor-Advised Fund
C) a Supporting Organization
D) an Independent Foundation
D) an Independent Foundation
The correct answer is D. “Independent Foundation” is another term for “private foundation.” A private foundation is a private, not a public, charity. A donor-advised fund is a tool of a sponsor, and the sponsor is considered a public charity. Likewise, a private operating foundation, even if funded by a single funder, is considered a public charity. All this matters if the client has appreciated assets other than publicly traded stock and wishes to get the best possible deduction. A private charity, as you know, has lower deduction limits, and gifts are deductible only up to lower of fair market value or basis.
With respect to oversight of private foundations, which statement(s) below is (are) true?
I. Federal oversight is provided through the IRS.
II. At the state level, no oversight is provided.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The IRS oversees private foundations. The states also oversee them, most often through the office of the State Attorney General.
Jack gifts a paid up life policy to charity. The face amount is $100,000. The cash value is $40,000. His basis is $25,000. The replacement value is $45,000. What is Jack’s deduction?
A) $40,000
B) $41,000
C) $45,000
D) $25,000
D) $25,000
The correct answer is D. For a gift of a paid-up policy, the deduction is for replacement cost, or basis, if less. So the answer in this case is $25,000, his basis in the policy. This comes as a surprise to many donors. They often expect the value for gift purposes to be the cash value, or some such amount. They are distressed to learn their actual deduction is for basis. Even then, they also have to get policy appraised by a qualified appraiser.
Freida has a policy in premium-payment mode. The face amount is $100,000. Cash value is $25,000. Interpolated terminal reserve is $26,000. Basis is $19,000. She owns the policy and makes a public charity the irrevocable beneficiary. What is her income tax deduction?
A) $0
B) $19,000
C) $20,000
D) $21,000
A) $0
The correct answer is A. Zero is her deduction. She still owns the policy. As we know, a donor can deduct a gift only if all rights of ownership have been relinquished. That is the general rule, and life insurance gifts are not an exception to that rule. To get a deduction, Freida would have to give the entire policy with no strings attached. Her deduction for a gift of a policy in premium-paying status would be limited to the lesser of interpolated terminal reserve or basis, if less. She would also need a qualified appraisal from a qualified appraiser to substantiate her deduction, since the policy is worth more than $5,000.
The Charitable Rollover of IRA funds may be beneficial to donors for which reason(s)?
I. Provides a net-income tax deduction
II. Avoids increasing AGI
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. No, the donor does not get a net income tax deduction. The benefit is that the donor avoids bringing the money from the IRA into Adjusted Gross Income. Nothing good happens, from a tax perspective, when AGI goes up. If the charitable rollover provision were not available, consider what would happen for a high-income taxpayer who pulls money out, then gives it to charity. Yes, there would be an income tax deduction to offset the income from taking the money out of the IRA, but consider all the sneaky little taxes and charges. The AGI limits for a deduction might apply. The donor might be kicked up into a bracket where the Net Investment surtax of 3.8% applies. Payroll tax for Medicare might go up. The tax on Social Security benefits might be higher. At the other extreme, consider a taxpayer who does not itemize. If he or she took money out of the IRA, absent the rollover provision, the income would be taxable, but there would be no offsetting deduction, since the donor does not itemize. So, overall, the charitable rollover provisions, now made permanent, are a big help to fundraisers.
All of these will yield the donor an income tax deduction of zero, except
A) A gift of a life policy via irrevocable beneficiary designation, while retaining access to the cash value
B) A gift to a private foundationof appreciated, privately held C-Corporation stock, with basis of zero and fair market value of $1 million
C) A gift of $150,000 to a public charity, from an IRA via a Charitable IRA Rollover
D) A gift of S-Corporation stock, with basis of zero and fair market value of $1,000,00 to a DAF
D) A gift of S-Corporation stock, with basis of zero and fair market value of $1,000,00 to a DAF
The correct answer is D. For a gift of closely held C- or S-Corporation stock to a public charity, including a DAF, the deduction is for fair market value. A charitable rollover is tax-neutral. There is neither taxable income nor income tax deduction to the donor. For a gift of anything other than public stock to a private foundation, the deduction is limited to basis or fair market value, if less. For a gift of insurance, the donor must give away all rights in the policy to the charity in order to get a deduction.
A wealthy donor is a public figure who demands complete confidentiality. She would like to set up a charitable tool that would flow money to charities, but she does not want anyone to know that the money is coming from her. Which tool or tools might you appropriately suggest for her consideration?
I. Private Foundation
II. Donor-Advised Fund
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. A private foundation is not, in a sense, entirely private, as the foundation must make public its 990-PF, which details who set up the foundation, how it is managed, how much is in it, and where the grants went. With a DAF, however, the general public and the press have no way of knowing where the money comes from, if the fund is named something opaque, like “The Riverside Fund.” Even the charity that receives the funds, in this case, won’t know who their benefactor is. In reality, most donors do name their fund in a way that identifies them as the donor, but they are not required to do so. As a result, for those who want privacy, a DAF, not a private foundation, is the tool of choice.
With respect to donor-advised funds and private foundations, which statement(s) is (are) correct?
I. Generally, a DAF is a better tool for donors wishing to give closely held business interests.
II. Generally, a private foundation is a better tool for donors who seek a tool that will last for many generations.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are correct. The DAF can accept business interests and provide a deduction at fair market value. With a private foundation, the deduction is for basis (or FMV is lower). Also, the AGI deduction limits for gifts of appreciated property are lower for the foundation (20% of AGI) than for the DAF (30% of AGI). Most DAF sponsors will let the DAF last for only a generation or two. Private foundations can be set up “in perpetuity.”
The donor would like to set up a scholarship fund, but hold the money outside the charity itself. Instead, she wants the money held in an account outside the charity, with an annual gift from the tool to the charity sufficient to pay that year’s scholarships. The donor also wants to fund the tool with a gift of highly appreciated, privately held stock. Which tool or tools could work, assuming the charity is willing to accept this arrangement?
I. Donor-advised fund
II. Supporting organization at a community foundation
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both could work. Both a DAF and a supporting organization can accept closely held business interests, with deduction at fair market value. If the charity is willing to set up a scholarship on the premise that they will get sufficient cash from the DAF or supporting organization each year, this arrangement could work. Note that, in this case, the advisor can continue to manage the money. By working with advisors to meet the overall needs of the donor and the charity, while respecting the advisor’s desire to manage the money, certain cases may come together that might not do so otherwise.
Fred owns an office complex. He allows a college to use an office there at no cost. The fair market rent is $1,000 a month. Fred’s AGI is $500,000 a year. Assume he itemizes and has $75,000 of prior charitable gifts this year. What is Fred’s deduction for waiving the rent?
A) $0
B) $12,000
C) $8,000
D) $9,500
A) $0
The correct answer is A. Free rent is not considered a deductible gift.
Which of the four community foundation models, as described by Bryan Clontz, would be most likely to present itself as a community convener of all sides of an important issue?
A) Agency-Focused
B) Leadership-Focused
C) Grant-Focused
D) Donor-Focused
B) Leadership-Focused
The correct answer is B. Leadership can include thought leadership, in acting as a convener. In the agency model, the community foundation seeks to support other nonprofits by holding and administering money for them. In the grant model, they have a large endowment of unrestricted funds that the community foundation uses to makes it own grants. With the donor-focused model, the community foundation seeks donors and advisors to bring in the money, often in DAFs.
Your elderly client, Sara, has been receiving a life income from a gift annuity. In prior years, her statement from the charity showed that only some of her income was taxable. This year, it is all taxable. What is the most likely explanation?
A) She has outlived her life expectancy.
B) The charity has made an error.
C) Tax laws have changed.
D) Her tax bracket has changed.
A) She has outlived her life expectancy.
The correct answer is A. With a gift annuity, the donor receives basis and capital gain (if any) from the original contribution back in installments over his or her life expectancy. Thus, when a donor exceeds his/her life expectancy, the payments change to all ordinary income. In effect, the donor’s basis and capital gain built into the original gift have already been returned, leaving nothing but ordinary income to come back from that point forward.
Which statement(s) below is (are) correct?
I. With a Grantor CLT, the grantor pays tax on gains inside the trust.
II. With a Non-Grantor CLT, the trust itself pays income tax, with a deduction for grants made from the trust to charity.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both statements are true. What throws many people is the idea that a Charitable Lead Trust is an income-tax paying entity. But, yes, a CLT, if it has taxable income, does pay income tax, though it gets an income tax deduction for grants made from the trust to charity. With the Grantor CLT, the donor gets a deduction going into the trust, but all gains inside it are taxable to the grantor going forward.
Your donor wants to know what her deduction will be, if she gives a paid-up policy to charity. To work towards an answer, which information would be needed?
I. The cost of a replacement policy
II. Her basis in the current contract
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true. A paid-up policy is valued for charitable gift purposes at replacement value, but the gift value is limited to basis, if basis is less than replacement cost. Also, be aware that a qualified appraisal is required if the policy is worth more than $5,000.
Which of the following statements concerning the donation of artwork by the creator of the property is (are) correct?
I. A deduction is not permitted.
II. The deduction is equal to the fair market value of the artwork.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
D) Neither I nor II
The correct answer is D. For gifts of artwork by the artist, the deduction is for basis–that is, for the cost of the materials used.
Trey has a painting worth $1,200,000. He gives a charity an undivided partial interest in the painting, meaning the charity can possess it and display it, for one month each year. Trey continues to retain the other 11/12th interest in the painting for more than ten years. Which statement or statements below correctly describe the tax results?
I. Trey may deduct the value of the 1/12th interest in the year of the gift, subject to a qualified appraisal by a qualified appraiser.
II. Trey will recapture the value of his deduction as ordinary income, and will owe a 10% penalty tax, since he has not given the remaining interest in the property to the museum within ten years.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are correct. Special recapture rules apply to collectibles.
A client has a piece of land worth $325,000, with a loan against it of $25,000. The client’s basis in the property is $100,000. The gift is made to a public charity. What is the client’s charitable deduction?
A) $325,000
B) $300,000
C) $250,000
D) $225,000
B) $300,000
The correct answer is B. The deduction is reduced by the loan. The transaction is treated as a bargain sale, with the loan treated as income to the donor. The donor’s basis is allocated proportionally between the gift portion and the deemed sale portion.
In the “Case of Jill Donor,” advisors and fundraisers collide for each of these reasons, EXCEPT:
A) The advisors have the client’s best interest at heart, while the fundraiser is concerned only with the gift.
B) The CPA pays attention to the tax consequences of the gift without looking at the gift as something the donor would find satisying and important, even if it is not fully deductible.
C) The banker and the stockbroker seem protective of assets under management.
D) The professionals and the fundraiser never meet with each other to create a gift plan that will work.
A) The advisors have the client’s best interest at heart, while the fundraiser is concerned only with the gift.
The correct answer is A. Each person on the case, including the fundraiser, may be concerned to do right by the donor, but each works only from within his or her own professional perspective. Each can improve by taking a broader perspective and including others in the process.
In a “nonreversionary” CLT to whom or what do the trust assets go at the end of the trust term?
A) Grantor
B) Trustee
C) Noncharitable beneficiary, such as the heirs
D) Charity
C) Noncharitable beneficiary, such as the heirs
The correct answer is C. In a nonreversionary CLT, the assets do not revert to donor. They go to the noncharitable beneficiary, usually the donor’s heirs.
The donor has low basis closely held stock. She would like to make a gift of the stock and receive the largest possible write-off. Each of the entities below might work, except
A) a public charity
B) a supporting organization of a public charity
C) a donor-advised fund
D) a private foundation
D) a private foundation
The correct answer is D. This is the only one of the choices listed for which the deduction is limited to basis, and to which the lower AGI limits apply. The foundation rules will also come into play and may prevent the gift. The question flags a very common situation in working with business owners. They think of a private foundation first, but for gifts of their closely held stock, it may well not be the right tool.
Which statement(s) about donor-advised funds is (are) correct?
I. For the purpose of determining the income tax deduction, gifts to a donor-advised fund are treated as gifts to a public charity.
II. Donor-advised funds must distribute at least 5% of assets each year.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. DAFs do not have a minimum distribution requirement, unlike private foundations.
Each of these is a prohibited activity under the IRS private foundation rules, except
A) self-dealing
B) excess business holdings
C) family control of the board
D) taxable expenditures
C) family control of the board
The correct answer is C. A private foundation, also called a family foundation or an independent foundation, can, indeed, be controlled by a single family. That is one of its chief benefits.
The client is contemplating how she might transfer her closely held C Corporation to her son at her death. Her estate will be $50 million or more. She is highly interested in leaving a charitable tool that her son can use to carry on the family tradition of philanthropy. Which strategy or strategies below would be appropriate to suggest her advisors consider?
I. Have her son purchase the business from the estate for cash and a note; these will then go into a private foundation.
II. Have her son purchase the business from the estate for cash and a note; these will go into a charitable lead trust.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. These are both advanced strategies discussed by Brunner and Leibell. As they make clear, both require expert legal counsel.
Each of these will yield a deduction limited to basis, except
A) a non-qualified deferred annuity, with basis of $10,000 and fair market value of $100,000, given to a public charity
B) closely held stock, with basis of $10,000 and fair market value of $100,000, given to a public charity
C) a painting purchased for $10,000, now appraised for $100,000, given to a public charity that will sell it and use the proceeds for its work
D) a life insurance policy that is paid up, with basis of $10,000 and fair market value of $25,000
B) closely held stock, with basis of $10,000 and fair market value of $100,000, given to a public charity
The correct answer is B. A gift of closely held stock to a public charity gets a fair market value deduction; if given to a private foundation, it would be for the lower of FMV or basis. With deferred annuities, the deduction is for basis. For art work, the deduction is for basis, unless the art itself will be used (displayed) in line with the charitable purpose of the organization. For insurance, check the basis! Donors are disappointed that their deduction is limited to that when the value of the policy is higher.
Tom bought a collection of baseball cards for $5,000 several years ago. The fair market value is now $1,000. With respect to his deduction, which statement(s) below is (are) correct?
I. If his collection is given to a museum that displays the cards, his deduction will be $5,000.
II. If his collection is given to a charity that sells the cards and uses the cash for its own purposes, his deduction will be $1,000
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. Think “lesser of.” The IRS writes the rules to favor itself. When the donor has lost money on an investment, giving the asset to charity is never a work-around, although some donors hope it might be. That is, if the cards are worth only $1,000, the donor can get a deduction of only $1,000 when giving them to a public charity, even if the donor purchased the cards for $5,000, and even if the charity uses the cards for its exempt purpose. The donor can never get a deduction for more than FMV. If the charity sells the cards, the answer remains the same: the deduction is for $1,000. For a charity that does not use the cards for an exempt purpose, the deduction is for the lesser of basis or FMV.
To which beneficiary or beneficiaries does the trustee of a CRT owe a fiduciary responsibility
I. To the income beneficiary
II. To the charitable beneficiary
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true. What this means, in practice, is that the trustee must be capable of balancing the needs of both parties. This can be a challenge in a CRUT, where the donor may want an income that rises gently via a balanced investment fund inside the CRUT, while the charity may want to invest for growth, since their interest is more long-term.
What is the best definition of “charitable bunching”?
A) Giving to only one cause
B) Giving to very few causes
C) Giving to a single charity
D) Lumping annual gifts into one year to get a deduction, then giving less or nothing until the next lump
D) Lumping annual gifts into one year to get a deduction, then giving less or nothing until the next lump
The correct answer is D. Advisors working under the new tax law will increasingly recommend “charitable bunching.” When, because of the standard deduction, a donor cannot take an itemized deduction this year for a gift of, for example, $2,000, but could get a deduction by giving $20,000, advisors will suggest that he/she “bunch” the ten $2,000-a-year gifts into one big gift of $10,000, giving nothing in between the bunches. This may tend to drive charities crazy, as the gifts will go up and down. Alternatively, the donor could give $20,000 to a DAF, then make the $2,000 a year gifts from that. Charities may have to reconsider their attitude towards DAFs under these circumstances. Instead of seeing the DAF as competing with them, charities may see that the DAF is a way for the donor to have a deduction while continuing to make regular ‘annual’ gifts.
Donor makes several gifts to charities at the end of the year. Which donation requires a qualified appraisal?
A) Publicly traded stocks valued at $10,000
B) An online credit card donation of $5,000
C) Membership at the art museum at the $500 level
D) A painting valued over $20,000
D) A painting valued over $20,000
Answer is D. Art valued at $20,000 or more requires an appraisal from a qualified appraiser.
To which IRS-accepted resource can a donor refer, when determining whether an organization is an eligible charity for purposes of income tax deduction?
A) Notification 65
B) Publication 78
C) Reg BI
D) Charity Listing
B) Publication 78
Answer is B. Publication 78. The IRS publishes a list of organizations eligible for income tax deduction.
Jason makes a $300 gift to a qualified charitable organization in 2020. He does not itemize. Which of the following statement(s) is true?
I. Jason can deduct the $300 gift, even though he does not itemize.
II. Jason cannot deduct the $300 gift because he does not itemize.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
Answer is A. Jason can deduct the $300 gift, even though he is not an itemizer. Under the CARES Act, non-itemizers making cash gifts to a qualified organization in calendar year 2020 can deduct up to $300.
A donor is interested in setting up a CRT. All of the following are potential benefits, except
A) the cost of the CRT’s setup and administration
B) a partial income tax deduction for assets contributed to the trust
C) income to beneficiary
D) the trust can accept many kinds of assets
A) the cost of the CRT’s setup and administration
Answer is A. Setting up a CRT can be costly, as it requires legal counsel. CRTs need to file annual tax returns. In addition, funds inside the CRT needs to be managed for tax-efficiency and income considerations, which may require professional investment management services.
A donor wishes to remain anonymous. Which of the following tools would be best for the donor?
I. CRT
II. CGA
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
Answer is A. A donor who sets up a charitable gift annuity must work directly with the charity. A donor who sets up a charitable remainder trust does not need to let any charity know it is a remainder beneficiary.
With respect to CGAs, which of the following is true?
I. CGAs are backed by the nonprofit’s assets.
II. Reinsurance can alleviate some risks for CGA’s pools.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
Answer is C. Both statements are true.
No single factor nor category is used to determine what a “jeopardizing investment” is, except
A) trading in commodities futures
B) buying puts, calls, and straddles
C) selling short
D) buying publicly traded foreign stocks
D) buying publicly traded foreign stocks
Answer is D. The IRS specifically refers to the first three as investments that will be carefully scrutinized. They are investments that show a” lack of reasonable business care and prudence” in providing for the financial needs of the foundation for it to carry out its exempt function. Publicly traded securities generally do not fall into that category. Whether an investment is a “jeopardizing investment” is decided on a case-by-case basis, taking into account the overall portfolio.
All of the following are considered private foundations, except
A) conduit foundations
B) operating foundations
C) company-sponsored foundations
D) charitable remainder foundations
D) charitable remainder foundations
Answer is D. There is no such thing as a charitable remainder foundation. Company-sponsored foundations are private foundations, with the company as the primary donor.
Private foundations are subject to a tax on expenditures for non-charitable purposes. Which of the following is not subject to this tax?
A) Influencing legislation
B) Lobbying for or against candidates in an election
C) Making grants to specific individuals, without following certain requirements
D) Making grants to support municipal governments for a public purpose
D) Making grants to support municipal governments for a public purpose
Answer is D. Private foundations are bound by stringent rules, especially concerning lobbying and influencing legislation. Private foundations can make grants to specific individuals, but they must follow certain processes. Gifts to a local government for charitable purposes are considered charitable expenditures.
Which of the following does not qualify for a charitable tax deduction?
A) Annual gift to a qualified charity
B) Clothing and toys to a qualified charity
C) Auction items won with a bid in excess of the item’s value
D) Raffle tickets purchased during a fundraising drive
D) Raffle tickets purchased during a fundraising drive
Answer is C. The cost of bingo cards, lottery tickets, raffle tickets, etc. is not deductible.
The donor must take her required minimum distribution from her IRA. She makes annual gifts to three charities. She wants to use her RMD to make these gifts. What would you recommend?
A) She should have her financial advisor sells some assets in her IRA portfolio and wire her the proceeds. She will write a check to each of the three charities.
B) She should take the RMD for herself and have her financial adviser look for highly appreciated stocks to give to the charities.
C) She should direct her financial advisor to send her RMD to a donor-advised fund at the community foundation. Then, she can advise a grant to each of the three charities.
D) She should have her financial adviser send the RMD directly to the three charities.
D) She should have her financial adviser send the RMD directly to the three charities.
Answer is D. For a charitable IRA rollover to work, the donor needs to direct the gift from the IRA to the charity. Once she receives the RMD from the IRA, it is considered income. RMDs must be made to a qualified charity. They cannot be gifted into a DAF.
The donor wants to help revive a declining neighborhood. She values partnerships and working with the local community. Of all the following levers at her disposal, which one would not fit her goals?
A) Work with the local community foundation to see what other donors would like to be involved
B) If the neighborhood is designated an opportunity zone, invest in a qualified opportunity fund to support the area
C) Look into impact investing opportunities in the neighborhood, such as investing in small businesses or social enterprises
D) Create a charitable remainder trust, and designate a charity working in that neighborhood as a beneficiary
D) Create a charitable remainder trust, and designate a charity working in that neighborhood as a beneficiary
Answer is D. They are all ways that the donor can help. However, the first three allow the donor to work with partners. They are levers she can work on immediately and which may allow her to see the results a bit earlier. A CRT to one charity helps only that one charity, and it may take a while for the charity to see the remainder.
