Quiz Compilation - questions to study Flashcards
Which of these statements is (are) true?
I. Charitable tools are tools of personal finance.
II. Charitable tools are ways to provide social impact.
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. A repeated point in CAP is that philanthropic tools are “both/and.” They benefit donors financially, and they benefit society. The art of charitable planning is planning for both aspects of the tools in a coherent, thoughtful way. “The Case of Jill Donor” shows how a case can fall apart with advisors who think only of finance and a nonprofit who thinks only of social benefits via his or her organization. It is when both perspectives are harmonized that cases come together, and donor/clients feel well served.
Of the following strategies, which produces an income tax deduction for the donor when the strategy is funded?
I. Foundation
II. For-profit, double bottom line, social venture
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 gift to a foundation is deductible, within the limits allowed by law. To establish a business–even if that business is socially responsible–is not tax deductible.
With respect to the impact of tax reform on the charitable income tax deduction, which statement or statements below is (are) correct?
I. It will significantly reduce the number of American who itemize.
II. The majority of those with income in the top five percent will still itemize.
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. Yes, tax reform has greatly reduced the number of Americans who itemize and who can, therefore, take advantage of the charitable income tax deduction. However, it is also true that the majority of those with income in the top 5% will itemize, and they are the best prospects for significant gifts.
The donor has the following assets: cash, appreciated publicly traded stock, antique furniture that has appreciated in value, and art works that the donor has created herself. All of the statements below are true, EXCEPT:
A) Cash given to a public charity can be deducted up to 60% of AGI.
B) Appreciated publicly traded securities given to a public charity can be deducted up to 30% of AGI.
C) Art created by the artist who gives it can be deducted at fair market value, up to 30% of AGI, if given to a public charity.
D) Appreciated antiques can be deducted at fair market value, up to 30% of AGI, only if they will be used by the public charity pursuant to its charitable purpose, rather than being sold.
C) Art created by the artist who gives it can be deducted at fair market value, up to 30% of AGI, if given to a public charity.
The correct answer is C. Art created by the artist can only be deducted up to basis.
With respect to a couple with a combined net worth of $20 million, what is the right amount to leave to their two heirs? One heir is wealthy, while the other is struggling.
A) They should leave the heirs as much as possible, outright and evenly divided.
B) They should leave 25% outright to the successful heir, and 75% in trust for the struggling one.
C) They should leave half outright to the successful heir, and half in trust to the struggling one.
D) This question cannot be answered, based on the facts given
D) This question cannot be answered, based on the facts given
The correct answer is D. The best answer cannot be found by computing taxes or by unthinkingly working out the largest possible amount to the heirs, whether outright or in trust. A CAP needs to help the client or donor think about the issues. What is the right amount? When and in what form? The goals should be to help he family thrive across generations. The change in estate tax means that more and more families of wealth will likely be given a plan that directs very large amounts to heirs. Whether that is good or bad for the heirs, whether it helps or hinders their life quest, is often passed over in silence. As CAPs, we can help families consider plans driven by a more nuanced wisdom. Perhaps in this case, some amount should go to heirs, outright or in trust, and some amount should be going to family philanthropy to help pass on family values, build character, foster family unity, and create social impact. The reasons in favor of the philanthropic plan, in a case like this, have much more to do with our humanity than they do with tax law.
With regard to the Pease Amendment, which statement or statements below is (are) correct?
I. The Amendment was passed in the 2017 Tax Reform legislation.
II. The Amendment phases out itemized deductions for high-income earners.
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 Amendment does, or did, phase out itemized deductions for high-income earners, but it was repealed in the 2017 tax reform legislation.
A year ago, Donor gave $300,000 in appreciated public stock to a charitable tool. His basis in the stock was $100,000. He is receiving an income back. His annual statement says that his total income of $16,000 consists of $12,000 in long-term capital gain and $4,000 of ordinary income. Which tool or tools might he have?
I. Charitable Remainder Trust (CRT)
II. Charitable Gift Annuity (CGA)
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 CRT could produce this result. The trust apparently earned $4,000 in ordinary income (dividends, rent, interest). That would come out first. Any additional payment due from the trust would dip into the capital gains earned by the trust and (trust provisions and state law permitting) the pre-contribution capital gain in the asset originally given. With a charitable gift annuity, by contrast, every payment from the beginning will include a return of principal, or basis, prorated over the actuarial life of the donor. Once the donor outlives that life expectancy, the whole payment would be capital gain and ordinary income.
A “super lead trust” could appropriately be described to a donor in marketing language in which of these ways?
A) A super lead trust, if appropriately set up, may be able to reduce your income tax now, move money to heirs with little or no transfer tax, while also providing a stream of payments to the charities you support. This is an advanced concept, and will require first-rate legal counsel.
B) A lead trust can be a super idea for someone in your position who wants to sell an appreciated asset without current income tax and to receive an income for life.
C) A super lead trust will reduce your income tax now and move money to heirs with little or no transfer tax, while also providing a stream of payments to both you and the charities you support.
D) A super lead trust will not reduce your income tax, but it will help charities during your lifetime or at death, with a stream of payments to them. It may also greatly reduce your taxable estate. We should get legal counsel before moving ahead.
A) A super lead trust, if appropriately set up, may be able to reduce your income tax now, move money to heirs with little or no transfer tax, while also providing a stream of payments to the charities you support. This is an advanced concept, and will require first-rate legal counsel.
The correct answer is A. The “super lead trust” has the benefits described in (A), but is an advanced technique which, when applied to a client’s situation, would require first-rate independent legal counsel. (B) seems to be describing a CRT. (C) wrongly states that the donor will get some income back. (D) incorrectly states that a super lead trust will not reduce current income tax. In fact, if the technique works, it should reduce both income tax and transfer tax.
Which is the best description of a “shark fin CLAT”?
A) A shark fin CLAT is another term for a super lead annuity trust.
B) A shark fin CLAT is an IRS-approved format in which the grantor gives cash to a defective grantor charitable lead annuity trust, which then invests in tax-free bonds and life insurance. The trust pays little to charity until the death of the insured grantor, at which time the payment to charity balloons. The grantor receives income tax benefits at inception, with little or no phantom income in the future. Transfer taxes will also be reduced.
C) A shark fin CLAT is a controversial technique in which the grantor gives cash to a grantor charitable lead annuity trust, which then invests in tax-free bonds and life insurance. The trust pays little to charity until the death of the insured grantor, at which time the payment to charity balloons. If the technique works as advertised, the grantor receives income tax benefits at inception, with little or no phantom income in the future. Transfer taxes may also be reduced.
D) A shark fin CLAT provides payments to a wealth replacement trust funded with life insurance to replace the gift assets.
C) A shark fin CLAT is a controversial technique in which the grantor gives cash to a grantor charitable lead annuity trust, which then invests in tax-free bonds and life insurance. The trust pays little to charity until the death of the insured grantor, at which time the payment to charity balloons. If the technique works as advertised, the grantor receives income tax benefits at inception, with little or no phantom income in the future. Transfer taxes may also be reduced.
The correct answer is C. The technique is controversial, with the purported benefits as described.
With respect to nonqualified charitable lead trusts, which statement or statements are true?
I. They do not qualify for estate tax benefits or income tax benefits.
II. CLATs and CLUTs are examples of nonqualified CLTs.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. To get the benefits associated with CLTs, the trust has to qualify under the IRS rules. CLAT and CLUT formats do qualify.
All of these are prohibited acts of self-dealing between disqualified persons and the foundation, except
A) any sale, exchange, or lease, regardless of price
B) furnishing goods and services or facilities without charge, or under terms no more favorable than those offered to the public
C) payment of more than reasonable compensation
D) transferring income or assets to a disqualified person for that person’s use or benefit
B) furnishing goods and services or facilities without charge, or under terms no more favorable than those offered to the public
The correct answer is B. B is the exception, given that it is done without charge and for the exempt purpose or under terms no more favorable than those offered to the public.
“All life insurance is built from the same elements.” What elements figure in all insurance products?
I. Premium, cost of mortality, administrative and commission expense loads
II. Guaranteed cash value and projected cash value
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. Not all policies have cash value. Term insurance does not.
What are the four characteristics used to describe impact investing?
A) Intentionality, investment with return expectations, range of return expectations and asset classes, and impact measurement
B) Intentionality, investment with no return expectations, range of return expectations and asset classes, and impact measurement
C) Intentionality, investment with return expectations, charitable tax deduction, and impact measurement
D) Intentionality, investment with return expectations, range of return expectations and asset classes, and donor satisfaction
A) Intentionality, investment with return expectations, range of return expectations and asset classes, and impact measurement
The correct answer is A. Impact investing is described to have these four characteristics: intentionality, investment with return expectations, range of return expectations and asset classes, and impact measurement. Similarly, GIIN defines impact investments as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return
A client has a closely held business. The client has a very large estate that will be subject to estate tax. He also has a significant interest in making an impact on a particular cause. He is making large annual gifts. At death, the client wants the gifts to continue, at least for a number of years. At the same time, the client ultimately wants to pass the business to his heirs. He has been told that the business could be sold to his heirs for cash and a note at his death. The note and cash could then fund a CLT. The assets in the CLT could eventually go to the heirs. Which of these would be an appropriate response from a CAP who is not the client’s attorney or CPA?
I. “Yes, the deal is permissible.”
II. “No, the deal is not permissible.”
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. The CAP should not offer a verdict one way or the other unless he or she happens to be the client’s attorney or CPA. Even if the CAP is an investment advisor legally able to give “advice,” it would be unwise to opine flatly for or against a deal as complex as this. What this case pattern flags is an important opportunity that should be investigated fully by the client’s qualified tax and legal counsel. The CAP would be wise to convene the team, or otherwise advance the case towards a team meeting. Based on the facts presented, the deal may work, but there are also a host of practical as well as legal issues. Can the heirs run the business? Will the business generate sufficient cash flow to service the note? Will the cash flow from the note be sufficient to maintain the CLT’s payout? Will the payout be high enough to adequately reduce the transfer tax cost? A note between the foundation or CLT and related parties created during the donor’s lifetime will be considered self-dealing. There is an exception to this rule that comes into play, subject to many caveats, at the donor’s death. A case like this calls not merely for counsel, but for highly qualified counsel with experience doing specific transactions of this kind. A CAP can add value by maintaining a referral network of specialists.
At what dollar amount is a qualified appraisal needed for a gift of an interest in a closely held business?
A) $5,000
B) $10,000
C) $25,000
D) $50,000
B) $10,000
The correct answer is B.
