Week 10 Flashcards
Margaret is a widow, aged 75. Her only child has died. She lives in Atlanta and holds Coca-Cola stock inherited from her father. It is now worth $5 million, with dividends of 2.7%. Her other major asset is her home, which is now paid off with no mortgage, and which is worth about $700,000. Her goals are financial security and a legacy. She is concerned about inflation and the risk of having so much in one stock; she also wishes to reduce her income tax. She is afraid to sell the stock because it has almost no basis, and she does not want to pay capital gains tax. She is a past board member of the museum, and would enjoy making a significant gift to them. Which tool or tools would be appropriate to suggest for discussion with Margaret’s tax planners?
I. Charitable remainder trust
II. Gift of a remainder interest (life estate) in her home
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. This a classic CRT prospect. Also, the gift of a home in which she continues to live, via a life estate agreement, could be advantageous to Margaret, in that it will give her a current income tax deduction. She has no one to whom to leave her house at her death other than charity. Her advisors can help her appreciate the pros and cons of these arrangements. The museum may also weigh in as to whether they will accept a gift of the house, subject to a reserved life estate.
You are sitting with a client or donor. He hands you a charitable tools illustration that someone else ran for him. It shows what is clearly a CRAT for $1 million, paying him 5% for life. Here is how the dialogue goes:
You: “What do you like about this?”
Donor: “The deduction and being able to defer the gain, and also it helps a charity.”
You: “What don’t you like?”
Donor: “A fixed income for life. I am concerned about the cost of living rising.”
You: “What do you plan to fund this with?”
Donor: “A parcel of raw land worth $1 million.”
You: “Basis?”
Donor: “Very little, say, $100,000.”
You: “Debt against it?”
Donor: “Yes, about $200,000. But the net value is a million.”
You: “Any buyers who want it?
Donor: “Many would want it. I am meeting with one for lunch tomorrow. She may make me a good offer.”
Given what you have learned from this dialogue, all of the responses below would be appropriate, EXCEPT:
A) The debt against it could be an issue. It may have tax implications for both you and the trust. Would you consider paying the debt off before donating the land?
B) The buyer waiting in the wings may be an issue. If you are serious about this, you may want to put off meeting with a potential buyer. If you aren’t careful, the IRS might say it was a done deal before you gave the property, and then tax you as if you had already sold it. How close is too close is something we should discuss with your attorney.
C) A big concern is the trust design. Did you know that a CRAT has to make a payment per the trust terms, whether not there is any income to make a payment with? What if the land does not sell? How will the trust make the payment?
D) A CRT is a poor choice, since you don’t want a fixed income.
D) A CRT is a poor choice, since you don’t want a fixed income.
The correct answer is D. All the other remarks are on target. But the donor could use a CRUT for the land, once the debt is paid off. In fact, this looks like a good set of facts for a Flip CRUT that will flip to income-paying status once the land is sold.
A client has $50,000 to give, wants a current deduction, and would like to set up a deferred giving account. The client probably will not make further gifts into the vehicle, or, at least, is unlikely to make gifts larger than a few thousand dollars a year. The client does not need income back. Which vehicle would be an appropriate suggestion?
A) DAF
B) PIF
C) Private non-operating foundation
D) CLT
A) DAF
A donor, age 61, widowed, is committed to helping disabled children. The donor has significant wealth and a modest lifestyle. The donor’s heirs are successful and well provided for currently. Her children do not share the donor’s philanthropic interests. The donor is concerned about estate tax. The donor is about to retire as CEO from a company. She wants to be actively involved in some meaningful way in her community, preferably in helping disabled children. Along with charity, she also wants to transfer money, over time, to her heirs. She feels she could give $500,000 to charity a year going forward without missing the money. She would like to be actively involved in seeing the good her money does. Her major assets are as follows:
Residence: $1 million
Publicly traded securities: $25 million, with basis of $12 million. The income on the portfolio is $700,000 per year.
IRA: $3 million
Raw land: $3 million
She has a defined benefit pension plan and a deferred compensation plan sufficient to support her expected lifestyle for her life expectancy.
She is giving generously, has hit her AGI limits, and has 5 years of carryforwards “maxed out” from prior gifts.
Her only debt is against her house.
Which tool would be most appropriate as a suggestion for her to consider with her advisors?
A) Testamentary CLT
B) Inter vivos (living) CLT
C) Private foundation
D) DAF
B) Inter vivos (living) CLT
The correct answer is B. Since she wants to do something for charity now, we can rule out the testamentary CLT. Since she wants not only to help charity but also get money to heirs over time, a CLT seems more appropriate than a foundation or donor-advised fund. So, that gives us an inter vivos CLT as the best suggestion. She has the net worth to make this tool plausible.
You are working on a CRT case. If you had a choice of funding asset, each of equal value, which would you look to first as the best asset to use?
A) S Corporation stock
B) Publicly traded stock
C) Raw land with debt against it
D) The donor’s home
B) Publicly traded stock
The correct answer is B. Raw land with debt is an issue. The debt should be paid off first. Then, we would have to find a buyer for the land. Meanwhile, there would be no income from the trust. Giving S Corporation stock to a CRT revokes the S election. The donor’s home will cause self-dealing problems, if the donor continues to live there. Her home would have to be put on the market and sold to produce income. Meanwhile, someone has to maintain the property and pay taxes and insurance. All these complications can be avoided by using the publicly traded stock as a funding asset.
You are working with a client, Miguel, who owns a successful business. He is 65, with a hard-charging personality. Miguel plans to sell the business to outsiders. He has not consulted any of the other stakeholders–not family, not key employees. His attitude is, “I built it, I can do what I please.” Nonetheless, Miguel clearly loves his family and his employees. He has made clear that his goal is to create a successful family, one that will last for many generations, preserving family values, developing healthy heirs, and making a positive difference in the community.
On the team advising the client are a trusts and estate attorney, a CPA, an insurance agent, a financial advisor, and a business exit planning expert with connections to buyers. You are, let us say, the person on the team who is closest to being the “trusted advisor.” You are also well aware that neither you nor anyone else on the team is positioned to give this client unsolicited advice regarding how he should live his life or treat his family. Which statement or statements below, might you make to the client without overstepping the bounds of good sense?
I. “Miguel, many business owners in your situation have found it helpful to involve a business and family communications specialist to make sure that the owner and other important stakeholders are ‘on the same page’ before irrevocable decisions are made. This can help keep the business and the family on track as significant changes are made. Would you like me to line up a communications specialist or two for you to interview?”
II. “Miguel, you may not clearly see what is best for you. Your planning may cause conflicts with your family. I know therapists who specialize in dysfunctional business families. Would you like me to find a therapist for you and your family?”
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. It is all in how you position the counselor. Most respected family business consultants who do this kind of humanistic work have degrees in counseling or social work, but few lead with that. They do not want to imply that the family leader or the family as a whole is “sick.” Instead, the issues are often best framed as issues of intrafamily communication.
Joanna is a professional tax advisor (an attorney) engaged by Tanya, the matriarch of a very successful family business. Joanna is working with Tanya to transition the business to outside buyers.
Tanya has two children, Bill and Maria. Bill works in the business and expects that he will inherit the firm and control of it. His sister, Maria, is not employed by the business, but expects that she will inherit half of its value someday.
As Joanna is leaving her client’s office, she runs into Bill, who asks, “What is going on with mother? What is the big topic these days?”
Later, Joanna gets a call from Maria. “Joanna,” she says, “I know you are working with mother, and I suspect Bill has been talking to you as well. What about me? Don’t I need to be kept informed? Obviously, something big is going on. Tell me.”
Which statement or statements below might responsibly guide Joanna?
I. Joanna must remember that her client is Tanya. As a professional, and in particular as an attorney, Joanna must remain loyal to her client and keep client confidences.
II. Joanna now has indications that the family dynamics are complex and potentially disruptive. She may responsibly suggest to her client that it might be wise to open a broader dialogue with the family, perhaps with the help of a specialist in family business communication.
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, the attorney represents the client, and, as such, the attorney must be loyal to the client and keep client confidences. At the same time, however, the client’s interest may be affected by the emerging family dynamics. Without carrying tales, the attorney might well suggest that an outside specialist in family communication would be helpful. Without such a focal point, the children may continue to try to work through the attorney, having her carry stories back and forth. In family systems psychology, this is called “triangling,” and it seldom leads to good results. Very often, the person carrying stories gets blamed by all parties. Complicating all this is the possibility that the children may expect the attorney to keep their confidences and not to tell their mother that they are making these inquiries. This puts the attorney in a difficult position. She may want to make clear to the children that she represents only their mother, and that anything they say to her, as their mother’s attorney, can or will be shared with the client. That, too, however, could prove explosive. The recommendation to involve an outside specialist in family dynamics seems most appropriate.
You are a planned giving officer for a small school. You have a choice of working with any of these clients, all worth $5 million. Which is most likely to be a good investment of your time, if each client is equally loyal to your school?
A) Tabitha, age 83, no heirs. Net worth is primarily in publicly traded stock. She needs additional income, as dividends and interest in her portfolio have declined.
B) Toby, age 51, owns three strip malls, which make up 95% of his net worth. He is considering exiting the business over perhaps the next ten years.
C) Belinda is an aggressive entrepreneur whose assets, including land, home, and closely held business interests, are highly leveraged.
D) Sam, 62, has a personal service business run as an S corporation. He has reinvested in his business as it has grown. It represents most of his net worth.
A) Tabitha, age 83, no heirs. Net worth is primarily in publicly traded stock. She needs additional income, as dividends and interest in her portfolio have declined.
The correct answer is A. An older client with publicly traded assets is ideal for gift planning in a nonprofit context. She may be a good prospect for a CRT or gift annuity. Perhaps her home could be used for a gift with a retained life estate. She is old enough that a bequest might be realized in the foreseeable future. The others are ideal prospects for certain advisors who specialize in these business clients. Out of that planning process, these prospects may emerge as significant philanthropists. Thus, we each play a role in the “philanthropic ecosystem” in our community. To make a case like those with the business owners move forward, the fundraiser might refer them to a professional advisor and work as part of the team. Certain community foundations might help with such cases. Increasingly, commercial donor-advised fund companies and other intermediaries work withsuch prosp ects, helping convert business interests and other noncash assets to philanthropic funds.
You are attending a conference with professional advisors present. You hear one say, “I often show charitable tools like CRTs and foundations, but my clients never move forward with them, even though I show them all the financial advantages.” Based on what you have learned in this course, in what way or ways might you help this advisor see things in a new and better light?
I. Work with him or her to show how a gift of $1 can produce more than $1 in tax and financial benefits to the donor.
II. Work with him to help him appreciate that philanthropy is meant to benefit a charity as well as the donor.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. Seldom, if ever, do people make money directly from giving money away. Rather, by giving away money intelligently, they can reduce the total after-tax cost of the gift while having a major impact on and through the charity. An advisor who considers only the financial and tax benefits to the donor and family will generally be baffled by philanthropy and will find that few cases actually close. Once the advisor begins to work with clients who want to have a positive social impact while also receiving financial benefits themselves, such cases are more likely to come to fruition.
A CAP is working with a wealthy donor who is on the board of a small nonprofit. He would like to set aside an endowment for the charity, but is concerned that the organization might go out of business. He has highly appreciated raw land that he would like to give. He is 85 years old. What would be the best suggestion?
A) Consider giving the land to a community foundation to create an endowment fund earmarked for the charity, but with a provision that, should the initial charity fail, the funds will support other charities that are similar. Let the CF provide oversight after the donor is gone.
B) Set up a private foundation and make ongoing grants to the charity.
C) Set up a donor-advised fund to make grants in perpetuity.
D) Give the land directly to the charity and have them manage their own endowment.
A) Consider giving the land to a community foundation to create an endowment fund earmarked for the charity, but with a provision that, should the initial charity fail, the funds will support other charities that are similar. Let the CF provide oversight after the donor is gone.
The correct answer is A. This is an ideal set of facts for using a CF. A donor-advised fund could work, but there is no indication that the donor has designated someone to direct the grants after he is gone. Also, he wants perpetuity. Generally, donor-advised funds do not offer that. A gift outright to the charity would be inappropriate, it would seem, since they have no prior experience managing endowments and the donor is concerned about their long-term viability. A private foundation won’t work well with the funding asset, and there is no indication that he has chosen anyone else to manage the foundation when he is gone.
Which tool is best suited to transfer an asset to heirs in a controlled manner?
A) CRT
B) CLT
C) DAF
D) Private foundation
B) CLT
The correct answer is B. The lead trust (in its most common format) pays income to a charity for the term of the trust, then the balance can pass to the heirs. With a foundation, the heirs never get the money. Likewise, with a DAF, the heirs never get the money. With a CRT, the balance at the end of the trust term goes to charity.
