Week 8 Flashcards
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 not gifts larger than a few thousand dollars a year. The client does not need income back. Which vehicle would be an appropriate suggestion?
A) Donor-Advised Fund
B) Pooled Income Fund
C) Private Non-operating Foundation
D) Charitable Lead Trust
A) Donor-Advised Fund
For conservation easements, what is the AGI limitation for the charitable income tax deduction?
A) 20% (100% for qualified farmers)
B) 30% (100% for qualified farmers)
C) 40% (100% for qualified farmers)
D) 50% (100% for qualifed farmers)
D) 50% (100% for qualifed farmers)
The correct answer is D. For conservation easements, the deduction limits are very generous, and so are the carryforward rules. Instead of getting to carry forward unused deductions for only five years, as with other gifts, the carryforward for conservation easements is 15 years.
Joe purchased land for $200,000 in cash several years ago. The fair market value is now $1,000,000. The land is near a college which would like to purchase it. Joe sells the land to the college for $500,000. What is the capital gain, if any?
A) None
B) $500,000
C) $300,000
D) $400,000
D) $400,000
The correct answer is D. This is a bargain sale, part sale and part gift. To determine the capital gain, we consider what the donor received ($500,000.) Then we determine the basis. In effect the basis is spread between the part given and the part received. $500,000 was given, since the property worth $1,000,000 was sold for half price. The basis, spread proportionally, then, is the original basis of $200,000 spread half and half. Half of the orignal basis of $200,000 is $100,000 of basis allocatable to the sale portion. Cash received by donor ($500,000) minus donor’s allocated basis ($100,000) = capital gain. So, $500,000 - $100,000 = $400,000.
Which of the following statement(s) about pooled income fund (PIF) gifts is (are) correct?
I. A PIF donor may designate a group of individuals, such as his or her children, as income beneficiaries of the pooled-income fund gift.
II. A PIF is a split-interest gift.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
A donor/client may have many goals for his or her estate plan. Charities and heirs may be benefited, a surviving spouse may need an income, a business may be transferred, and/or taxes may be reduced. In this context, which of these tools is the most flexible in providing liquidity that can be used for a variety of purposes?
A) Foundation
B) Bequest
C) Pooled Income Fund
D) Life insurance
D) Life insurance
The correct answer is D. Insurance can provide cash upon the donor’s death to create the liquidity needed to meet a variety of goals. Insurance can also benefit charity, not only when the charity is the beneficiary of the policy but also when the insurance is used as part of an overall plan to get the right assets to the right beneficiaries at death. For example, insurance could create enough cash so that the spouse has an income, which might allow more money to go to charity. Insurance can purchase, say, a business from the estate, leaving cash in the estate which can then go to a foundation or directly to charity. Insurance can provide money to heirs, to replace an asset that has gone to charity. The other tools mentioned do not provide liquidity for such estate-planning purposes.
All of these charitable tools produce cash flow to the donor (or income beneficiary specified by the donor), except
A) Charitable Remainder Trust
B) Charitable Lead Trust
C) Pooled Income Fund
D) Charitable Gift Annuity
B) Charitable Lead Trust
The correct answer is B. The charitable lead trust produces cash flow to the charity, not to the donor. The others give the donor (or the income beneficiary specified by the donor) an income back.
With respect to the Limited Liability Company as a giving tool, which statement or statements below is (are) correct?
I. Contributions to it are deductible for income tax purposes
II. Gifts to it are deductible for estate tax purposes
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. Assets placed into an LLC are not tax-favored in any way. The tool is designed so all options are open. The LLC itself can make charitable gifts to nonprofits, and the deduction will then pass through to the LLC creator’s personal tax return. The LLC can also fund for-profit social ventures, public relations, or political activity. The LLC can pull all levers to induce change in the desired direction.
A donor who is currently low on the philanthropic learning curve would like to learn more about giving and become a better-connected and better-informed donor. Which recommendation(s) below would be appropriate?
I. Visit the local community foundation and speak with a staff person there
II. Join or form a giving circle
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 fine recommendations. Community foundations are like a clearinghouse for local giving. They would almost certainly be able to find engagement and networking opportunities for an emerging donor. Another good recommendation is a giving circle. Many community foundations sponsor these, as do women’s groups and other groups that share bonds of ethnicity, tradition, or devotion to a cause. If a giving circle does not yet exist, the donor might consider organizing one.
With respect to international giving, which statement or statements below is (are) true?
I. IRS rules make it difficult for individuals or foundations to make income tax-deductible gifts or grants directly to foreign charities
II. Giving to or through a qualified intermediary enables individuals and foundations to readily make income tax-deductible gifts to foreign charities
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 IRS imposes strict rules on those wishing to make gifts to foreign charities. The donor must prove the foreign organization is doing work equivalent to a U.S. charity, or the donor must exercise “expenditure responsibility” (oversight) on how the foreign charity uses the money. So, generally, donors give either to a U.S. charity providing programs abroad (i.e., American Red Cross, Doctors Without Borders) or the donor may use an intermediary that works with foreign charities.
You hear of a donor who entered into some kind of transaction involving her home. She is 80 years old and says she got a deduction of almost $400,000 based on her home’s worth of $500,000. She still lives in the home. What tool was used?
A) Life estate
B) Conservation easement
C) Bargain sale
D) Gift of an undivided partial interest
A) Life estate
The correct answer is A. A life estate is usually described as “give away the house and keep the keys.” The older the donor, the bigger the deduction. He or she enters into an agreement with a charity under which the charity gets the property at death. Meanwhile, the donor has the right to live there. Of course, the charity has to wait, the charity has to want the property, and the donor must agree to keep the property up and pay taxes. The agreement has to somehow address what happens if the donor needs to leave the house and go to a nursing home. Life estate cases require the right set of facts, but can yield huge deductions for older donors.
The donor has given appreciated securities into this tool. He has taken a very significant write-off, and received back 1%-2% of his original contribution each year. Which tool is this?
A) Pooled Income Fund
B) Bargain Sale
C) Charitable Remainder Trust
D) Charitable Gift Annuity
A) Pooled Income Fund
The correct answer is A. Pooled income fund. The donor gives the asset into a commingled account of a charity. The pool of assets produces some limited return, which is then shared out pro-rata with those who have contributed an asset. The deduction is very high because the income is generally very low. Say, for example, the donor’s gift stock pays 1% dividends. The fund gets those dividends and pays them back out pro-rata. So, the donors get a very low return, and hence the remainder value is very high, as is the deduction.
Sarah, a teacher, comes to you with a dream. She has noticed several parent groups working at cross purposes with respect to the school. The PTA, the sports boosters, the alumni association, a group for after-school tutoring–each does good work but could do more, if they coordinated. She has a small personal budget. Which of these would be an appropriate suggestion?
A) Consider a donor-advised fund
B) Consider a direct gift to the school or its foundation
C) Consider a charitable gift annuity
D) Consider a Jeffersonian Dinner
D) Consider a Jeffersonian Dinner
The correct answer is D. A Jeffersonian Dinner might bring together people of goodwill from these and other networks around a question of common concern, such as, “How can we create the best possible education for our children?” As a teacher, she might have the skills to facilitate the conversation. A Jeffersonian Dinner is not a fundraiser; there is no “agenda” she is selling. The goal is to get people to communicate, network, and forge a common purpose.
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.
All of the following pertaining to opportunity zones (is) are true, EXCEPT:
A) Opportunity zones allow investors to defer tax on any prior gains if they invest in a Qualified Opportunity Fund
B) Opportunity zones are required to generate positive public benefits and measurable social impact
C) Selected tracts are designated as opportunity zones
D) Opportunity zones were created to spur economic development and job creation in distressed communities.
B) Opportunity zones are required to generate positive public benefits and measurable social impact
The correct answer is B. There are no rules or tests requiring that investments produce specific public benefits, such as hiring local workers or providing services to local communities.
