Week 9 Flashcards
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
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.
A father owns a closely held C-Corporation. He gives 10% of the business to his daughter. The father then gives 10% of the overall company to a CRT. The company then offers to redeem its shares at a fair price that is offered to all owners. Stock is redeemed from the CRT. What are the benefits of this scenario?
I. The father gets a tax deduction for remainder interest of the stock he gives to the CRT, receives an income, and avoids immediate tax on the redemption.
II. The value of the daughter’s interest is increased without incurring a transfer tax consequence.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
The correct answer is C. These are the benefits of what is sometimes called a “charitable stock bailout.”
Scotty gives an interest in his closely held business, a C-Corporation, to a CRT whose beneficiary is a public charity. John has owned the business for many years. The business is highly appreciated. What are the income tax implications?
A) The gift is valued at fair market value. Deduction is for the remainder interest. Deduction is limited to 30% of AGI.
B) The value of the gift is reduced to basis. Deduction is for the remainder interest. Deduction is limited to 20% of AGI.
C) The value of the gift is reduced to basis. Deduction is for remainder interest. Deduction is limited to 30% of AGI.
D) The gift is valued at fair market value. Deduction is for the reminder interest. Deduction is limited to 50% of AGI.
A) The gift is valued at fair market value. Deduction is for the remainder interest. Deduction is limited to 30% of AGI.
The correct answer is A. The status of the remainder beneficiary passes back to the trust.
John’s closely held C-Corporation leases land from John. The C-Corporation is highly appreciated. It pays no dividends. John wants to give the company to a Flip CRUT whose beneficiary is a public charity. John does not have a buyer in mind, but feels the business can be sold within a year or so. What is (are) the issue or issues that should be flagged?
I. The lease will trigger the self-dealing rules, with potentially significant tax penalties.
II. A C-Corporation cannot be used with a Flip CRUT format.
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 lease payment to John is self-dealing. Putting the land inside the CRT will not cure the problem, since that lease payment from the company to the CRT will create unrelated business taxable income. A C-Corporation can be used to fund a Flip CRUT; in fact, that trust format would be appropriate, since it calls for income to the income beneficiary only after a triggering event. The triggering event here could be the ultimate sale of the business.
The client has a closely held business she wishes to sell. She also would like to move forward with philanthropy. Which of the strategies below might you suggest for consideration with her attorney?
I. Give some of the business interests to a donor-advised fund, and have the buyer purchase those interests from the DAF.
II. Give some of the business interests to a private foundation, and have the buyer purchase those interests from the foundation.
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 DAF is an option to weigh. A private foundation will not work for many reasons, including the private foundation rules, the restriction of the gift value to basis, and the lower AGI limitations.
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 for consideration by her advisors?
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.
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.
For which reason below is it generally inappropriate to gift S Corporation interests to a CRT
A) S election will be revoked.
B) CRTs cannot accept S Corporation stock.
C) CRT is not permitted to sell S Corporation stock.
D) S Corporation stock will be considered a jeopardizing investment for the CRT.
A) S election will be revoked.
The correct answer is A.
When a corporation sets up a charitable remainder trust, gives an asset to it, and takes back the income, how long can the trust run?
A) For the life of the majority owner
B) For up to 10 years
C) For up to 15 years
D) For up to 20 years
D) For up to 20 years
The correct answer is D.
“Ground legal liabilities with those best able to bear them.” This suggestion from the article “Doing Well, Doing Good, and Doing No Harm” is best paraphrased:
A) Take as little responsibility for your work as you can.
B) Blame others when things go wrong.
C) Work for an organization with deep pockets.
D) Work as a team with specialists, and defer to them in their area of expertise.
D) Work as a team with specialists, and defer to them in their area of expertise.
The correct answer is D.
The essay “Doing Well, Doing Good, and Doing No Harm” suggests that a term like “gift planner” or, for that matter, “wealth coach,” or “philanthropic planner” is ambiguous or indeterminate in meaning. The article suggests that it is good practice for a professional to define his or her role narrowly and explicitly. All of these statements are in the spirit of that advice, EXCEPT:
A) “I work for Memorial Hospital as a gift-planning officer. My role is to help you match your vision, values, hopes, dreams, and aspirations to the major gift opportunities available at the Hospital where you and your family have been such valued supporters over the years. I work with you on what you wish to accomplish and with your advisors on how best to accomplish that, insofar as that plan involves the Hospital.”
B) “I am an independent philanthropic advisor who helps you clarify your giving in light of your goals. My hope is to help you have greater impact with your giving, receive more joy from it, and, if you wish, engage your family in that giving. I am not a financial advisor, but I will work with your advisors, if you wish, to situate the gift in your overall financial or estate plan. I do not sell products.”
C) As your attorney, I represent you as the client. We will work together to develop a plan that meets your needs, the needs of your family, and the needs of the nonprofits you love and support. But you, and neither the family nor the nonprofits, are my client. Your interests come first.
D) As a gift coach, I have been asked by Memorial Hospital to help you achieve your most cherished goals.
D) As a gift coach, I have been asked by Memorial Hospital to help you achieve your most cherished goals.
The correct answer is D. It is not clear who the “gift coach” represents. The donor? The hospital? It is also not clear what line of work the gift coach “really” is in. Is this a person who sells products? Advice? Does he or she represent a financial firm? Is this person an associated person of a Registered Investment Advisor? Is he or she a peer volunteer? What is the scope of the service being offered? What types of “cherished goals” will be addressed? Giving only? Giving in the context of a financial plan, an investment plan, an estate plan? Clients or donors should not have to guess.
The essay “Doing Well, Doing Good, and Doing No Harm” suggests that which of these is the most dangerous?
A) A conscious incompetent
B) A conscious competent
C) An unconscious competent
D) An unconscious incompetent
D) An unconscious incompetent
The correct answer is D. An unconscious incompetent does not know what he or she does not know. Perhaps “Ignorance is bliss” may sometimes be true, but this is rarely the case for a donor who has been guided by an ignorant advisor. By recognizing his or her own shortfalls, the advisor or gift planner comes to the realization that he or she needs to work with other professionals who can round out the knowledge and skills required for a complex case.
Which is the best definition of a “synthesizing generalist,” as that term is used in the CAP curriculum?
A) A person on the team with no specialized expertise, but with a general understanding of the situation
B) A person who operates at a high level but with limited grasp of the relevant details
C) A person who has an excellent grasp of the client’s goals, aspirations, and personal situation, who can help organize a team to meet the client’s needs and desires
D) A person who operates in generalities
C) A person who has an excellent grasp of the client’s goals, aspirations, and personal situation, who can help organize a team to meet the client’s needs and desires
The correct answer is C. The generalist needs to know enough about the specialties to be a good talent scout, to bring a good team together if called upon to do so, to understand what the client or donor wishes to accomplish, and to help the client or donor synthesize what the planning team is suggesting. The synthesizing generalist may have deep expertise in a given role, but he/she also has good lateral vision and sees where his/her own expertise fits in the bigger picture.
On Bryan Clontz’s list of top ten gifts to avoid are all of these, except
A) Timeshares
B) Life insurance policies with loans
C) Patents producing no cash flow
D) Commercial real estate
D) Commercial real estate
The correct answer is D. Actually, commercial real estate, along with closely held business interests, are among the most likely gifts to be successful for a charity that is able to accept them and dispose of them.
With respect to gifts of S-Corp stock to a DAF, all of these statements below is (are) true, EXCEPT:
A) The gift is deductible at basis only or at fair market value, if less
B) Income flows through to the DAF as Unrelated Business Income
C) Gain upon sale inside the trust produces Unrelated Business Income to the DAF
D) The DAF sponsor gets a deduction for charitable gifts made from its DAF, thereby reducing shrinkage from Unrelated Business Taxable Income
A) The gift is deductible at basis only or at fair market value, if less
The correct answer is A. The deduction is for fair market value. The other statements are true. The benefit of the gift is reduced because the DAF (or actually the DAF sponsor) has to pay tax on unrelated business income flowing through from the S Corporationh and also on the gain upon sale inside the DAF. This UBIT is offset by the deduction the sponsor can take for grants made from its funds. Needless to say, this is a complex topic that requires experts. As synthesizing generalists, we spot an opportunity, flag some of the issues, and connect the donor and his or her tax and legal counsel to potential DAF providers.
