CAP CAP Philanthropic Vehicles & Structures 1 — Questions and Answers
Question 1: A Donor Advised Fund (DAF) is best described as:
- A private foundation that operates its own charitable programs
- A charitable giving account sponsored by a public charity where donors recommend grants (Correct answer)
- A trust that pays income to the donor for life before transferring to charity
- A pooled investment vehicle exclusively for endowment purposes
Correct answer: A charitable giving account sponsored by a public charity where donors recommend grants
A DAF is a charitable giving account held by a sponsoring public charity; donors make irrevocable contributions, receive an immediate tax deduction, and recommend grants over time.
Question 2: Which of the following is a key regulatory distinction between a public charity and a private foundation under U.S. tax law?
- Private foundations must distribute at least 5% of assets annually; public charities have no such requirement (Correct answer)
- Public charities pay a 1.39% excise tax on investment income; private foundations do not
- Private foundations can accept anonymous donations; public charities cannot
- Public charities must register with the SEC; private foundations register only with the IRS
Correct answer: Private foundations must distribute at least 5% of assets annually; public charities have no such requirement
Private foundations are required to distribute at least 5% of the fair market value of their investment assets annually for charitable purposes, while public charities are not subject to this mandatory payout rule.
Question 3: A Supporting Organization (SO) is a type of public charity. What is its defining characteristic?
- It operates independently with no relationship to other nonprofits
- It is organized and operated exclusively to support one or more specified public charities (Correct answer)
- It qualifies as a private foundation but elects public charity status
- It must have a majority of board members appointed by government entities
Correct answer: It is organized and operated exclusively to support one or more specified public charities
A Supporting Organization is a 501(c)(3) public charity that maintains a formal relationship with and supports one or more specified public charities, qualifying it for public charity status.
Question 4: What is a Charitable Gift Annuity (CGA) and who typically issues them?
- An annuity product issued by insurance companies with charitable tax benefits
- A contract between a donor and a charity where the donor transfers assets and receives fixed income for life (Correct answer)
- A government-sponsored retirement vehicle with charitable components
- A type of mutual fund that donates a percentage of gains to charity
Correct answer: A contract between a donor and a charity where the donor transfers assets and receives fixed income for life
A CGA is a contract between a donor and a nonprofit charity; the donor transfers assets in exchange for fixed lifetime income payments, with the remainder benefiting the charity.
Question 5: Which philanthropic vehicle allows multiple donors to pool contributions, benefit from professional investment management, and receive a pro-rata share of income while supporting charity?
- Donor Advised Fund
- Pooled Income Fund (Correct answer)
- Charitable Lead Trust
- Supporting Organization
Correct answer: Pooled Income Fund
A Pooled Income Fund combines contributions from multiple donors into a single fund managed by the charity; each donor receives income proportional to their share until death, when the remainder goes to charity.
Question 6: Under IRS rules, a private foundation engaging in a transaction that benefits a 'disqualified person' may face what consequence?
- Loss of 501(c)(3) status immediately
- Excise taxes on self-dealing transactions under IRC Section 4941 (Correct answer)
- Conversion to a public charity status automatically
- Criminal prosecution of board members
Correct answer: Excise taxes on self-dealing transactions under IRC Section 4941
Self-dealing transactions between a private foundation and disqualified persons (substantial contributors, officers, family members) trigger excise taxes under IRC Section 4941.
CAP CAP Philanthropic Vehicles & Structures 1
A Donor Advised Fund (DAF) is best described as: