Risk Assessment & Underwriting Flashcards

A philanthropic advisor is reviewing a client's bequest intention to a nonprofit. Which risk should the advisor raise regarding conditional bequests?

Answer: If the condition cannot be fulfilled, the bequest may fail and pass elsewhere under state law

If a bequest condition becomes impossible to fulfill (e.g., the charity closes), state law may redirect the funds under cy-pres doctrine or intestacy, contrary to the donor's intent.

In underwriting a charitable gift annuity for a married couple on a two-life basis, the payout rate will be LOWER than a single-life annuity primarily because:

Answer: The expected payout period is longer since payments continue until the death of the survivor

A two-life annuity continues until the last surviving annuitant dies, creating a longer expected obligation period that requires a lower initial payment rate to keep the charity's reserve adequate.

A donor contributes S-corporation stock to a charitable remainder trust. The MOST significant tax risk is:

Answer: The trust cannot hold S-corporation stock, causing termination of the S election

Only eligible S-corporation shareholders can hold S-corp stock; a CRT is not an eligible shareholder, so the contribution triggers immediate termination of the S election.

When assessing operational risk for a private foundation, the advisor should note that failure to distribute the required minimum amount (5% of assets) annually results in:

Answer: An excise tax on the shortfall, with an additional tax if not corrected

IRC §4942 imposes an initial 30% excise tax on the undistributed amount, and if the deficiency is not corrected in the correction period, a 100% additional tax applies.

A philanthropic advisor is evaluating a donor's plan to fund a CRUT with a promissory note. The advisor should advise that:

Answer: Funding a CRT with a personal promissory note is a prohibited act of self-dealing and disqualifies the trust

A donor's own promissory note contributed to a CRT is considered a contribution of an incomplete or encumbered interest, and the IRS treats it as self-dealing, disqualifying the trust.

Which of the following BEST describes 'excess business holdings' risk for a private foundation?

Answer: The risk of holding more than 20% combined ownership in a for-profit business with all disqualified persons

IRC §4943 generally prohibits a private foundation and its disqualified persons from collectively owning more than 20% of a for-profit business, imposing excise taxes on excess holdings.

A philanthropic advisor recommends a qualified charitable distribution (QCD) from a donor's IRA. The key risk to highlight is that the QCD exclusion from income is lost if:

Answer: The donor is under age 70½ at the time of distribution

The QCD exclusion is only available to IRA owners who are age 70½ or older at the time of the distribution; distributions before reaching this age do not qualify.