CEA Charitable Giving Strategies 4 — Questions and Answers
Question 1: A Pooled Income Fund differs from a Charitable Gift Annuity in that the Pooled Income Fund:
- Pays a fixed annuity rate guaranteed by the charity
- Pays a variable income based on the fund's actual investment return (Correct answer)
- Provides a larger charitable deduction than a CGA for the same gift
- Requires a minimum term of 20 years before the charity receives assets
Correct answer: Pays a variable income based on the fund's actual investment return
A Pooled Income Fund pays donors a proportionate share of the fund's actual annual investment income, making payments variable, unlike a CGA which pays a fixed annuity.
Question 2: The 'Ten Percent Test' for Charitable Remainder Trusts requires that:
- At least 10% of each contribution must be distributed to charity immediately
- The present value of the charitable remainder interest must be at least 10% of the initial contribution (Correct answer)
- The trust must invest at least 10% of assets in tax-exempt bonds
- The non-charitable beneficiary must be at least 10 years younger than the donor
Correct answer: The present value of the charitable remainder interest must be at least 10% of the initial contribution
IRC Section 664 requires that the present value of the remainder interest passing to charity must be at least 10% of the initial net fair market value of assets transferred to the trust.
Question 3: Which of the following is a self-dealing transaction prohibited under IRC Section 4941 for private foundations?
- Paying reasonable compensation to a disqualified person for services rendered
- Granting scholarships to students regardless of family connection to foundation managers
- Making a loan to a foundation manager even at market interest rates (Correct answer)
- Investing foundation assets in publicly traded securities
Correct answer: Making a loan to a foundation manager even at market interest rates
Under IRC Section 4941, loans between a private foundation and a disqualified person constitute self-dealing regardless of whether the terms are at market rates.
Question 4: A Charitable Lead Trust (CLT) is most useful for estate planning when:
- The donor expects interest rates to be high and assets to appreciate rapidly
- Interest rates are low and assets are expected to appreciate significantly (Correct answer)
- The donor needs income from the assets during their lifetime
- The donor wants to maintain control over investment decisions
Correct answer: Interest rates are low and assets are expected to appreciate significantly
CLTs are most effective when the Section 7520 rate is low (reducing the calculated value of the charity's annuity) and assets are expected to appreciate, maximizing the remainder passing to heirs.
Question 5: What IRS form must a donor obtain from a charity for a single cash contribution of $250 or more to support the deduction?
- Form 8283
- A contemporaneous written acknowledgment from the charity (Correct answer)
- Form 1099-MISC from the charity
- Form 990 filed by the charity
Correct answer: A contemporaneous written acknowledgment from the charity
For contributions of $250 or more, donors must obtain a contemporaneous written acknowledgment from the charity before filing their tax return, or the deduction is disallowed.
Question 6: Which rule limits the deduction for contributions of ordinary income property (such as inventory) to a public charity?
- The deduction is limited to the donor's adjusted basis in the property (Correct answer)
- The deduction equals the fair market value minus the long-term capital gain element
- The deduction equals the fair market value of the property at time of gift
- The deduction is limited to 20% of AGI regardless of property type
Correct answer: The deduction is limited to the donor's adjusted basis in the property
Contributions of ordinary income property are limited to the donor's adjusted basis; the donor cannot deduct the unrealized ordinary income element that would have been recognized on a sale.
Question 7: A donor age 72 with a large IRA wants to make a significant charitable gift while satisfying their Required Minimum Distribution. Which strategy accomplishes both goals most efficiently?
- Withdraw the RMD, pay income tax, then donate the net amount
- Contribute the RMD amount to a Donor-Advised Fund from the IRA
- Make a Qualified Charitable Distribution directly from the IRA to a public charity (Correct answer)
- Convert the IRA to a Roth IRA and donate the converted amount
Correct answer: Make a Qualified Charitable Distribution directly from the IRA to a public charity
A QCD up to $100,000 transfers directly from an IRA to a public charity, satisfies the RMD requirement, and is excluded from gross income, making it the most tax-efficient approach.
CEA Charitable Giving Strategies 4
A Pooled Income Fund differs from a Charitable Gift Annuity in that the Pooled Income Fund: