CTFA Charitable Planning and Philanthropy 2 — Questions and Answers
Question 1: What is the minimum annual distribution requirement for a private non-operating foundation under IRC Section 4942?
- 3% of the fair market value of all foundation assets
- 5% of the average fair market value of net investment assets (Correct answer)
- 7% of total annual investment income
- 10% of total assets including program-related investments
Correct answer: 5% of the average fair market value of net investment assets
IRC Section 4942 requires private non-operating foundations to distribute at least 5% of the average fair market value of their net investment assets each year for charitable purposes.
Question 2: Under IRC Section 4941, which transaction between a private foundation and a disqualified person constitutes prohibited self-dealing?
- Investing foundation assets in publicly traded index funds
- Selling foundation-owned property to a substantial contributor at fair market value (Correct answer)
- Making grants to public charities where a disqualified person volunteers
- Hiring an investment advisor recommended by a foundation trustee
Correct answer: Selling foundation-owned property to a substantial contributor at fair market value
Under Section 4941, any sale or exchange of property between a private foundation and a disqualified person constitutes prohibited self-dealing, regardless of whether the price reflects fair market value.
Question 3: A Pooled Income Fund is structurally most similar to which type of investment vehicle?
- A private foundation that makes grants to public charities
- A donor advised fund held by a community foundation
- A mutual fund that allocates income to investors proportionally based on units held (Correct answer)
- A charitable remainder annuity trust paying fixed annual amounts
Correct answer: A mutual fund that allocates income to investors proportionally based on units held
A Pooled Income Fund maintained by a public charity commingles contributions from multiple donors and pays each donor a proportionate share of the fund's actual net income, similar to how a mutual fund allocates earnings.
Question 4: Under IRC Section 4943, what percentage limit generally applies to the combined holdings of a private foundation and all its disqualified persons in any business enterprise?
- 5% of voting stock or profits interest
- 10% of any class of stock
- 20% of voting stock or profits interest in the business enterprise (Correct answer)
- 35% of non-voting preferred stock only
Correct answer: 20% of voting stock or profits interest in the business enterprise
Section 4943 generally limits the combined business holdings of a private foundation and its disqualified persons to 20% of the voting stock (or profits interest) of any business enterprise.
Question 5: A 'zeroed-out' Charitable Lead Annuity Trust (CLAT) is primarily designed to accomplish which estate planning objective?
- Eliminate all income taxes on trust earnings during the charitable payment term
- Transfer appreciation above the Section 7520 hurdle rate to heirs with minimal gift or estate tax (Correct answer)
- Provide the grantor with a guaranteed income stream for the duration of their lifetime
- Ensure the charity receives the maximum possible remainder interest in the trust
Correct answer: Transfer appreciation above the Section 7520 hurdle rate to heirs with minimal gift or estate tax
A zeroed-out CLAT is structured so the present value of the annuity payments to charity equals the initial contribution (producing a zero taxable gift), meaning any investment growth above the Section 7520 rate passes to heirs gift-tax free.
Question 6: Which of the following characteristics distinguishes a public charity from a private foundation under IRC Section 509?
- Operating exclusively for religious or educational purposes as defined by state law
- Having a funding base concentrated primarily among a small group of related donors
- Being exempt from the Section 4942 minimum annual distribution requirement
- Receiving broad public support from diverse, independent sources (Correct answer)
Correct answer: Receiving broad public support from diverse, independent sources
Public charities receive broad public support from diverse independent sources and satisfy the public support tests under Section 509(a), distinguishing them from private foundations which typically rely on a narrow donor base.
Question 7: IRC Section 4944 imposes an excise tax on private foundations for 'jeopardizing investments.' What makes an investment jeopardizing?
- Any investment generating returns below the prevailing market rate of return
- An investment concentrated in a single industry sector exceeding 25% of the portfolio
- An investment that jeopardizes the carrying out of the foundation's exempt charitable purposes (Correct answer)
- Any equity investment not pre-approved by the foundation's board of directors
Correct answer: An investment that jeopardizes the carrying out of the foundation's exempt charitable purposes
Section 4944 defines a jeopardizing investment as one where the foundation's managers failed to exercise ordinary business care in considering whether the investment jeopardizes the foundation's ability to carry out its exempt charitable purposes.
CTFA Charitable Planning and Philanthropy 2
What is the minimum annual distribution requirement for a private non-operating foundation under IRC Section 4942?