Risk Assessment & Underwriting Flashcards

Which scenario would MOST likely trigger the IRS 'self-dealing' rules applicable to private foundations, creating a risk of excise taxes?

Answer: A foundation purchases property from a disqualified person at fair market value

IRC §4941 prohibits most financial transactions between a private foundation and disqualified persons, including purchases even at fair market value, with very limited exceptions.

A philanthropic advisor identifies that a donor's proposed charitable remainder trust has a payout rate of 11%. The primary compliance risk is:

Answer: The trust likely fails the 10% minimum remainder test, disqualifying it as a CRT

High payout rates combined with younger beneficiaries make it mathematically impossible for the charity's remainder to equal 10% of the initial contribution, disqualifying the trust.

For a donor-advised fund (DAF), which of the following represents the PRIMARY risk to the donor after a contribution is made?

Answer: The sponsoring organization could deny or redirect the donor's grant recommendations

Because the sponsoring organization legally owns DAF assets, it has ultimate discretion over grants, and the donor's recommendations are advisory only and can be declined.

In evaluating a charitable lead unitrust (CLUT), the advisor warns that compared to a CLAT, the CLUT introduces additional risk because:

Answer: Annual payments to charity fluctuate with asset values, so the charity may receive less if assets decline

Unlike a CLAT's fixed annuity payments, a CLUT's payments are a percentage of annually revalued assets, so a market decline reduces what the charity receives each year.

Which reserve requirement practice is MOST important for a charity running a gift annuity program in compliance with most state regulations?

Answer: Maintaining reserves equal to at least the present value of future annuity obligations

Most states require charities to segregate and maintain reserves that cover the present value of all outstanding annuity obligations to protect annuitants if the charity becomes insolvent.

A donor wants to contribute highly appreciated artwork to fund a charitable remainder trust. The advisor should caution that:

Answer: The donor cannot take a charitable deduction for appreciated tangible personal property contributed to a CRT

Contributions of tangible personal property to a CRT do not generate a charitable income tax deduction unless the property is put to a 'related use' by the charity, which is impossible in a CRT.

The 'jeopardizing investment' excise tax under IRC §4944 applies to:

Answer: Private foundations that make investments deemed to carry an unacceptably high risk of loss relative to the foundation's charitable purposes

IRC §4944 imposes an excise tax on private foundations—and their managers—that make investments that jeopardize the carrying out of their exempt purposes.