1. Which of the following is NOT an important reason why fundraisers would likely be interested in learning about charitable giving and retirement plan assets?
a) Because such a large share of wealth is held in retirement plan assets
b) Because retirement plan assets left at death to non-charities can be heavily taxed, making transfers to charities at death relatively inexpensive
c) Because current gifts from IRAs are particularly attractive for living donors under age 59 ½
d) Because donors over 70½ must make withdraws from standard IRAs even if they don't need the money, potentially opening up the possibility for charitable giving
e) Because Roth conversions may cause large spikes in income that donors will want to offset with charitable, or other, deductions
2. According to a 2010 publication by the Investment Company Institute, about what percentage of all household financial assets are held in the form of retirement assets?
a) 5%
b) 10%
c) 36%
d) 51%
e) 75%
3. The participant ages that separate the life stages of a standard IRA account between early distributions, regular distributions, and required minimum distributions are
a) 49 ½ and 70 ½
b) 59 ½ and 69 ½
c) 59 ½ and 70 ½
d) 70 ½ and 79 ½
e) 55 ½ and 70 ½
4. All of the following are possible reasons why withdrawing money from an IRA to make a charitable gift during life may generate net tax costs, EXCEPT
a) If the donor is not yet itemizing deductions, the donor will not receive the full value of the resulting charitable deduction due to the loss of the standard deduction
b) If the donor has already made charitable gifts beyond the income giving limitations, the donor will not receive the full value of the resulting charitable deduction in the current year
c) If the donor is under age 59 ½, withdrawals from the IRA will generate a 10% penalty that will not be offset by the charitable deduction
d) Because the withdrawal will count as income to the donor, the donor's increased income level may disqualify him or her for other tax deductions that are phased out at specified income levels.
e) In certain years Congress has allowed those over age 70 ½ to make qualified charitable distributions (QCD), and donors using these provisions may lose the value of the deduction due to increased levels of reported income and/or loss of the standard deduction
5. What is the most obvious reason why withdrawing money from an IRA before age 59 ½ in order to make a charitable gift is NOT tax efficient?
a) Because such withdraws generate at 10% penalty
b) Because withdraws count as taxable income to the participant
c) Because taking a charitable deduction requires itemization
d) Because there are limits on the amount of deductible charitable gifts that a person can make each year
e) Because required minimum distributions do not start until age 70 ½
6. A person of the following age can make a withdrawal from his or her IRA, give it to charity, and potentially have all taxes and penalties completely offset by the charitable deduction:
a) 40
b) 45
c) 50
d) 55
e) 60
7. What happens if a person does not take the required minimum distribution from an IRA after reaching age 70½?
a) Nothing
b) The principal of the IRA becomes fully taxable
c) The taxpayer is taxed on the value of the Required Minimum Distribution, regardless of whether he actually withdraws it or not
d) The IRS charges a 50% penalty for the amount that should have been withdrawn but was not
e) The IRS charges a 10% penalty for not withdrawing, mirroring the 10% penalty charged for withdraws before age 59 ½
8. In years in which the Qualified Charitable Distribution has been allowed by congress, which of the following charitable transfers might have been considered a Qualified Charitable Distribution?
a) A transfer of $10,000 from a 401(k), 403(b), pension, or profit sharing plan by a person aged 72
b) A transfer of $10,000 from an IRA by a person aged 65
c) A transfer of $10,000 from an IRA to a private foundation by a person aged 80
d) A transfer of $100,000 to a public charity from an IRA by a person aged 73
e) A transfer from an IRA to a Charitable Remainder Trust of $50,000 by a person aged 74
9. Which of the following transactions would normally result in a charitable deduction in the year of transaction greater than any income reported as the result of the transaction?
a) Withdrawing $10,000 of direct contributions made to a Roth IRA and giving the money to a public charity
b) Transferring $10,000 directly from an IRA to a public charity through a Qualified Charitable Distribution in a year in which such transactions were permitted
c) Withdrawing $10,000 from an IRA and giving the money to a public charity when the donor was age 50.
d) Withdrawing $10,000 from an IRA and giving the money to a public charity when the donor was age 65.
e) Withdrawing $10,000 from an IRA and giving the money to a public charity when the donor was age 75 and the $10,000 was a required minimum distribution.
10. Why is it more advantageous to give retirement plan assets, rather than other types of assets, to charity at death?
a) Retirement plan assets receive no step-up in basis if given to charitable beneficiaries
b) Retirement plan assets are subject to both gift and estate taxes if given to non-charitable beneficiaries
c) Retirement plan assets are subject to both income taxes and estate taxes if given to non-charitable beneficiaries
d) Retirement plan assets accumulate tax free, making them a larger part of the overall estate
e) Retirement plan assets are more difficult to sell in the subsequent estate administration if given to non-charitable beneficiaries
11. Which of the following would not be a good way to name a charity on a beneficiary form in order to transfer retirement assets to the charitable entity?
a) 100% of a $1,000,000 IRA to a public charity
b) 100% of a $1,000,000 IRA to a private foundation
c) 100% of a $1,000,000 IRA to a private foundation managed by my surviving children and grandchildren
d) 100% of a $1,000,000 IRA to the decedent's estate where his will directs that $1,000,000 shall be paid to a public charity
e) 100% of a $1,000,000 IRA to a public charity's donor advised fund with the decedent's daughter as the named advisor
12. John Donor is the participant in a defined benefit pension plan that will pay him $50,000 per year for life (a.k.a. an annuity with no term certain). What are possible tax advantages if John bequeaths this asset to a charity in his will?
a) John's estate will receive a charitable estate tax deduction
b) John's estate will receive a charitable income tax deduction to offset the income taxes associated with an IRD asset
c) John's estate will receive both a charitable estate tax deduction and avoid paying income taxes from the IRD asset
d) The charity will receive more money than if he had engaged in lifetime giving
e) There are no tax advantages
13. Steve is a graduate of Texas Tech University. His wife Mary is a graduate of a rival school, Texas A&M University. Steve makes gifts to Texas Tech out of his separate bank account, because Mary hates the school. Steve plans to name Texas Tech University as a 10% death beneficiary of his 401(k) account and Mary as a 90% death beneficiary. Why might he not be able to do this?
a) Because it is impossible to name more than one death beneficiary on a 401(k) account
b) Because beneficiaries must share equally, it is not possible to list Texas Tech University as a 10% beneficiary
c) Because the spouse, if she survives, must be the sole beneficiary of a 401(k) account
d) Because if Mary splits the 401(k) with someone else, the transfer will no longer qualify for the marital deduction
e) Because Mary must give her permission for Texas Tech University to be named as a death beneficiary and she hates the school
14. John dies leaving a $1,000,000 IRA to his wife Mary. Mary rolls the IRA into her own account. Over time the account grows to $2,000,000. Mary dies at age 69 having never made a withdrawal from this account. She leaves the account to her favorite public charity. If Mary and John were both in a 40% estate tax bracket at both of their deaths and both had a 40% combined state and federal income tax bracket, how much tax will all of these transactions generate in total?
15. An IRA with a charity listed as the death beneficiary is similar to a Charitable Remainder Trust in that the account can be used during life, but goes to charity at death. Which of the following is NOT an advantage to the donor of an IRA with a charitable beneficiary as compared with a Charitable Remainder Trust?
a) With an IRA, the donor has the freedom to change his or her mind and later decide not to leave the funds in the IRA to any charity
b) With an IRA, the donor may take any amount of money in the account out (subject to taxes and penalties) at any time and is not limited to fixed dollar or fixed percentage payouts
c) With an IRA, the donor receives a 100% tax deduction for all funds placed into the IRA, whereas the Charitable Remainder Trust provides a deduction for only the share of funds representing the present value of the charity's projected remainder interest
d) With an IRA, the donor incurs relatively few administration costs, whereas with a Charitable Remainder Trust there are significant ongoing administration costs, including the requirement to annually file a tax return on behalf of the Charitable Remainder Trust
e) The donor can place more money into an IRA than into a Charitable Remainder Trust
16. Roth conversions and charitable planning are often complementary. All of the following are examples of that complementarity EXCEPT
a) By giving a remainder interest in a home or farmland to charity, the taxpayer can generate a significant deduction to offset the taxable income created by the Roth conversion even without having cash available to make a direct charitable gift
b) By use of a grantor Charitable Lead Trust, the donor can take an immediate deduction for his next ten years' worth of charitable giving (assuming sufficient assets are shifted into the CLT to fund the future charitable contributions), helping to immediately offset the taxable income created by the Roth conversion
c) By naming a charitable organization as the death beneficiary of the new Roth IRA resulting from the Roth conversion, the donor can avoid the income taxes that would have to be paid at death by his or her heirs due to these assets being considered Income in Respect of a Decedent (IRD)
d) For a donor who has given in excess of the income giving limitations and has carryover charitable deductions that are about to expire, a Roth conversion can generate the taxable income needed to claim these deductions by allowing the donor to pay taxes in advance on future withdrawals from the retirement account.
e) By use of a donor advised fund, the donor can take an immediate deduction for future charitable grants by placing money into the donor advised fund that will, in the future, be paid out to other charities, helping to offset the taxable income created by the Roth conversion
17. Roth conversions and charitable planning can work together largely by helping to balance
a) Gifts and Deductions
b) Income and Deductions
c) Income taxes and Estate taxes
d) IRD and Charitable Deductions
e) Taxes and Retirement Withdrawals
Answers
1/ Answer: C. Explanation: Current gifts of retirement assets are not particularly attractive for living donors under age 59 ½, because then withdrawals from traditional IRAs are subject to a 10% penalty in addition to the withdrawal being taxable as income. All other reasons given would be valid reasons why a fundraiser would want to know about the possible interaction of charitable giving and retirement plans.
2/ Answer: C. Explanation: According to the publication, about $16.5 trillion, or 36% of all household financial assets, were held in the form of retirement assets in 2010.
3/ Answer: C. Explanation: Distributions taken before age 59 ½ are early and are usually subject to a 10% penalty. After age 70 ½, participants are required to take minimum distributions from the IRA, regardless of their desire or need for the funds.
4/ Answer: E. Explanation: Qualified charitable distributions (QCD) result in no income and no deduction for the donor. Thus, the donors cannot be disadvantaged by either increased income or the need to itemize deductions.
5/ Answer: A. Explanation: The most obvious reason why making such withdrawals for charitable gifting is not tax efficient is the 10% penalty on withdrawals before age 59 ½. The withdrawals do count as taxable income, but that does not necessarily create a problem, as it is possible for the resulting charitable deduction to offset this taxable income. Charitable deductions do require itemization, but many taxpayers are itemizing deductions already (most commonly to take the mortgage interest deduction), so this is not an obvious disadvantage. There are limits on the amount of deductible charitable gifts that a person can make each year, but this applies to all forms of giving and doesn't explain why making withdraws from an IRA account prior to age 59 ½ is particularly disadvantageous. Similarly, although it is true that required minimum distributions do not start until age 70 ½, this does not explain why it would be disadvantageous to make a withdrawal prior to age 59 ½.
6/ Answer: E. Explanation: Before age 59 ½ withdrawing money from an IRA typically generates a 10% penalty that will not be offset by the charitable deduction.
7/ Answer: D. Explanation: Failing to take a required minimum distribution results in a 50% penalty for the amount that should have been withdrawn but was not
8/ Answer: D. Explanation: When congress has allowed the Qualified Charitable Distributions from IRAs to charities (permitting the transaction to generate no income or deduction) such QCDs have been limited to IRA or IRA rollovers by participants age 70 ½ or older only to public charities and in a maximum amount of $100,000
9/ Answer: A. Explanation: Withdrawing funds from the Roth IRA generally generates no taxable income and the subsequent gift creates a charitable deduction, thus resulting in a transaction that generates more deduction than income. A Qualified Charitable Distribution generates no income and no deduction. IRA withdrawals after age 59 ½ can, at best, result in a deduction as large as the reported income. Prior to age 59 ½, such withdrawals typically generate an additional 10% penalty.
10/ Answer: C. Explanation: Whenever possible, testamentary charitable gifts should be made from retirement plan assets because such assets are subject to both income taxes and estate taxes. Because no income taxes have yet been paid on the assets they are considered Income in Respect of a Decedent (IRD), and income taxes will be due on them. However, when received by a charity, no income or estate taxes are due because the charity is a tax exempt entity. Thus, non-charitable beneficiaries are much better off if they receive other assets, which do not generate income tax liability, than if they receive IRD assets - like retirement plan assets - that do generate income tax liability.
11/ Answer: D. Explanation: Paying the IRA to the estate and using those funds to fulfill the specific dollar (pecuniary) bequest to a charity will cause the estate to pay the income taxes on the IRA. No income taxes would have to be paid if the IRA were paid directly to a public charity or private foundation.
12/ Answer: E. Explanation: A defined benefit pension plan paying $50,000 for life has no residual value after the death of the participant. Thus, at John's death there is no retirement asset remaining. Attempting to bequeath the asset has no effect.
13/ Answer: E. Explanation: Nothing prevents a 401(k) account from naming multiple death beneficiaries in equal or unequal shares. However, the participant's spouse must approve the beneficiary for any retirement accounts covered by ERISA, and 401(k) accounts, unlike IRAs, are covered by ERISA.
14/ Answer: $0. Explanation: There are no income taxes due on the money placed into the IRA. There are no income or capital gains taxes on the growth of the money inside the IRA. There are no estate taxes when transferring the IRA from John to Mary because of the unlimited marital deduction. There are no estate taxes when transferring the IRA from Mary to the charity because of the charitable deduction. Mary pays no income taxes because she never withdrew any money from the IRA. Her estate pays no income taxes as it never owned the IRA. The charity pays no income taxes because it is a tax exempt entity. Thus, $0 of taxes are generated by this series of transactions.
15/ Answer: E. Explanation: The two primary disadvantages of the IRA with charitable death beneficiary is that only a limited amount of funds can be placed into the IRA and that the IRA cannot avoid capital gains tax by accepting transfers of appreciated property. Because of these limitations, the donor would not normally be able to place more money into the IRA than into a Charitable Remainder Trust. All other examples are advantages to the donor of the IRA with charitable death beneficiary over the Charitable Remainder Trust.
16/ Answer: C. Explanation: Roth IRAs do not generate IRD (Income in Respect of a Decedent) because unlike traditional IRAs, the income taxes have already been paid. All other examples are valid ways in which Roth conversions and charitable planning can work together.
17/ Answer: B. Explanation: Roth conversions generate taxable income and charitable planning generates charitable deductions. When used alone it is possible for charitable planning to generate too many deductions for the donor's income level. Similarly, a Roth conversion can generate too much taxable income creating the need to offset such income with large deductions such as those that can be created by charitable planning.