Donating Retirement Plan Assets

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Donating Retirement Plan Assets

This quiz is part of the introductory curriculum for the graduate course Personal Financial Planning 5325 "Introduction to Charitable Planning" from Texas Tech University. For free downloads of the audio lectures and PowerPoint slides for this course, or to learn about the online Graduate Certificate in Charitable Financial Planning at Texas Tech University, go to www. EncourageGenerosity. Com


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Questions and Answers
  • 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 bequests to charities relatively inexpensive

    • C. 

      Because current gifts from IRAs are particularly attractive for living donors under age 60

    • 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 number one 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 become 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 from a 401(k), 403(b), pension, or profit sharing plan

    • B. 

      A transfer from an IRA by a person aged 65

    • C. 

      A transfer from an IRA to a private foundation

    • D. 

      A transfer of $100,000 to a public charity from an IRA

    • 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 non-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 50% 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. 
    John dies and leaves a $1,000,000 IRA to a charitable remainder trust naming Mary, his surviving spouse, as the sole income beneficiary.  Which of the following is an example of how this transaction might differ from John leaving his IRA directly to Mary?
    • A. 

      Leaving the IRA directly to Mary will generate no estate tax at John’s death, but leaving money to the charitable remainder trust will.

    • B. 

      Leaving the IRA directly to Mary qualifies for a marital deduction, but leaving the IRA to the charitable remainder trust will not.

    • C. 

      Leaving the IRA directly to Mary will generate no estate tax at Mary’s death, but leaving the IRA to the charitable remainder trust may.

    • D. 

      Leaving the IRA directly to Mary will allow her to use as much of the money as she desires, but leaving the IRA to the charitable remainder trust limits her to a fixed dollar (CRAT) or percentage (CRUT) amount of the trust.

    • E. 

      Leaving the IRA directly to Mary will create ordinary income whenever she takes a withdrawal, but leaving the IRA to the charitable remainder trust will not create ordinary income for Mary.

  • 16. 
    A client wishes to use his $1,000,000 IRA at death to provide ten years of income to his child with the remainder going a charity.  What is the best way to accomplish this goal?
    • A. 

      List the child as the beneficiary of the IRA and verbally inform the child of the intended plan that the remainder should go to charity after ten years.

    • B. 

      List the estate as the beneficiary and write in the will that $1,000,000 from the estate should be placed into a charitable remainder trust with payments to the child for ten years, remainder to the charity.

    • C. 

      List a charitable lead trust as the beneficiary with charity payments made substantially all at the end of the ten year trust term due to “shark fin” management of underlying assets postponing income until the end.

    • D. 

      List a charitable remainder trust as the beneficiary of the IRA with payments to the child for ten years, remainder to the charity.

    • E. 

      List a donor advised fund as the beneficiary with the child named as the advisor to direct contributions, allowing the child to name nonprofit charities that offer to directly benefit the child.

  • 17. 
    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 almost no 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. 

      Over time, the donor can place more money into the IRA than into a Charitable Remainder Trust

  • 18. 
    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 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

  • 19. 
    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

  • 20. 
    Thanks for taking the quiz!  The rest of the free online curriculum, including slides and audio lectures, is at www.EncourageGenerosity.com.  Our ability to create and post new curriculum depends on being able to prove that it is actually being used by professionals in nonprofits or financial advising.  It would help us tremendously if you would write your name and the name of your organization below, so that we will have evidence that this product is being used.  Thanks!