What estate planning strategy would you recommend that might use her usual amount of charitable giving to transfer assets to her children?
Finance 550C – Endowments, Foundations, & Philanthropy
Final Exam
Instructions:
• Please work on your own
• Not every question below has a clear correct answer – what I’m looking for in your answers is your analysis and that you can apply what you’ve learned in the class.
• Your answers don’t need to be long. Just thoughtful.
• Please email me your answers by the due date above. Please put your name or student number in the file name.
• There are 13 questions. Have fun!
Questions:
1. Sam is a trustee of his family’s private foundation. Having an undergraduate degree in finance as well as an MBA, he is knowledgeable about investments. He thinks that the foundation would make better returns if the existing portfolio were sold and reinvested in a combination of Bitcoin and distressed debt. Are there any rules that suggest that this is not a good idea?
2. Susan owns a painting that was left to her by her grandparents decades ago. She recently learned that it is worth $50,000, which was a surprise to her because she doesn’t really like it. Susan has been contemplating making a big gift to her church for expanding its support of the homeless. She thinks she’d like to give the painting to the church. She figures that her church can sell the painting and use the proceeds in its homeless project. You are her financial advisor. Is this a good idea?
3. Samantha is widowed and has three children who are young adults. She’d like to move assets to them over time without estate tax and without using her gift and estate tax exemption. She gives about $100,000 per year to charity. What estate planning strategy would you recommend that might use her usual amount of charitable giving to transfer assets to her children? Briefly explain how the strategy works.
4. Scott is 92 years old and has terminal cancer. His estate plan leaves $5 million to Siteman Cancer Center at his death. You are his financial advisor. What do you recommend with respect to this gift? Please explain the reasoning for your recommendation.
5. Sonja is your client. She’s recently sold her business and has quite a bit of cash to invest. She’s recently read about the great returns of the Wash U’s Endowment as well as the returns of other university endowments like Yale and Stanford. She asks you whether she can and should invest like those university endowments. What is your advice to Sonja?
6. Stephen is the majority owner of Oak Industries, a leading manufacturer of electronic insulation. Oak Industries is being sold to a private equity firm. Stephen’s share of the sale proceeds will be about $70 million, almost all of which is gain. He would like to give $10 million to a charitable entity that he would control and would allow him to give to public charities over time. Should Stephen use cash or Oak Industries stock for his charitable gift? And should he establish a private foundation or a donor advised fund? Please explain your reasoning.
7. Sarah is very charitable. She’s on the board of a few charities, regularly volunteers for those organizations, and financially supports them with charitable donations. Sarah has recently inherited a large amount of wealth from her parents and would like to do more to make an impact in areas that she thinks are important. She’d also like to engage her children to establish a philanthropic legacy for their family. You are her advisor – what is your advice to her? What strategies should she employ?
8. During Class Six we heard from the Cordes family and how they invest their private foundation. A key concept is employing the 95% and not just the 5% for their foundation’s mission. Please explain what the Cordes family meant by this concept.
9. Sophie gives $25,000 – $50,000 a year to charity. Most charitable gifts are in the $500 – $5,000 range and she has always just written a check when making her charitable gifts. She does make a few bigger gifts of $10,000 or more from time-to-time. She has an investment portfolio of publicly-traded stocks, many of which have a low cost basis. Assume Sophie becomes a client of yours. What do you advise her with respect to her charitable giving? Is there a better way for her to give to charity?
10. Sebastian owns a house on 100 acres of wooded land. He loves to hike around his property, alone and with friends and family. He remembers when his property was in the “middle of nowhere” but notes with consternation that urban sprawl has led to development of subdivisions and stores near his property. The thought of his property one day being tract houses, or a Home Depot makes him sad. You are Sebastian’s financial advisor. Do you have any ideas for how he might ensure that his property won’t be developed in the future?
11. Which of the following are organizations to which a donor can deduct their contribution:
a. A church
b. A university
c. A fraternity
d. A political candidate’s campaign
e. A food pantry
f. A car wash
g. A bowling alley
Answer: _______________
12. Skyler created a private foundation with a $10 million contribution in 2021. She and her husband, Simon, are trustees. Skyler and Simon don’t know that they need to issue a substantiation letter to Skyler as donor and so they don’t send one prior to filing their 2021 tax return. In 2023 their income tax return is audited by the IRS. Will the IRS allow the $10 million deduction? Assume that Skyler can prove that she transferred the $10 million to the foundation and that the foundation qualifies as a 501(c)(3) entity.
13. Assume you just won the Powerball lottery. Congratulations! You now have $100,000,000 net of tax. How would you invest your $100 million? There are no wrong answers (other than just keeping it in cash).