1. If a donor purchases a gift annuity for $100,000, what is the minimum amount that must go to the charity?
a) The charity must receive at least $10,000 at the donor's death
b) The charity must receive at least $50,000 at the donor's death
c) If the donor lives exactly as long as his or her life expectancy, the charity must receive greater than $10,000
d) If the donor lives exactly as long as his or her life expectancy, the charity must receive at least $50,000
e) If the donor lives exactly as long as his or her life expectancy, the charity must receive an amount with a present value (at the time of the initial transaction) greater than $10,000
2. Some common reasons to use a charitable gift annuity would include all of the following EXCEPT
a) A donor wishes to make a large gift to a charity, but is concerned that she may outlive her assets and be left with no income
b) A donor already plans to leave an estate gift to the charity, but would like to get an immediate income tax deduction
c) A donor wishes to receive a fixed income stream that won't change or run out, even if market returns are poor
d) A donor wishes to receive income that is guaranteed by all of the assets of a large charitable institution
e) A donor wishes to gift appreciated property and completely avoid the payment of any capital gains taxes while receiving some income
3. Which of the following is an example of a requirement found in a state rule regulating charities issuing gift annuities in that particular state?
a) The charity must maintain a reserve equal to their payment obligations in the gift annuities
b) The charity must maintain a reserve equal to their payment obligations in the gift annuities plus a designated surplus
c) The charity must have been in operation for a minimum number of years (such as three years) and must have a minimum amount of cash reserves (such as $300,000).
d) The charity must meet no financial, reserve, or age requirements at all
e) All of the above are examples of state rules regulating charities issuing gift annuities in at least one state
4. Which of the following is NOT a negative risk for a charitable organization that is issuing charitable gift annuities?
a) The annuitants may, on average, live longer than their actuarial life expectancy
b) The annuitants may, on average, live only to their life expectancy, but those with relatively large annuities live longer
c) The annuitants may, on average, live only to their life expectancy, but those with relatively small annuities live shorter
d) The annuitants may, on average, live only to their life expectancy, but those with relatively small annuities live longer
e) The charity's investment returns may be less than those needed to fund the annuity payments
5. Appropriately licensed financial advisors can become involved in the charitable gift annuity process in all of the following ways except?
a) Managing gift annuity assets pools for nonprofit organizations
b) Selling commercial annuities as reinsurance for nonprofits issuing gift annuities
c) Giving advice to clients regarding the financial strength and stability of a nonprofit organization issuing charitable gift annuities
d) Selling charitable gift annuities on behalf of financial institutions
e) Giving advice to clients regarding the financial results of a charitable gift annuity
6. Which of the following actions would NOT create any risk of losing the exemption from securities regulations normally given to the offering of charitable gift annuities?
a) Paying a sales commission to fundraisers selling charitable gift annuities
b) Marketing charitable gift annuities primarily as investments, rather than as a means to make a charitable gift
c) Listing the rates available for donors as a percentages
d) Comparing the gift annuity rates with CD rates as a comparison of "yields"
e) Indicating that because gift annuity published rates are higher than other investment interest rates, they are therefore generating a higher "return"
7. Reinsuring gift annuities (where the charity purchases commercial annuities to match some or all of its annuity payment obligations) can offer the following benefits to a charitable organization operating a gift annuity program, EXCEPT
a) Reinsurance can exactly match an income stream (from the annuity company) to the charity's obligation to pay annuity checks.
b) Reinsurance removes the charity's legal obligation to make the annuity payments
c) Reinsurance removes the risk from the charity that the annuitant may live much longer than expected.
d) Reinsurance can be used to cover the risk associated with accepting a few very large gift annuities by allowing the charity to reinsure only those few annuities
e) Reinsurance prevents the charity from being in the odd circumstance of wishing for the early death of its donor annuitants.
8. Why is a gift annuity that is actuarially projected to pay 75% of its original cost to an 80 year old annuitant (with a 9 year life expectancy) riskier for the issuing charity than a gift annuity that is actuarially projected to pay 75% of its original cost to a 40 year old annuitant (with a 42 year life expectancy)?
a) An 80 year old annuitant is more likely to die
b) A 40 year old annuitant is more likely to die
c) An 80 year old annuitant is more likely to live 10 years past her original life expectancy
d) A 40 year old annuitant is more likely to live 10 years past her original life expectancy
e) An 80 year old annuitant is more likely to live to twice as long as her original life expectancy (thus resulting in 2 times the actuarially projected payout) than is a 40 year old annuitant.
9. Which of the following comparisons between charitable gift annuities and Charitable Remainder Trusts is incorrect?
a) A charitable gift annuity usually involves no costs charged directly to the donor for setup or administration, where a CRT may require both expenses
b) Charitable gift annuities can commonly be created even for transactions as small as five or ten thousand dollars, where a CRT is usually not practical unless much more money is involved
c) A charitable gift annuity is a simple (often one page) document, where a CRT often involves many pages and greater legal expense
d) A charitable gift annuity pays a fixed dollar amount to the donor, where a CRT is required to pay a percentage of all trust assets
e) A charitable gift annuity is issued by the charity itself, where a CRT is typically created by the donor.
10. All of the following are available options using some type of a charitable gift annuity EXCEPT:
a) The donor can name a different person as recipient of the annuity payments other than the donor himself or herself
b) The donor can select a fixed period annuity rather than a life annuity to receive larger payments over a shorter term
c) The donor could donate the remainder of the annuity if income payments from it are no longer needed
d) The donor could defer the payments of the annuity to increase the value of the remaining payments by purchasing a deferred charitable gift annuity
e) The donor could opt for a two life annuity in which the payments cease only after the death of both individuals
Answers
1/ Answer: E. Explanation: The charity must receive a share with a present value that is actuarially worth more than $10,000 (i.e., more than 10%) at time of the charitable gift annuity transaction. In other words, the value of what the charity receives must be worth more than $10,000 today (on the day the gift annuity is purchased). If the charity is expected to have to wait many years (the donor's life expectancy) to receive $10,000, this is clearly worth less than $10,000 today. So, the charity must be entitled to receive some future amount that is worth something more than $10,000 today.
2/ Answer: E. Explanation: Although a charitable gift annuity can defer the payment of capital gains tax where the annuitant is also the donor, the charitable gift annuity does not avoid the payment of capital gains tax, as would be possible with a direct gift or sometimes possible with a Charitable Remainder Trust. The other desires can be met by a charitable gift annuity
3/ Answer: E. Explanation: State rules vary widely. Some states have absolutely no regulation while others require annual reports proving that reserve amounts including a surplus percentage are always on hand.
4/ Answer: D. Explanation: The charity is at risk if the investment returns are less than expected or if the annuitants - weighted by the relative size of their annuities - live longer than expected. If the annuitants, on average, live to their life expectancy, but those with relatively small annuities live longer, it means that those with relatively large annuities are living shorter than their life expectancies. This would result in a positive net effect to the charity. All of the other options would result in a negative effect to the charity.
5/ Answer: D. Explanation: A financial institution cannot offer a charitable gift annuity. Only charities can offer a charitable gift annuity. All other alternatives are open to financial advisors who are appropriately licensed (e.g., with a license to sell commercial annuities).
6/ Answer: C. Explanation: Listing the rates available for donors as percentages is not a risky practice and such rates are included in almost all brochures for charitable gift annuities. Paying sales commissions results in an automatic nullification of the exemption, and all other practices listed are risky according to existing case law.
7/ Answer: B. Explanation: Even if a charity purchases a matching commercial annuity, it still has a legal obligation to make the annuity payments. Although there appear to be no modern examples where the bankruptcy of an insurance company led to the reduction of annuity payments for annuity holders, it is theoretically possible. In such a circumstance, the charity would still be obligated to make the annuity payments for the remainder of the donor's life. All other examples are potential benefits of reinsurance.
8/ Answer: E. Explanation: The actuarial projected payout is based upon the annuitant's life expectancy. If the 80 year old annuitant lives to age 89, she would receive payments worth 75% of the initial amount paid for the charitable gift annuity. If, however, she lived to age 98, she would receive twice that many payments. In order for the 40 year old to receive twice as many checks as expected, she would have to live to age 122. The likelihood of a 40 year old reaching age 122 is less than the likelihood of an 80 year old reaching age 98. In other words, although the average (or expected) payout percentage is the same in both cases, the potential variance is much greater for the older annuitant because her payout is based upon a shorter life expectancy.
9/ Answer: D. Explanation: Charitable Remainder Trusts can pay a fixed dollar amount like a charitable gift annuity. These are called Charitable Remainder Annuity Trusts. Charitable remainder unitrusts pay a percentage of all trust assets. The other comparisons are accurate.
10/ Answer: B. Explanation: Charitable gift annuities must be for the life of the annuitant. They cannot be for a fixed number of years. All other options are available with certain types of charitable gift annuities.