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Finance 550C – Endowments, Foundations, & Philanthropy

Final Exam

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 to expand 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 via his last will and testament. You are his financial advisor. What do you recommend with respect to this gift? Should he instead make the $5 million gift during his life? 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 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 from the sale or contribute shares in Oak Industries prior to the sale to fund 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. 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?

9. The Sisters of St. Susan run a homeless shelter called Hope House, which is a 501(c)(3) charity. In order to provide job training and income for the people living in Hope House, the Sisters of St. Susan opened a restaurant called Hope Deli, which is located next to Hope House and is owned by Hope House. The homeless residents of Hope House staff the restaurant as cooks, wait staff, and managers. Hope Deli is profitable, and thus Hope House earns income. Is the income from Hope House UBTI? Why or why not?

10. 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

11. In class, we discussed how giving can be thought of as being along a continuum with being “charitable” on one end and being “philanthropic” on the other. Please explain the difference between “charitable giving” and being “philanthropic.”

12. Greg has a net worth of $50 million and is single. He’d like to fund a trust for his nieces and nephews with $10 million by making a gift. He has never used any of his estate and gift tax exemption. Will he owe gift tax on his $10 million gift to the trust?

13. Your client Jane would like to gift $25,000 to her college. Her assets include $100,000 of excess cash and $100,000 of Berkshire Hathaway stock that has a cost basis of $20,000. Jane’s annual income (AGI) is $500,000. Should she use cash or stock to fund the charitable gift? Explain your reasoning.

14. According to Larry Swedroe (in his talk & in his book), why might an investor expect investments in companies with high ESG scores (“green companies”) to underperform investments in companies with poor ESG scores (“brown companies”)?

15. 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 (besides just keeping it in cash).