Estate Planning: Chapter 11

In 2023, gifts of life insurance policies valued at $17,000 may qualify for the annual gift tax exclusion. Which of the following statements correctly describes a requirement to qualify for the exclusion?

The donee must have the unrestricted right to use, posses, or enjoy the donated property after the gift is received.

Which of the following rights will not cause an insurance policy to be included in the gross estate of the owner/insured if retained within the three years prior to the death of the owner/insured assuming the policy was in an ILIT?

The right to change the name of a charitable beneficiary to another charitable beneficiary.

Justin is the grantor of an ILIT. When he dies, his estate needs cash for funeral costs, final medical expenses, death taxes, etc. How can the proceeds of the life insurance policy in the ILIT be made available to the executor?

The trust terms may authorize the purchase of assets from the estate, or authorize loans to the estate.

Which of the following statement(s) concerning the choice of an entity purchase versus a cross-purchase partnership buy-sell agreement funded with insurance is false?

The use of existing insurance to fund the agreement causes a transfer-for-value problem if an entity agreement is selected but does not cause this problem if a cross-purchase approach is used.

Which of the following is not a reason that the death benefit of a life insurance policy would be included in a decedent's gross estate?

The decedent transferred the ownership of the policy to their business partner four years ago.

Eric and Tawny gift $120,000 to an irrevocable life insurance trust (ILIT) with Crummey provisions. The trust has, as beneficiaries, their three children. A few weeks later, Eric dies in an auto accident. Tawny, with the assistance of her attorney and financial planner, is calculating Eric's gross estate. How much of the gift will be brought back into Eric's gross estate? The annual exclusion is $17,000 for 2023. Split gifts are available. The 5/5 lapse rule is in effect.

$0.

Death benefit proceeds from a life insurance policy are included in a decedent's gross estate in which of the following circumstances: The decedent gave the policy to their father four years ago but retained the right to change the name of the beneficiary. The policy beneficiary is a grantor trust of the decedent, but the policy is owned by a closely held corporation in which the insured is the majority owner. The decedent gave the policy to a charity seven years ago. The decedent transferred the policy to an irrevocable life insurance trust five years ago with no retained incidents of ownership.

1 and 2

A client asks you to explain the statement, "Life insurance proceeds are tax-free." You answer that the general rule(s), subject to some exceptions, is/are that death benefits received from a life insurance policy due to the death of the insured are income tax free to the beneficiary, but which of the following are also correct: The proceeds are subject to estate taxes in the estate of the insured if the insured is the owner. The proceeds may be subject to income taxes if the policy was sold to a third party. The proceeds are not subject to income tax, even if sold to a third party if the contract is a modified endowment contract.

1 and 2.

Which of the following describes second-to-die life insurance? It is generally not includible in any insured's gross estate, if owned in an ILIT. It can provide liquidity to pay estate taxes at the death of the second insured. It pays a partial benefit at the death of the first insured to die (administrative and estate taxes) with the remainder paid in full at the second death. Premiums are usually less expensive than for individual policies on each of the two insureds for the same face amount.

1, 2 and 4

Use of an irrevocable life insurance trust (ILIT) can accomplish which of the following? Create a vehicle to avoid generation skipping transfer tax. Make proceeds available to the surviving spouse. Ensure that proceeds will be excluded from the probate of both spouses. Shelters cash contributed for premiums from taxation up to the annual exclusion amount.

1, 2, 3 and 4.

Which of the following constitute incidences of ownership in an insurance policy? The right to name or change the name of the beneficiary. The right to surrender the policy. The right to assign the policy. The right to borrow cash from the policy.

1, 2, 3 and 4.

Some reasons to use life insurance to fund business continuation agreements include which of the following: It provides sufficient assets for the buyer to perform on the contract. Insurance protects the company and its shareholder because the IRS cannot challenge the value of stock if provided for in a shareholders agreement (SHA). The insurance gives the agreement efficacy. No money . . . No deal. The insurance strengthens the commitment of the buyer when it must follow through on the agreement.

1, 3 and 4

Which of the following statements is correct regarding buy-sell agreements?

If the corporation is designated as the owner and irrevocable beneficiary of any life insurance policy used to fund the buy-sell agreement, the death benefit from the policy is not includible in the decedent shareholder's gross estate.

How many insurance policies are required under a LLC entity buy-sell agreement if the LLC has five members?

5

The best life insurance policy for the payment of federal estate taxes for a 55-year-old couple with illiquid assets is:

A joint and last-to-die life insurance policy owned by an irrevocable life insurance trust.

Which of the following terms describes an insurance policy that covers the lives of two people and is payable only after both have died?

A second-to-die life insurance policy

Which of the following statements accurately reflects the nature of buy-sell agreements?

A stock redemption plan must have a corporation as a party to the contractual arrangement.

Which of the following applies to the income tax or estate tax treatment of life insurance policy proceeds?

Benefits received under a periodic settlement option are partially subject to income tax.

Which of the following is not a major type of insurance?

Custodial life insurance

Ron, a certifiable terminally ill patient, sold the ownership of his life insurance policy to a viatical settlement provider for $200,000. Which of the following statements is/are true with respect to the transfer? 1. Ron will be subject to income tax on this transaction if he lives beyond two years. 2. Ron will be subject to income tax on the sale proceeds less his cost basis.

Neither

Which of the following statements about insurance and annuities is incorrect?

The cash surrender value of a life insurance policy is the amount payable by the insurance company to the beneficiary.

XYZ Corporation is a closely held corporation. Martin McFly, along with the three other owners, set up a stock redemption agreement requiring the corporation to buy all shares of a deceased or disabled shareholder. The plan is funded by entity life insurance policies on each shareholder. Premiums are paid by the corporation. The agreement states that the share price of any buyout will be established by an independent, competent third-party appraiser. What are the tax implications of this plan? A deceased shareholder's gross estate will be increased by the amount of the life insurance. There is no step-up in basis for decedent's family on the shares of stock covered by the plan. The corporation will owe income tax on the difference between the cash value of the policy and the death benefit amount.

None of the above.

Prairie Dog Corporation (PDC), an oil drilling company, has a "key-person" variable universal life policy on Digger Phelps, its vice-president of drilling operations. The owner and beneficiary of the policy are the corporation. Digger is about to retire so PDC no longer needs the policy. Which of the following will not cause the death benefit to be taxable under the transfer-for-value rule?

PDC sells the policy to Digger.

Which of the following are included in the gross estate?

Proceeds from a life insurance policy owned by the decedent insured that was assigned to an ILIT two years before death of the insured.

Which of the following statements regarding buy-sell agreements is not correct?

Term life insurance is the ideal type of policy used to fund a cross-purchase agreement.

If a deceased person has "incidents of ownership" in a life insurance policy at the time of their death, the death benefits are included in the decedent's gross estate. When would the decedent not have incidents of ownership?

When the decedent did not pay any of the policy premiums.