Estate Planning Chapter 11

Which of the following constitute incidences of ownership in an insurance policy: 1. The right to name or change the name of the beneficiary. 2. The right to surrender the policy. 3. The right to assign the policy. 4. The right to borrow cash from the policy. A. 1, 2, 3 and 4. B. 2 and 3. C. 1, 2 and 4. D. 3 and 4

A. 1, 2, 3 and 4.

Which of the following statements regarding buy-sell agreements is not correct? A. Term life insurance is the ideal type of policy used to fund a cross-purchase agreement. B. An advantage of an entity agreement is that only one life insurance policy is required on each owner. C. An advantage of a cross-purchase agreement is the ability to increase the surviving owners' basis in their share of the business. D. A wait-and-see agreement is both an entity agreement and a cross-purchase agreement.

A. Term life insurance is the ideal type of policy used to fund a cross-purchase agreement. Whether term or permanent insurance should be used to fund the agreement depends on the facts and circumstances of the business and it's owners and/or potential purchasers.

If a deceased person has "incidents of ownership" in a life insurance policy at the time of his or her death, the death benefits are included in the decedent's gross estate. When would the decedent not have incidents of ownership? A. When the decedent can cancel the policy at any time during his lifetime. B. When the decedent paid none of the policy premiums. C. When the decedent is authorized to change beneficiaries. D. When the decedent assigned the policy proceeds as security for a loan.

B. When the decedent paid none of the policy premiums. All of the other options are incidents of ownership.

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. A variable life insurance policy. B. A second to die life insurance policy. C. A split-dollar life insurance policy. D. An indexed universal life insurance policy

B. A second to die life insurance policy.

Which of the following statements accurately reflects the nature of buy-sell agreements? A. Proceeds of a life insurance policy owned by a surviving shareholder must be included in the gross estate of the decedent. B. A stock redemption plan must have a corporation as a party to the contractual arrangement. C. Under a cross-purchase plan funded with life insurance, premiums paid are tax deductible to the payor. D. A stock redemption plan increases the cost basis of surviving shareholders.

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

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. A. 2 only. B. Neither 1 nor 2. C. Both 1 and 2. D. 1 only.

B. Neither 1 nor 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: 1. The proceeds are subject to estate taxes in the estate of the insured if the insured is the owner. 2. The proceeds may be subject to income taxes if the policy was sold to a third party. 3. The proceeds are not subject to income tax, even if sold to a third party if the contract is a modified endowment contract. A. 2 and 3. B. 1 only. C. 1 and 2. D. 1, 2 and 3.

C. 1 and 2.

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? 1. A deceased shareholder's gross estate will be increased by the amount of the life insurance. 2. There is no step-up in basis for decedent's family on the shares of stock covered by the plan. 3. The corporation will owe income tax on the difference between the cash value of the policy and the death benefit amount. A. 1 and 3. B. 1, 2 and 3. D. 2 only

C. None of the statements is true. The deceased shareholder's estate will not increase due to the life insurance, as the deceased shareholder does not own the insurance policy and already has the value of his business interest in his gross estate. The stock will be included in the decedent's gross estate and there is a step-up in basis because the descendant died and the shares are "purchased" by the corporation. The corporation owns the policy and will receive the proceeds tax free.

Death benefit proceeds from a life insurance policy are included in a decedent's gross estate in which of the following circumstances: 1. The decedent gave the policy to his father four years ago, but retained the right to change the name of the beneficiary. 2. The policy beneficiary is a grantor trust of the decedent but the policy is owned by a closely-held corporation. 3. The decedent gave the policy to a charity seven years ago. 4. The decedent transferred the policy to an irrevocable life insurance trust five years ago with no retained incidents of ownership. A. 1 and 2. B. 2 and 3. C. 3 and 4. D. 1 and 4.

A. 1 and 2.

Which of the following statement(s) concerning the choice of a stock redemption (entity agreement) versus a cross-purchase partnership buy-sell agreement funded with insurance is FALSE? A. An entity approach may solve the affordability problem if one partner is significantly older than the others. B. An entity agreement becomes more desirable as the number of partners included in the agreement increases. C. A cross-purchase should be selected if the surviving partners expect to sell their business interest during their lifetimes. D. 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.

D. 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.

Eric and Tawny gift $120,000 to an Irrevocable Life Insurance Trust 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 $15,000 for 2019. Split gifts are available. The 5/5 lapse rule is in effect. A. $102,000. B. $0. C. $42,000. D. $21,000

B. $0. This was a cash gift, not a gift of life insurance. Therefore, none of the gift will be included in Eric's gross estate as the trust is irrevocable.

Which of the following describes second-to-die life insurance? 1. It is generally not includible in any insured's gross estate, if owned in an ILIT. 2. It can provide liquidity to pay estate taxes at the death of the second insured. 3. 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. 4. Premiums are usually less expensive than for individual policies on each of the two insureds for the same face amount. A. 3 and 4. B. 1 and 2. C. 1, 2, 3, and 4. D. 1, 2, and 4.

D. 1, 2, and 4.

Use of an Irrevocable Life Insurance Trust can accomplish which of the following? 1. Create a vehicle to avoid Generation Skipping Transfer Tax. 2. Make proceeds available to the surviving spouse. 3. Ensure that proceeds will be excluded from the probate of both spouses. 4. Shelters cash contributed for premiums from taxation up to the annual exclusion amount. A. 1 and 2. B. 2, 3 and 4. C. 1, 2, 3 and 4. D. 1, 2 and 3

C. 1, 2, 3 and 4.

How many insurance policies are required under a LLC entity buy-sell agreement if the LLC has five members? A. 20. B. 1. C. 5. D. 25.

C. 5.

Some reasons to use life insurance to fund business continuation agreements include which of the following: 1. It provides sufficient assets for the buyer to perform on the contract. 2. Insurance protects the company and its shareholder because the IRS cannot challenge the value of stock if provided for in a Shareholders Agreement (SHA). 3. The insurance gives the agreement efficacy. No money . . . No deal. 4. The insurance strengthens the commitment of the buyer when it must follow through on the agreement. A. 1, 3 and 4. B. 1, 2 and 3. C. 4 only. D. 2 and 4

A. 1, 3 and 4. The IRS may challenge the valuation of stock in business continuation agreements, with or without insurance; the IRS is not bound by any contractual agreement between the company and its shareholders.

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. Which of the following is correct? A. Premiums paid by PDC are tax deductible as a business expense. B. Any death benefit paid will be nontaxable to PDC. C. Premiums paid by PDC are taxable income to Digger. D. Premiums paid by PDC are considered gifts to Digger.

B. Any death benefit paid will be nontaxable to PDC. PDC is the owner and beneficiary of the policy. For the same reason, premiums are NOT considered a gift or taxable to Digger, nor will they appear in his gross estate. "Key person" life premiums are not deductible as a business expense. Any death benefit paid will be nontaxable to PDC.

Which of the following is not a major type of insurance? A. Term life insurance. B. Custodial life insurance. C. Whole life insurance. D. Indexed universal life insurance.

B. Custodial life insurance.

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? A. The trust terms may only authorize loans to the estate. B. The trust terms may authorize the purchase of assets from the estate, or authorize loans to the estate. C. The trust terms may only authorize the purchase of assets from the estate. D. The trust terms may require that all proceeds be paid to the estate.

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

Which of the following statements is correct regarding buy-sell agreements? A. The agreement must be funded with property or insurance. B. In a cross-purchase buy-sell agreement funded with life insurance, the entity purchases life insurance on the lives of each owner. C. 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. D. With an entity-redemption buy-sell agreement, life insurance premiums paid by the entity are deductible by the corporation.

C. 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. A buy-sell agreement need not be funded with life insurance or property. Life insurance premiums are not deductible. In a cross-purchaseagreement, the owners purchase life insurance on the lives of the other owners.

Which one of the following provisions should NOT be included in a buy-sell agreement for an unincorporated business? A. Names of the parties to the agreement. B. Modification or termination agreement. C. Provisions allowing for Section 6166 relief. D. Identifying the funding mechanism.

C. Provisions allowing for Section 6166 relief.