Lesson 10: Life Insurance in Estate Planning, Special Elections, and Post-Mortem Planning Flashcards
Justin is the grantor of an ILIT. When he dies, his estate will need cash for funeral costs, final medical expenses, death taxes, and so on. How can the proceeds of the life insurance policy in the ILIT be made available to the executor without inclusion in Justin’s gross estate?
A) The trust terms may authorize both the purchase of assets from the estate or authorize loans to the estate at the trustee’s discretion.
B) The trust terms direct the executor to the purchase of assets from the estate upon request from the executor.
C) The trust terms authorize loans to the estate at the discretion of the executor.
D) The trust terms may require that all proceeds be paid to the estate.
The correct answer is (A).
While the proceeds may not go directly into the estate, the trust terms have either of the other two options for making cash available to the executor. However, the trust must not require the trustee to make the cash available or else the trust assets will end up being included in the grantor’s estate. Options (B), (C), and (D) would cause the trust assets to be included in the estate because the trust terms require it, or at the executor’s request.
Which of the following terms describes an insurance policy that covers the lives of two people and is payable only after both insureds have died?
A) A variable life insurance policy
B) An indexed universal life insurance policy
C) A split-dollar life insurance policy
D) A second-to-die life insurance policy
The correct answer is (D).
A second-to-die policy pays the beneficiary(ies) upon the death of the second-to-die insured.
If a deceased person had incidents of ownership in a life insurance policy at the time of his or her death, the death benefits will be included in the decedent’s gross estate. A decedent would be considered to have possessed incidents of ownership EXCEPT
A) when the decedent was authorized to change beneficiaries.
B) when the decedent assigned the policy proceeds as security for a loan.
C) when the decedent could cancel the policy at any time during his or her lifetime.
D) when the decedent paid none of the policy premiums.
The correct answer is (D).
All of the other options are incidents of ownership.
Which of the following statements is correct regarding buy-sell agreements?
A) The agreement must be funded with property or insurance.
B) 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.
D) In a cross-purchase buy-sell agreement funded with life insurance, the entity purchases life insurance on the lives of each owner.
The correct answer is (C).
Option (A) is incorrect because a buy-sell agreement does not need to be funded with life insurance or property. Option (B) is incorrect because life insurance premiums are not deductible. Option (D) is incorrect because in a cross-purchase agreement, the owners purchase life insurance on the lives of the other owners.
Ron, a 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?
I. Ron will be subject to income tax on this transaction if he lives beyond 2 years.
II. Ron will be subject to income tax on the sale proceeds less his cost basis.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
The correct answer is (D).
Statements I and II are incorrect. Ron is terminally ill, and as a result, the proceeds from the viatical settlement are excluded from his gross income for income tax purposes.
Failure to make an installment payment under Section 6166 could result in
I. an accelerated due date for all unpaid tax.
II. the loss of the special 2 percent interest rate.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
The correct answer is (C).
Both are correct.
The alternate valuation date
A) is optional if the fair market value of the estate’s assets has decreased.
B) if elected may be revoked in an amended return, provided that the first return was filed on time.
C) must be used for valuation of all of the estate’s assets (with no exceptions) if the alternate valuation date is selected.
D) can be elected only if doing so reduces the value of the gross estate and the estate tax liability.
The correct answer is (D).
To qualify for the alternate valuation date there are two requirements:
- Electing the alternate valuation date must reduce the estate tax liability.
- Electing the alternate valuation date must reduce the gross estate.
Ordinary and necessary administration expenses paid by the fiduciary of an estate are deductible
A) only on Form 706.
B) only on the fiduciary tax return Form 1041.
C) on the fiduciary tax return Form 1041 or on Form706.
D) on both the fiduciary tax return and the estate tax return.
The correct answer is (C).
The executor determines and elects where to deduct administrative expenses (on Form 1041 or Form 706, one or the other).
Which of the following is (are) correct regarding qualifying disclaimers?
I. The disclaimer must be in writing.
II. The property must be disclaimed within 9 months of the date of death.
III. The disclaiming party cannot have benefited from the property previous to disclaiming..
IV. The disclaiming party cannot direct the interest to any other specific person.
A) I only
B) II only
C) I and II
D) I, II, III, and IV
The correct answer is (D).
All of the statements are correct.
Kyrie dies and leaves his son, LeBron, the family farm. The value of the land as used is $3,000,000. The fair market value of the land at its highest and best use (if it were converted to a supermarket or shopping mall) is $6,000,000. Which of the following statement(s) is (are) true regarding a proper 2032A election?
I. The value of the land in the gross estate will be less than $3,000,000.
II. LeBron will have to use the farm for 10 years to avoid recapture of the 2032A benefit.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
The correct answer is (B).
Statement I is incorrect because the amount included in the gross estate will be $6,000,000 minus the 2032A election.
