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PART 6—REVIEW QUESTIONS AND ANSWERS
| QUESTIONS | ||||
| Circle your answers | ||||
| T | F | 1. | Life insurance is generally used for estate liquidity purposes by a young couple with minor children and insignificant wealth. (2.1–2.2) | |
| T | F | 2. | Probate expenses are fixed in amount and unrelated to the size and complexity of the estate. (2.2) | |
| T | F | 3. | Joint life insurance pays at the earlier death of two insureds. (2.5) | |
| T | F | 4. | Proceeds of life insurance payable to a decedent’s named beneficiary will be excluded in determining the federal gross estate if the decedent possessed incidents of ownership in the policy. (2.6) | |
| T | F | 5. | If life insurance is payable to a decedent’s estate, the proceeds of the life insurance will be subject to the claims of creditors. (2.6) | |
| T | F | 6. | Incidents of ownership include the right of the insured to change the beneficiary. (2.7–2.8) | |
| T | F | 7. | Corporate-owned life insurance on the life of a majority shareholder is included in the shareholder’s estate unless the corporation directly or indirectly benefits from the policy. (2.9–2.10) | |
| T | F | 8. | Like other assets, life insurance proceeds are not includible in the insured’s gross estate if the policy is transferred by gift within 3 years of death. (2.10–2.12) | |
| T | F | 9. | The full value of life insurance proceeds payable outright to a surviving spouse will qualify for the federal estate tax marital deduction. (2.12) | |
| T | F | 10. | When an individual owning a life insurance policy on the life of another dies, the fair market value of the unmatured policy will be included in the decedent’s gross estate for federal estate tax purposes. (2.13–2.15) | |
| T | F | 11. | Unless the decedent had directed to the contrary under the terms and provisions of the will, the federal estate taxes attributable to the life insurance proceeds that were included in such decedent’s gross estate will be payable by the beneficiary of the life insurance policy. (2.15–2.17) | |
| T | F | 12. | The generation-skipping transfer tax is applied only to life insurance payable directly to a skip person as the named policy beneficiary. (2.16–2.17) | |
| T | F | 13. | The gift tax value of a life insurance policy is equal to the cumulative gross premium paid by the donor at the time of the transfer. (2.16–2.17) | |
| T | F | 14. | If one spouse owns a policy on the other spouse, an inadvertent taxable gift of the proceeds may occur if the beneficiary of the life insurance policy is someone other than the policyowner. (2.17) | |
| T | F | 15. | One disadvantage of life insurance gifts, compared to gifts of other property, is that the donee immediately becomes financially independent from the donor. (2.17) | |
| T | F | 16. | The federal gift tax cost incurred by the transfer of life insurance usually makes this an unattractive estate planning technique. (2.17) | |
| T | F | 17. | A revocable trust to hold a life insurance policy is an advantageous estate planning technique because it provides for management of assets and greater dispositive flexibility. (2.18–2.19) | |
| T | F | 18. | The use of the grandparent-grandchild trust will subject the insurance proceeds to federal estate taxation in the parent’s estate. (2.21) | |
| T | F | 19. | A closely held business interest may result in an estate liquidity deficit in the business owner’s estate. (2.22–2.24) | |
| T | F | 20. | The use of life insurance is well suited for accomplishing "equity of inheritance" objectives. (2.24–2.25) | |
| T | F | 21. | Life insurance carried on the life of the nonworking spouse is important because his or her death can be a loss to the family equivalent to the economic value of his or her services. (2.25–2.26) | |
| T | F | 22. | The second-to-die policy is unique because a death benefit is paid at the death of each insured. (2.26–2.29) | |
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ANSWERS TO FALSE SELF-TEST QUESTIONS
| 1. | Under these circumstances, estate enhancement is the primary purpose for life insurance to replace the lost future earnings of the insured and to provide for the support needs of the children. |
| 2. | Probate expenses are based on the size of the estate and are increased by the complexity of the estate as more professional assistance is required. |
| 4. | Proceeds of life insurance are included in the decedent’s gross estate if the decedent possessed any incidents of ownership, regardless of the beneficiary designation. |
| 8. | Although gifts of assets generally are no longer included in a decedent’s gross estate, there is an exception with regard to transfers of life insurance policies within 3 years of death. The full proceeds of all life insurance policies transferred by the insured within 3 years of death will be includible in the decedent-insured’s gross estate. |
| 12. | Life insurance proceeds can be taxable under the GSTT if a skip person benefits in any manner. For example, a life insurance trust with grandchildren as current or remainder beneficiaries could be subject to the GSTT as a taxable distribution or termination. |
| 13. | If the policy is transferred immediately (within the first year) after the purchase, the gift is equal in value to the gross premium paid to the insurer. If the policy is paid up at the time it is assigned (or is a single-premium policy) the amount of the gift is the amount of premium the issuing company would charge for the same type of single-premium policy of equal face amount on the insured’s life, based on the insured’s age at the transfer date. If the policy is in a premium-paying state at the time it is transferred, the value of the gift is generally equal to the sum of (1) the interpolated terminal reserve and (2) the unearned premium on the date of the gift. |
| 15. | An advantage of life insurance gifts is that the donee does not become immediately financially secure and remains dependent on the donor for future premiums. |
| 16. | The gift tax cost to transfer a policy is usually nominal when compared with the potential estate tax savings. This is the case since the policy is transferred at its present value, which is usually much less than the face value that would otherwise be included in the insured’s gross estate. |
| 18. | The use of the grandparent-grandchild trust will generally not subject the insurance proceeds to federal estate taxation since the incidents of ownership are usually not held by the insured. |
| 22. | The second-to-die policy pays a benefit only at the death of the insured who dies second. |
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