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PART 4—STUDY QUESTIONS
(Questions followed by [A] are answered in part V.)

  1. Identify the two basic purposes of life insurance in an estate plan. (2.1–2.3)






  2. Describe the types of expenses that cause the need for life insurance for estate liquidity purposes. (2.2–2.3)






  3. Explain whether the life insurance in each of the following situations will be includible in the insured’s gross estate for federal estate tax purposes: [A]

    1. The policy proceeds are payable to the insured’s estate, and the insured’s spouse owned the policy.

    2. The policy proceeds are payable to the insured’s spouse, and the insured owned the policy.

    3. The insured assigned a paid-up policy to his son and died 2 years later. (2.4–2.15)

  4. Explain the estate tax consequences that would occur in the following circumstances: [A]

    1. An irrevocable trust created by the insured purchases a life insurance policy on the insured’s life. The trust terms expressly permit the insured to purchase the policy from the trust for fair market value.

    2. A, B, and C each own policies on the lives of each other to fund a cross-purchase buy-sell agreement for the ABC partnership. The partnership agreement gives each partner the right to acquire the policies on his or her life if the agreement terminates. (2.8–2.10)

  5. The XYZ corporation owns a policy on the life of its sole shareholder, Mrs. Smythe. Identify the tax consequences to her estate if the benefits are payable to

    1. Mrs. Smythe’s designated beneficiary

    2. the corporation for key person indemnification (2.8–2.10)

  6. Suppose a life insurance policy owned by a deceased husband on his life is payable to his testamentary trust. Describe the circumstances in which the proceeds will qualify for the marital deduction. (2.12–2.13)






  7. Suppose Mrs. Jones owns a policy on her husband’s life. Mrs. Jones predeceases her husband when the policy is paid up and has a terminal reserve of $100,000 and a face amount of coverage of $500,000. If the insurer would provide a single-premium contract at her husband’s attained age for $95,000, what value is included in her estate as a result of the policy? [A] (2.13)






  8. Under the federal estate tax laws, who must pay the tax attributable to life insurance proceeds included in a decedent’s gross estate? (2.15)






  9. Describe the circumstances in which life insurance policy proceeds would be taxable by the GSTT as a direct skip. (2.15–2.16)





  10. Eleven years ago, Jerome Albert transferred a whole life insurance policy to his son Scott. However, it was clear at the time of the transfer that Mr. Albert would still have the right to borrow against the substantial cash value in the policy and the right to change the beneficiary. Explain to Mr. Albert why the policy is still includible in his gross estate for federal estate tax purposes when he dies. [A] (2.16–2.19)






  11. A modestly wealthy young married couple with two infant children recently purchased life insurance policies covering each spouse’s life. Explain how a revocable trust can be useful as the owner or beneficiary of the policies. (2.20–2.22)






  12. John Robinson, Jr., who is 40 years old, has a wife, aged 38, and three children, aged 12, 10, and 7. John’s father, John, Sr., is in a high federal income tax bracket and has a sizable estate. John also has begun to accumulate an estate that is large enough to be subject to federal estate taxation.

    John, Sr., would like to provide for his grandchildren by funding irrevocable insurance trusts for their benefit. The life insurance would be on John, Jr.’s life.

    1. Explain the advantages of such a trust to John, Sr.

    2. Explain the advantages of such a trust to John, Jr. (2.21–2.24)

  13. Define the concept of estate liquidity, and explain why life insurance is an effective tool for curing a liquidity deficit. (2.22–2.24)





  14. Jesse Jones, a widower, has two sons, Howard, aged 40, and Chet, aged 36. Chet works as a senior vice president and general manager of two of the four supermarkets that Jesse owns. Chet has expressed an interest in running all the stores upon his father’s death or retirement. Howard, a CPA, lives overseas and is employed as a tax partner for the European office of a large accounting firm. He has no interest in becoming involved with the supermarkets. How can Jesse structure his estate plan to "equalize" the inheritance between his two sons? (2.24–2.25)







  15. What advice should be given about ownership of life insurance when the nonworking spouse has a substantial estate of his or her own? (2.25)






  16. Why is nonworking spouse insurance often recommended by estate planners? (2.25–2.26)






  17. Explain why the unlimited marital deduction has not eliminated the importance of life insurance in estate planning. (2.26–2.27)






  18. Describe how second-to-die life insurance should be used by a married couple with substantial wealth. (2.26–2.29)






  19. David and Martha Megabucks have the following assets:

    David $2 million
       
    Martha $3 million
       
    Tenancy by entireties $1 million


    Assume that the property will not appreciate and that funeral and administration expenses are 3 percent of the gross estate. [A]

    1. Forecast the estate taxes payable by the Megabuckses if all assets are left to the surviving spouse. Assume Martha dies this year and David in 3 years. (Ignore state death taxes.) Use the worksheet and unified estate and gift tax rate schedule contained on pages 4.12–4.13 to assist you in making your calculations.

    2. Make a recommendation to David and Martha to lower family estate taxes by using the unified credit appropriately.

    3. Make a recommendation to David and Martha with respect to life insurance coverage. (2.26–2.29)
CHART FOR COMPUTING FEDERAL ESTATE TAX
           
  STEP l (1) Gross estate   _________
minus   (2) Funeral and administration    
      expenses (estimated as _____% of __________) ________  
    (3) Debts and taxes ________  
    (4) Losses ________  
      Total deductions ________  
equals          
  STEP 2 (5) Adjusted gross estate   _________
minus   (6) Marital deduction ________  
    (7) Charitable deduction ________  
      Total deductions ________  
equals          
  STEP 3 (8) Taxable estate   _________
plus          
    (9) Adjusted taxable gifts (post-1976 lifetime taxable transfers not included in gross estate)   _________
equals          
    (10) Tentative tax base (total of taxable estate and adjusted taxable gifts)   _________
compute          
    (11) Tentative tax ________  
minus          
    (12) Gift taxes payable on post-1976 gifts ________  
equals          
  STEP 4 (13) Estate tax payable before credits   _________
minus          
    (14) Tax credits    
      (a) Unified credit ________  
      (b) State death tax credit ________  
      (c) Credit for foreign death taxes ________  
      (d) Credit for gift tax for pre-1977 gifts ________  
      (e) Credit for tax on prior transfers ________  
      Total credits ________  
equals          
  STEP 5 (15) Net federal estate tax payable   _________

 

UNIFIED RATE SCHEDULE FOR COMPUTING ESTATE AND GIFT TAX FOR 1993 AND THEREAFTER


If the amount with respect to which the tentative tax is to be computed is The tentative tax is

Not over $10,000 18 percent of such amount
   
Over $10,000 but not over $20,000 $1,800, plus 20 percent of the excess of such amount over $10,000
   
Over $20,000 but not over $40,000 $3,800, plus 22 percent of the excess of such amount over $20,000
   
Over $40,000 but not over $60,000 $8,200, plus 24 percent of the excess of such amount over $40,000
   
Over $60,000 but not over $80,000 $13,000, plus 26 percent of the excess of such amount over $60,000
   
Over $80,000 but not over $100,000 $18,200, plus 28 percent of the excess of such amount over $80,000
   
Over $100,000 but not over $150,000 $23,800, plus 30 percent of the excess of such amount over $100,000
   
Over $150,000 but not over $250,000 $38,800, plus 32 percent of the excess of such amount over $150,000
   
Over $250,000 but not over $500,000 $70,800, plus 34 percent of the excess of such amount over $250,000
   
Over $500,000 but not over $750,000 $155,800, plus 37 percent of the excess of such amount over $500,000
   
Over $750,000 but not over $1,000,000 $248,300, plus 39 percent of the excess of such amount over $750,000
   
Over $1,000,000 but not over $1,250,000 $345,800, plus 41 percent of the excess of such amount over $1,000,000
   
Over $1,250,000 but not over $1,500,000 $448,300, plus 43 percent of the excess of such amount over $1,250,000
   
Over $1,500,000 but not over $2,000,000 $555,800, plus 45 percent of the excess of such amount over $1,500,000
   
Over $2,000,000 but not over $2,500,000 $780,800, plus 49 percent of the excess of such amount over $2,000,000
   
Over $2,500,000 but not over $3,000,000 $1,025,800, plus 53 percent of the excess over $2,500,000
   
Over $3,000,000 $1,290,800 plus 55 percent of the excess over $3,000,000
   
Over $10,000,000 but not over $21,040,000 Add an additional 5 percent of the amount in this range.


 

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