Life Insurance & Estate Liquidity Flashcards
7 cards from real CEA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Life Insurance & Estate Liquidity flashcards as text
For a closely held business owner with an illiquid estate, life insurance most directly solves the problem of:
Answer: Providing cash to pay estate taxes without selling the business at a loss
Life insurance creates immediate cash at death, allowing heirs to pay estate taxes and expenses without a forced or discounted sale of the business.
Under a cross-purchase buy-sell agreement funded by life insurance, each partner or shareholder:
Answer: Owns and is the beneficiary of policies on the other owners' lives
In a cross-purchase agreement, each owner buys and owns a policy on every other owner, receiving the proceeds to purchase the deceased's interest.
The income tax treatment of life insurance death benefits paid to an individual beneficiary is generally:
Answer: Excluded from gross income under IRC §101(a)
IRC §101(a) excludes life insurance death benefits from the beneficiary's gross income when paid by reason of the insured's death.
The 'transfer-for-value' rule can cause life insurance proceeds to become taxable. Which transfer is an exception to this rule?
Answer: Transfer to a corporation in which the insured is a shareholder
Transfers to a corporation in which the insured is a shareholder (or partner/co-insured) are statutory exceptions to the transfer-for-value rule.
Which estate planning strategy uses the low interest rate environment by having an ILIT purchase life insurance with funds loaned from the grantor at the AFR?
Answer: Private financing or intra-family loan to ILIT
A private loan to an ILIT at the AFR allows the trust to pay premiums while interest payments may remain within the estate, keeping policy proceeds out of the taxable estate.
In a split-dollar life insurance arrangement under the economic benefit regime, the employee is taxed annually on the:
Answer: Economic benefit of the current life insurance protection received
Under the economic benefit regime, the employee recognizes income equal to the cost of the pure life insurance protection (PS 58 or insurer's term rates) provided by the employer.
Which settlement option allows the life insurance beneficiary to leave proceeds with the insurer and receive periodic interest payments?
Answer: Interest option
The interest option lets beneficiaries leave the principal with the insurer while receiving interest, retaining the right to withdraw the lump sum later.