CEA Life Insurance & Estate Liquidity 3

Question 1

For a closely held business owner with an illiquid estate, life insurance most directly solves the problem of:

Accepted Answer

Providing cash to pay estate taxes without selling the business at a loss

Answer

Life insurance creates immediate cash at death, allowing heirs to pay estate taxes and expenses without a forced or discounted sale of the business.

Question 2

Under a cross-purchase buy-sell agreement funded by life insurance, each partner or shareholder:

Accepted Answer

Owns and is the beneficiary of policies on the other owners' lives

Answer

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.

Question 3

The income tax treatment of life insurance death benefits paid to an individual beneficiary is generally:

Accepted Answer

Excluded from gross income under IRC §101(a)

Answer

IRC §101(a) excludes life insurance death benefits from the beneficiary's gross income when paid by reason of the insured's death.

Question 4

The 'transfer-for-value' rule can cause life insurance proceeds to become taxable. Which transfer is an exception to this rule?

Accepted Answer

Transfer to a corporation in which the insured is a shareholder

Answer

Transfers to a corporation in which the insured is a shareholder (or partner/co-insured) are statutory exceptions to the transfer-for-value rule.

Question 5

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?

Accepted Answer

Private financing or intra-family loan to ILIT

Answer

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.

(CEA) Certified Estate Advisor Practice Test

(CEA) Certified Estate Advisor Practice Test

CEA Life Insurance & Estate Liquidity 3