FREE Chartered Life Underwriter (CLU) Planning for Business Owners Questions and Answers

Question 1

Three equal partners in a C-corporation have a cross-purchase buy-sell agreement funded by life insurance.
If one partner dies, which of the following accurately describes the income tax consequences for the two surviving partners?

Accepted Answer

The death benefit is received income tax-free, and the surviving partners receive a step-up in basis for the shares they purchase from the deceased partner's estate.

Answer

The death benefit is taxable as a dividend to the surviving partners, and they do not receive a step-up in basis.

Answer

The death benefit is received income tax-free, but the surviving partners do not receive a step-up in basis in the acquired shares.

Answer

The death benefit is taxable as ordinary income to the corporation, which then distributes the after-tax proceeds to the surviving partners.

Question 2

A closely held corporation wants to provide liquidity to the estate of its majority shareholder upon her death to cover estate taxes and administrative expenses. Which of the following allows the corporation to redeem a portion of the decedent's stock without the distribution being treated as a dividend?

Accepted Answer

A Section 303 Stock Redemption

Answer

A Section 162 Executive Bonus Plan

Answer

A Non-qualified Deferred Compensation Plan

Answer

An Entity-Purchase Buy-Sell Agreement

Question 3

XYZ Corp. provides a 'double bonus' Section 162 executive bonus plan to its CEO. The plan funds a life insurance policy with an annual premium of $50,000. Which statement is TRUE regarding the tax implications of this arrangement?

Accepted Answer

The corporation can deduct the bonus paid to the CEO, and the CEO reports the bonus as taxable income.

Answer

The corporation's deduction is limited to the $50,000 premium, and the CEO pays taxes on that amount.

Answer

The corporation cannot deduct the bonus, but the CEO receives the benefit tax-free.

Answer

The bonus is deductible by the corporation, and the CEO does not have to report any income because it is used for life insurance.

Question 4

A company establishes a split-dollar life insurance plan where the employee is the owner of the policy, and the employer's premium payments are secured by an interest in the policy's cash value and death benefit. This arrangement is best described as which of the following?

Accepted Answer

A collateral assignment method plan

Answer

An endorsement method plan

Answer

A key person insurance plan

Answer

A group carve-out plan

Question 5

Which of the following is a primary characteristic of a non-qualified deferred compensation (NQDC) plan?

Accepted Answer

It can discriminate in favor of highly compensated employees and benefits are subject to the claims of the employer's creditors.

Answer

It must be offered to all full-time employees to satisfy non-discrimination rules.

Answer

Plan assets are held in a separate trust and are protected from the employer's creditors.

Answer

The employer's tax deduction is taken when the compensation is deferred, not when it is paid.

Question 6

Regarding the tax treatment of a key person life insurance policy owned by and payable to a C-Corporation, which of the following statements is correct?

Accepted Answer

The premiums are not deductible, but the death benefit may be subject to the corporate alternative minimum tax (AMT).

Answer

The corporation can deduct the premiums paid, and the death benefit is received tax-free.

Answer

Both the premiums paid and the death benefit received are fully taxable to the corporation.

Answer

The premiums are not deductible, and the death benefit is always fully exempt from all corporate income taxes.

Three equal partners in a C-corporation have a cross-purchase buy-sell agreement funded by life insurance.If one partner dies, which of the following accurately describes the income tax consequences for the two surviving partners?

Three equal partners in a C-corporation have a cross-purchase buy-sell agreement funded by life insurance.
If one partner dies, which of the following accurately describes the income tax consequences for the two surviving partners?