Question

Bentley has paid $40,000 in premiums on a whole life policy with a $250,000 death benefit. The policy has paid a dividend of $1,000 per year for the past 10 years. If Bentley surrenders the policy today for it’s cash value of $55,000, what will be the amount of gain subject to taxation?

A. $55,000

B. $15,000

C. $25,000

D. $0

Which of the following statements regarding entity purchase buy-sell agreements is correct?

A. When one of the owners dies, the surviving owners will have an increased cost basis in their share of the business.

B. When an owner dies, the death benefit received by the business is income tax-free as long as the rules of IRC Sec. 101(j) have been followed.

C. The business entity will purchase a life insurance policy on each owner and will pay the premiums, which are tax deductible as a business expense.

D. If the business has five owners, 20 life insurance policies must be purchased.

In order to achieve tax deferral in a non-qualified deferred compensation arrangement, which of the following is (are) true?

A. There must be a substantial risk of forfeiture.

B. All of the above are correct.

C. The arrangement must be established in such a manner as to avoid constructive receipt.

D. The arrangement must be established in such a manner as to avoid a current economic benefit.

Redball Inc. would like to use key employee life insurance to provide protection in the event of the death of the owner and key employee, Red Baldwin. Which of the following is correct regarding the key employee insurance?

A. Red will own a policy on his own life and Redball, Inc. will pay the premiums and be the beneficiary of the policy.

B. Red will own the policy on his own life, Redball, Inc. will pay the premium, and Red’s spouse will be the beneficiary of the policy.

C. Redball, Inc. will own a policy on Red’s life and pay the premiums on the policy, and Red’s spouse will be the beneficiary of the policy.

D. Redball, Inc. will be the policy owner, premium payer, and beneficiary of a policy on Red’s life.

Minerva’s employer has offered to provide her with life insurance under a Sec. 162 double bonus plan. If the premium for the policy is $15,000 per year, and Minerva is in the 32% tax bracket, what will be the amount of her salary bonus this year?

A. $46,875.

B. $22,059.

C. $15,000.

D. $30,000.

Which of the following best describes the advantages of a split-dollar life insurance plan?

A. It is useful for employers who wish to provide an executive with life insurance at low cost and low cash outlay for the executive.

B. It is useful for employers in funding a Rabbi trust.

C. It is useful to provide protection for the business in the event of the death of a key employee.

D. It is useful to provide funding for a cross-purchase buy-sell agreement.

An owner/insured of a viatical settlement is not subject to income tax on the capital gains of the policy if:

A. The individual is terminally ill.

B. The death benefit is less than $1 million.

C. The individual is less than 65 years of age.

D. Viatical settlements are never tax-free.

Cross-purchase agreements are usually preferred from a tax planning perspective because:

A. The premiums paid by each owner are tax deductible.

B. They will never result in a transfer for value if the owner’s transfer existing policies to one another.

C. They permit the surviving shareholders to increase their basis in the business interest.

D. The death benefits are taxable to the policy owner, but are then deducted as a business expense.

Answer 1

1. 2,5000 (55,000-(40000-10000)

2. When an owner dies, the death benefit received by the business is income tax-free as long as the rules of IRC Sec. 101(j) have been followed.

3. All the above are true

4. Redball Inc. will be the policy owner,premium owner, and beneficiary of a policy on Red's life.

5. 22059

6. It is useful for employers who wish to provide anexecutive with lifeinsurance at low cost and low cash outlay for the executive.

7. The individual is terminally ill.

8. They permit the surviving shareholders to increase their basis in the business interest.