Charitable Life Insurance
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This quiz is part of the introductory curriculum for the graduate course Personal Financial Planning 5325 "Introduction to Charitable Planning" from Texas Tech University. For free downloads of the audio lectures and PowerPoint slides for this course, or to learn about the online Graduate Certificate in Charitable Financial Planning at Texas Tech University, go to www. EncourageGenerosity. Com
- 1.Common uses for life insurance involving charitable giving include all of the following EXCEPT:
- A.
Giving an existing policy to charity
- B.
Creating a new policy to give to charity with charity as sole death beneficiary, where future donations will be made to the charity, allowing the charity to make future premium payments
- C.
Replacing wealth for heirs who were initially disadvantaged by the use of a charitable planning technique
- D.
Creating a new policy to give to charity where future premium payments (deductible as charitable gifts) on the policy owned by the charity will be made by the donor to the insurance company, and where the charity will receive all death benefits of the policy
- E.
Creating a new policy to give to charity where future premium payments (deductible as charitable gifts) on the policy owned by the charity will be made by the donor to the insurance company, and where some of the death benefit of the policy will be given to the donor’s children.
- 2.John Smith has enough wealth to have a taxable estate for estate tax purposes. In which of the following cases will a $1,000,000 death benefit life insurance policy on the life of John Smith where his child, Mary Smith, is named as the beneficiary, pass $1,000,000 to Mary, but generate no estate taxes? I. If Mary Smith owns the policy and has owned it for more than three years II. If an Irrevocable Life Insurance Trust, managed by ABC Trust Company, has owned the policy since the creation of the life insurance policy III. If John Smith owns the policy IV. If John Smith and Mary Smith own the policy jointly V. If the John Smith revocable living trust, with John Smith as the trustee, owns the policy
- A.
I & II
- B.
I, II & IV
- C.
I, II & V
- D.
III only
- E.
III, IV, & V
- 3.All of the following are reasons why a Charitable Remainder Trust funded with highly appreciated property might work well in combination with creating an Irrevocable Life Insurance Trust owned life insurance policy benefitting the donor’s heirs, EXCEPT
- A.
Because the Charitable Remainder Trust produces a stream of income that can be used to pay for life insurance premiums
- B.
Because the Charitable Remainder Trust produces an initial charitable tax deduction, the value of which could help to pay for life insurance premiums
- C.
Because the Charitable Remainder Trust leaves its principal to charity at death, exclude the heirs, and life insurance naming the heirs can help to mitigate this loss of inheritance
- D.
Because the ILIT owned life insurance can pass estate tax free to heirs, whereas the assets transferred to the Charitable Remainder Trust may have been heavily taxed if left to the heirs
- E.
Because the Irrevocable Life Insurance Trust is a charitable entity preventing the payment of income taxes on the appreciation of the underlying life insurance policy
- 4.Priscilla, who has a taxable estate, wants to sell a $1,000,000 non-income producing zero-basis asset then spend the interest income of 5% while leaving the principal at death for her heirs and a charitable organization. What taxes might she reduce or avoid if she accomplishes this goal through a CRT-ILIT combination rather than simply selling the asset and dividing the property at her death by will?
- A.
Capital gains taxes
- B.
Estate taxes
- C.
Income taxes due to a charitable deduction
- D.
All of the above
- E.
None of the above
- 5.How can giving a remainder interest to charity in farmland generate an immediate financial benefit that can be used to fund the purchase of life insurance?
- A.
Because the remainder interest generates lifetime income
- B.
Because the remainder interest avoids the payment of capital gain tax if the donor’s remaining interest is sold at a profit
- C.
Because the gift of a remainder interest in farmland to charity generates an immediate income tax deduction
- D.
Because the gift of a remainder interest is a partial interest gift, and thus not deductible for income tax purpose
- E.
Because the gift of a remainder interest in farmland to charity reduces the payment of estate taxes due to the charitable deduction
- 6.Why might an heir be happier to be the death beneficiary of a $5,000,000 life insurance policy held by an Irrevocable Life Insurance Trust, instead of being named to receive shares of stock valued at $5,000,000 from the decedent’s estate?
- A.
Because, unlike the ILIT, the shares of stock will create capital gains tax liability at death
- B.
Because, unlike the ILIT, the shares of stock will create income tax liability at death
- C.
Because the ILIT life insurance death benefit can pass to the heir without the payment of estate taxes
- D.
Because the ILIT can be funded without consideration of gift tax implications
- E.
Because the potential post-death appreciation is higher for the ILIT distribution
- 7.Which of the following would not be a reason to consider giving an existing life insurance policy to charity?
- A.
If the donor bought too much insurance for actual or current needs
- B.
If the donor bought insurance for children who are no longer dependent
- C.
If the donor is terminally ill and knows the charity will surrender the policy for its cash value
- D.
If the donor bought insurance for a buy-sell agreement that is no longer needed
- E.
If the donor does not need the cash value in the life insurance policy
- 8.The valuation rules for determining fair market value and basis of typical life insurance policies are somewhat in transition due to Rev. Rul. 2009-13 and the emergence of the life settlement market. However, for newly issued policies and paid-up policies the rules for determining fair market value are
- A.
Use the first premium paid for fair market value of a paid up policy and replacement cost for the value of a newly-issued policy.
- B.
Use the interpolated terminal reserve plus the unused part of the last premium for fair market value of a paid-up policy and the first premium paid for the value of a newly-issued policy.
- C.
Use the interpolated terminal reserve plus the unused part of the last premium for fair market value of a newly-issued policy and the first premium paid for the value of a paid-up policy.
- D.
Use the first premium paid for fair market value of a newly-issued policy and replacement cost for the value of a paid up policy.
- E.
Use the replacement cost for the fair market value of a newly-issued policy and the interpolated terminal reserve plus the unused part of the last premium for fair market value of a paid-up policy
- 9.All of the following would be required to document a gift of a life insurance policy worth $5,000 EXCEPT
- A.
IRS Form 8283 Noncash Charitable Contributions
- B.
A statement from the life insurance company or agent indicating the fair market value of the policy
- C.
A note from the charity before taxes are filed or due indicating the date, location, and description of the property and that “no goods or services were provided in exchange for these gifts”
- D.
Summary of a qualified appraisal attached to the tax return
- E.
The donor’s own reliable records of the gift, the charity, the date, the place, and fair market value
- 10.Mary donates a policy with a fair market value of $100,000 to a public charity. She had previously taken out a loan of $2,000 against the policy and never paid it back. What is the net deductible amount for her charitable gift?
- A.
$0
- B.
$2,000
- C.
$98,000
- D.
$100,000
- E.
$102,000
- 11.After a charity receives a policy, it could reasonably choose to do any of the following except
- A.
Ask the donor to continue to pay premiums
- B.
Surrender it for cash value
- C.
Pay premiums from the charity’s funds if this maximizes the expected net return from the policy
- D.
Sell the policy in the life settlement market
- E.
Ask the donor to continue to pay premiums in exchange for leaving the donor’s children as beneficiaries of the policy
- 12.A typical arrangement to create a new policy for the charity might include any of the following EXCEPT
- A.
The donor creates a new policy owned by the charity
- B.
The donor makes gifts to the charity which the charity can use to make premium payments
- C.
The donor makes payments to the insurance company to pay the premiums on the policy owned by the charity
- D.
The death benefit on the policy is payable to the charity
- E.
The death benefit on the policy is payable half to the charity and half to the donor’s child
- 13.A donor wishes to create a new policy for a charity and fund future premium payments with appreciated stock, thereby avoiding any capital gain tax on the stock. All of the following might be included in such a transaction EXCEPT
- A.
The donor creates a new policy owned by the charity
- B.
The donor makes gifts to the charity which the charity can use to make premium payments
- C.
The donor makes payments to the insurance company to pay the premiums on the policy owned by the charity
- D.
The death benefit on the policy is payable to the charity
- E.
The charity provides receipts to the donor reflecting the gifts given to pay for the policy premiums
- 14.All of the following are plausible reasons why a charity might not want to encourage donors to give by creating and paying the premiums on new life insurance policies owned by the charity, EXCEPT
- A.
Donors may give less in current gifts to the charity because they are also making premium payments (i.e., current giving is cannibalized)
- B.
The charity may not, under state law, have an insurable interest sufficient to justify a new policy of the intended size
- C.
Depending on policy structure, the donor may give for years, and charity receives nothing due to later policy lapse
- D.
The charity may prefer to have current gifts today, rather than waiting to receive a benefit at the death of the donor
- E.
Premium payments made by the donor directly to the life insurance company will not result in ongoing charitable deductions for the donor
- 15.All of the following are policy characteristics that a charity might want to insist on in order to prevent a donor giving premium payments for many years and the charity later receiving nothing due to subsequent policy lapse, EXCEPT
- A.
Require policies with a relatively short-term before they are projected to no longer need additional premium payments
- B.
Require policies from highly rated insurance companies
- C.
Require that policy projections on reaching the point where additional premium payments are no longer needed must be based upon reasonable interest rates
- D.
Require that the donor give money for term life insurance policies only
- E.
Require that policy projections on reaching the point where additional premium payments are no longer needed must be based upon the donor living to age 100, rather than a younger age such as 80
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