Real Estate Planning - Chapter 11

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When Louie gave the $1,000,000 life insurance policy to his brother, the policy was valued at $200,000. However, if Louie dies two years after giving the gift, his federal gross estate will include the full value of the policy, which is $1,000,000. This means that the value of the policy will be included in Louie's estate for tax purposes.

An individual retirement account (IRA) rollover is not a valid settlement option for the designated beneficiary of a life insurance policy. An IRA rollover involves transferring funds from one retirement account to another, typically from a 401(k) to an IRA. It is not a settlement option for a life insurance policy, which typically offers options such as a lump-sum payment, life annuity, or term annuity to the beneficiary.

When Jerry gifted the whole life insurance policy to his daughter, he effectively transferred ownership and control of the policy. As a result, the policy is no longer considered part of Jerry's estate and therefore, $0 is included in his federal gross estate related to this whole life insurance policy.

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The owner of the life insurance policy has the right to surrender it for its cash surrender value. This means that the policyholder can choose to terminate the policy and receive the cash value that has accumulated over time. The insured, beneficiary, or insurer do not have the authority to surrender the policy for its cash value.

When a life insurance policy owner takes a loan from the policy, the death benefit of the policy will be reduced by the amount of the outstanding loan plus the accumulated interest due on the loan at the time of the insured's death. This means that if the insured dies before repaying the loan, the loan amount and any accrued interest will be deducted from the death benefit that is paid out to the beneficiaries.

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The correct answer is B. In an exchange of a life insurance policy for an annuity, the owner of the life insurance policy must recognize gain to the extent he receives boot in the exchange. Outstanding loans against the life insurance policy are considered boot. In this problem, the owner has potential gain of $135,000 ($150,000 + $50,000 - $65,000), and must recognize gain to the extent he had a loan outstanding, or $50,000. Normally, the owner's adjusted basis in the life insurance policy will be carried over to the annuity, but if the owner recognizes any gain on the exchange or pays additional expenses, he will increase his adjusted basis in the annuity by the gain recognized or the expenses paid. Because the owner had to recognize gain on the loan, he will increase his adjusted basis by this recognized gain of $50,000. After the exchange, the owner's adjusted basis in the annuity if $115,000, the adjusted basis in the life insurance policy increased by the amount of gain recognized on the transaction ($65,000 + $50,000). This answer is incorrect as an exchange is not considered a transfer for valuable consideration.

When Sally sells a whole life insurance policy to a viatical settlement provider, the amount she receives is considered a return of her investment in the policy, rather than a capital gain. Therefore, she does not have to recognize any capital gain for income tax purposes on the sale.

Since the ownership of the life insurance policy was gifted to Pamela six years ago, the policy is considered a gift and not taxable to her. Therefore, the death benefit of $1,000,000 will not be taxable to her.

When Jerry dies, his probate estate will include the death benefit of the life insurance policy. If Jerry designates a new beneficiary before he dies, and the beneficiary is alive at the time of Jerry's death, the death benefit will be excluded from his probate estate. However, Jerry's estate will not include the death benefit in its taxable income. Life insurance death benefits are generally not considered taxable income to the beneficiary.

The correct answer is always included in Jack's federal gross estate. This is because Jack never designated a beneficiary for the life insurance policy. When a policyholder does not designate a beneficiary, the death benefit is considered part of their estate and is subject to federal estate taxes.

Using life insurance to borrow the death benefit for retirement is not a reason for including it in an estate plan. Life insurance is typically used in estate planning to create liquidity for the decedent's estate, eliminate debt for the surviving spouse, and fund expected future education expenses. However, borrowing the death benefit for retirement is not a common or recommended use for life insurance in an estate plan.

If Carol dies, the death benefit of the life insurance policy on Carol's life, owned by Joe, is excluded from Carol's federal gross estate because Carol is not the owner of the policy. However, the value of the life insurance policy on Joe's life, owned by Carol, is included in Carol's federal gross estate because Carol is the owner of the policy.

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When Paul gifted ownership of the life insurance policy to Holly, it was considered a gift and not a sale. Therefore, Holly will not have to pay income tax on the death benefit she receives. The value of the policy at the time of Paul's death does not affect the taxability of the death benefit. Since Paul paid gift tax on the transaction, there will be no additional income tax on the death benefit. Hence, the correct answer is $0.

If John decides to surrender his whole life insurance policy to the insurer, the surrender value of the policy would be paid to him and the life insurance contract would be cancelled. This means that John would receive a lump sum payment from the insurer in exchange for canceling the policy. This would provide John with additional funds that he can use to pay for his living and medical expenses. However, it's important to note that surrendering the policy would mean that John would no longer have life insurance coverage.

The value of the life insurance policy to include in James' federal gross estate is not true because Fred is still alive. The value of the policy would not be zero just because Fred is alive. The value of the policy would depend on the type of policy it is, such as term life insurance, whole life policy in pay status, or paid-up/single premium life insurance policy.

The correct answer is $405,000. The federal gross estate includes the value of property owned by the deceased at the time of their death, including life insurance policies. In this case, the value of the life insurance policy at the time of the gift was $50,000, which is included in the gross estate. Additionally, the amount of federal gift tax paid by Jerry, which is $5,000, is also included in the gross estate. Therefore, the total amount included in Jerry's federal gross estate related to this life insurance policy is $50,000 + $5,000 = $405,000.

The premium on a term life insurance policy reflects the actuarial risk that the insured will die during the term of the contract. This means that the higher the risk of the insured dying, the higher the premium will be. Actuaries use statistical data and mortality tables to assess the likelihood of death for individuals based on factors such as age, health, and lifestyle. They then calculate the premium based on this risk assessment. Therefore, the premium is directly linked to the actuarial risk of death during the term of the policy.

If the insurer pays Mr. Fahey a life insurance policy dividend of $4,000, his adjusted basis in the whole life policy will decrease to $196,000. This statement is not correct because the payment of a dividend does not affect the adjusted basis of a life insurance policy. The adjusted basis is determined by the premiums paid, not the dividends received. Therefore, the adjusted basis would remain at $200,000 regardless of the dividend amount.

When Gayle gifts the life insurance policy to Celeste, Celeste becomes the owner of the policy and has the right to amend the beneficiary designation. Therefore, Celeste can add her son, Matt, as a co-beneficiary to the policy.

The correct answer is B. The transfer of the life insurance policy for the note is a transfer for valuable consideration. If a life insurance policy is transferred for valuable consideration, the death benefit in excess of the transferee's adjusted basis will be subject to income tax. Ronald did not have any basis in the boat, so correspondingly, he does not have any basis in the note and must recognize gain to the extent any value is received. As such the $50,000 death benefit received is taxable income to Ronald

Marvin's federal gross estate will include $0 related to this life insurance policy because he gave the policy as a gift to his daughter four years ago. Once a gift is made and the donor no longer has any incidents of ownership or control over the policy, it is excluded from the donor's estate for federal estate tax purposes. Therefore, the value of the life insurance policy will not be included in Marvin's federal gross estate.

Because Warren's life insurance policy was funded with a single premium payment, the policy is considered a modified endowment contract (MEC). Any loan from a MEC is considered capital gain to the extent there is any gain in the contract. Therefore, answer D is correct because Warren takes a $155,000 loan from the contract and has $90,000 ($155,000 - $65,000) of capital gain. Warren must recognize capital gain to the extent of the capital gain inherent in the policy before receiving a return of capital. In this answer B, Warren would recognize $65,000 of capital gain if he took a loan of $65,000.

The correct answer states that regardless of when the individual dies, the payment from the viatical settlement company is excluded from income tax. This means that even if the individual lives for more than one year after the transfer, they will not be subject to income tax on the payment. This is a benefit for individuals who sell their life insurance policies to viatical settlement providers, as they can receive the payment without having to pay taxes on it.

A whole life insurance policy would not provide Travis with the least expensive temporary life insurance needed to eliminate the mortgage at his death. Whole life insurance policies are typically more expensive than term life insurance policies, and they provide coverage for the entire lifetime of the insured rather than a specific term. In this case, Travis should consider a term life insurance policy that covers the duration of the mortgage, as it would be a more cost-effective option for providing the necessary coverage.

The gift tax value of the gift of this policy is $500,000 discounted for Jerry's six month life expectancy. This means that the value of the gift is determined by discounting the face value of the policy to account for Jerry's shortened life expectancy. This is because the gift tax value is based on the economic value of the gift at the time it is made. Since Jerry is expected to pass away within a year, the value of the policy is reduced to reflect this.

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The death benefit of a life insurance policy would be taxable, partially or wholly, in the situation where Adam sold a $100k death benefit life insurance policy to Dawson for $35k as part of a cross-purchase buy-sell agreement. This is because the policy was sold between shareholders of Cupper Corporation, indicating a business-related transaction. In such cases, the death benefit is considered taxable as it is seen as a part of the business arrangement rather than a personal life insurance policy.

When Jackie receives the lump-sum payment of the death benefit from the insurer, part of the payment will be taxable because life insurance death benefits are generally not taxable, but any interest or earnings on the benefit received as a lump sum may be subject to taxation.

The gain/loss subject to income tax on the life insurance policy is $60,000. This is calculated by subtracting the total amount paid in premiums ($100,000) and the cash policy dividends received ($20,000) from the cash payment received at surrender ($140,000). Therefore, the owner has a gain of $60,000 that is subject to income tax.

When Colleen transferred ownership of the whole life insurance policy to an Irrevocable Life Insurance Trust (ILIT) but retained the right to borrow against the policy, it means that she still has control over the policy and can access its funds. As a result, the proceeds of the life insurance policy will always be included in Colleen's federal gross estate when she dies, regardless of whether she has any outstanding loans against the policy or if she continued paying the premiums after transferring it to the ILIT.