TOOLS & TECHNIQUES OF LIFE INSURANCE PLANNING



TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING

11th Edition

College Course Materials

Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®

Associate Professor

CFP® Program Director

Personal Financial Planning Department

University of Missouri-Columbia

Please Note: Correct answers for each question are indicated in bold type. After each question, the number of the page containing information relevant to answering the question is given. When a calculation is necessary or the reasoning behind a given answer may be unclear, a brief rationale for the correct answer is also given.

Part B: Employee Benefit Planning

Life Insurance Plans

Chapter 43: Key Employee Life Insurance

True/False

43.1 The death benefits of key employee life insurance are payable to the employer

43.2 When a key employee dies, key employee life insurance provides the employer with liquid assets to facilitate control of corporate operations.

43.3 Corporate owned key employee life insurance has no effect on a deceased key employee’s estate

Answers:

43.1 True [p. 333]

43.2 True [p. 333]

43.3 False [p. 333]

Multiple Choice

43.4 Which of the following is (are) true regarding key employee life insurance?

a. death proceeds of key employee life insurance are always tax free when paid to the corporation

b. key employee life insurance policies use term life insurance exclusively

c. there is no income tax to a key employee or their estate when the executive owns the policy

d. the employer may have to pay an accumulated earnings tax

e. key employee life insurance is not very useful in a closely held business

Answer: D [pp. 333, 334]

43.5 Which of the following is (are) true regarding the alternative minimum tax (AMT)?

a. corporations must pay the larger of regular tax or AMT

b. AMT has favorable provisions for corporate owned life insurance

c. death proceeds to employer may be taxed under AMT

d. a and c

e. a and b

Answer: D [p. 334]

43.6 Which of the following is (are) true regarding use of personally owned insurance as substitute for key employee life insurance

a. can be funded through extra compensation paid to employee

b. if corporation’s marginal tax bracket is higher than the employee’s, personally owned insurance may provide lower taxes

c. employer cannot deduct amount paid to employee for insurance purchase

d. a and b

e. a and c

Answer: D [p. 335]

Application

43.7 Angus Deter, age 60, had a 60% interest in Amalgamated Manufacturing before his death this year. Corporate owned key employee life insurance on Angus named Trisha, his 35 year old wife, as the beneficiary of the $500,000 policy. Angus believed Trisha would share the proceeds with the corporation to ease any transition costs. Distribution of this life insurance policy:

a. can be accessed by the corporation

b. can be accessed by Amalgamated’s creditors

c. will be taxed as part of Angus’s estate as life insurance

d. all of the above

e. only a and b

Answer: C [pp. 333, 334]

43.8 Home Accents, Inc. is a closely held business headed by Mitch Franklin and his wife Maggie, both age 54. Their children Ted and Tom, twins aged 30, want to buy out their father’s interests when he retires or dies. As their financial advisor, you inform them that key employee life insurance on their father and their mother will:

a. stabilize the corporation financially at the death of a key employee

b. enable the business to continue contributing to employee benefit plans for surviving employees

c. allow the family to avoid all estate taxes

d. a and b

e. b and c

Answer: D [p. 333]

43.9 The owner of Migit Industries has asked you to explain the alternative minimum tax for her business. Last year, Migit had average gross business revenue of $2,000,000. You tell Migit’s owner:

a. Migit is exempt from the AMT because it is a small employer

b. the AMT is designed to force corporations to pay a minimum level of income tax, even if taxable income has been significantly reduced through legitimate methods of tax deduction

c. the best way to avoid the impact of the AMT is to reduce employer contributions to employee retirement plans

d. a and b

e. b and c

Answer: D [p. 334]

43.10 Estelle Peterson is a key employee of Paxton Marketing, Inc. She is covered by a key employee life insurance policy and has asked you, her financial advisor, to explain the tax implications that she faces due to this policy. You tell her that there is no income tax due from her or her estate when:

a. Paxton Marketing owns the policy

b. Paxton Marketing pays the premiums

c. death benefits are paid to Paxton Marketing or Paxton’s creditors

d. all of the above

e. only a and b

Answer: D [p. 333]

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