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

Question 1

A closely-held C corporation has a significant portion of its value tied to the ownership interest of its 70-year-old founder.
The founder's estate anticipates a large estate tax liability upon his death.
Which of the following allows the corporation to redeem a portion of the decedent's stock to pay for funeral expenses, estate administration costs, and death taxes, with the redemption being treated as a capital transaction rather than a dividend?

Accepted Answer

An IRC Section 303 stock redemption

Answer

A Section 1244 stock sale

Answer

A Reverse Section 303 stock redemption

Answer

A private annuity arrangement

Question 2

Three partners own a growing consulting firm and have a buy-sell agreement in place. They are considering two primary funding structures: a cross-purchase plan and an entity-purchase (stock redemption) plan. What is the primary income tax advantage for the surviving partners if they use a life-insurance-funded cross-purchase agreement versus an entity-purchase agreement?

Accepted Answer

The surviving partners receive an increased cost basis in the business interest they acquire.

Answer

The corporation can deduct the life insurance premium payments.

Answer

The death benefit proceeds are received by the corporation tax-free.

Answer

The administrative burden is lower with a cross-purchase plan.

Question 3

A corporation is establishing a non-qualified deferred compensation (NQDC) plan for its key executives to provide supplemental retirement income. To ensure the executives are not subject to immediate income tax on the deferred amounts under the doctrine of constructive receipt, the plan must include which of the following features?

Accepted Answer

The executives' rights to the deferred amounts are subject to a substantial risk of forfeiture.

Answer

The plan must be formally funded with an irrevocable trust.

Answer

The plan's assets must be segregated from the company's general assets.

Answer

The benefits must be fully vested and nonforfeitable from the date of deferral.

Question 4

A financial planner is advising a family-owned manufacturing company on its succession plan. The owners want to determine the company's value for a potential buy-sell agreement. They use a valuation method that analyzes historical earnings, adjusts them for non-recurring items, and applies a capitalization rate to determine the present value of anticipated future profits. What is this valuation method called?

Accepted Answer

Capitalization of Future Maintainable Earnings Method

Answer

Adjusted Book Value Method

Answer

Liquidation Value Method

Answer

Market Comparables Approach

Question 5

An S-Corporation is the owner and beneficiary of a key person life insurance policy on its president. Which of the following statements correctly describes the income tax treatment of the policy's premiums and death benefit?

Accepted Answer

Premiums are not tax-deductible, and the death benefit is generally received income tax-free.

Answer

Premiums are tax-deductible, and the death benefit is taxable income.

Answer

Premiums are tax-deductible, and the death benefit is tax-free.

Answer

Premiums are not tax-deductible, and the death benefit is taxable income.

Question 6

A business has five owners who wish to establish a life insurance-funded cross-purchase buy-sell agreement. Which of the following is a significant administrative disadvantage of this arrangement compared to an entity-purchase plan?

Accepted Answer

The number of policies required can become unwieldy.

Answer

The surviving owners do not receive a step-up in basis.

Answer

The policy cash values are considered a corporate asset.

Answer

The death benefit may be subject to the corporate alternative minimum tax (AMT).