1. It is often desirable to keep life insurance death proceeds out of the insureds estate for tax reasons. Which of the following describe(s) a necessary condition for keeping the proceeds out of the insureds gross estate?

I. The insured must surrender all incidents of ownership.

II. The transfer of incidents of ownership must occur more than three years prior to death.

III. The insured cannot continue to pay premiums on the policy.

A. I only

B. II only

C. I and II only

D. I, II and III

2. John purchases a life insurance policy on the life of Mary. John is the owner, and Bill is designated the revocable beneficiary. Under these circumstances, which of the following statements is correct?

I. John is deemed to have made a gift to Bill each time he pays a premium.

II. When Mary dies, John is deemed to have made a gift to Bill equal to the policy proceeds.

A. I only

B. II only

C. Both I and II

D. Neither I nor II

3. Some years ago, Y purchased a $100,000 universal life policy on his own life. Two years ago, he sold the policy to his cousin for the policys gift tax value of $40,000 as determined by government rules. The cousin paid two annual premiums of $2,200 each prior to Ys death. Under these circumstances, which of the following statements is correct?

A. Some of the $100,000 death proceeds will be includible in Ys gross estate.

B. Ys cousin will be in receipt of taxable income equal to $55,600.

C. Ys cousin will not be in receipt of any taxable income.

D. If Y had gifted the policy to his cousin, rather than making a sale, none of the death proceeds would have been included in Ys gross estate.

4. All the following statements concerning the use of a funded irrevocable life insurance trust are correct EXCEPT:

A. The income earned on the trust property is taxable to the trust creator if the income is used to pay premiums on a life insurance policy on the life of the creator.

B. The cash value of a policy on the life of the trust creators daughter is excluded from the creators gross estate for federal estate tax purposes.

C. The creation and funding of the trust have no gift tax implications.

D. The creator loses control over both the funding property and the life insurance policy.

5. A life insurance trust is often named the beneficiary of the life insurance policies it holds for which of the following reasons?

I. It can provide greater flexibility than is available under insurance settlement options.

II. It can eliminate a second estate tax upon the death of the beneficiaries.

III. It can incorporate special limitations and restrictions on the funds designed to be paid to specific beneficiaries.

A. I only

B. I and II only

C. II and III only

D. I, II and III