40.Prairie Dog Corporation (PDC), an oil drilling company, has a key-person variable universal life

policy on Digger Phelps, its vice-president of drilling operations. The owner and beneficiary of the

policy are the corporation. Which of the following is correct?

a. Premiums paid by PDC are taxable income to Digger.

b. Premiums paid by PDC are considered gifts to Digger.

c. Premiums paid by PDC are tax deductible as a business expense.

d. Any death benefit paid will be nontaxable to PDC.

41.Which of the following is not a reason that the death benefit of a life insurance policy would be

included in a decedents gross estate?

a. The beneficiary of the policy is the estate of the decedent.

b. The decedent transferred the ownership of the policy to his daughter six years before his death,

but retained the right to change the beneficiary of the policy.

c. The decedent transferred the ownership of the policy to his son six months before his death.

d. The decedent transferred the ownership of the policy to his partner four years ago.

42.A client asks you to explain the statement, Life insurance proceeds are tax-free. You answer that the

general rule(s), subject to some exceptions, is/are that death benefits received from a life insurance

policy due to the death of the insured are income tax free to the beneficiary, but which of the following

are also correct:

1. The proceeds are subject to estate taxes in the estate of the insured if the insured is the owner.

2. The proceeds may be subject to income taxes if the policy was sold to a third party.

3. The proceeds are not subject to income tax, even if sold to a third party if the contract is a modified

endowment contract.

a. 1 only.

b. 2 and 3.

c. 1 and 2.

d. 1, 2 and 3.

1. Paula, a single woman, transferred $2,000,000 to a GRAT naming her two sons as the remainder

beneficiaries, while retaining an annuity with a present value of $860,000. If this is the only transfer

that Paula made during the year, what is Paula's total taxable gift for the year?

a. $1,110,000.

b. $1,140,000.

c. $1,970,000.

d. $2,000,000.

43.True or False: Earl has four children - Kenny, Tim, Aaron, and Cathy. Earls will directs all of

his property to be divided equally among his four children, and if any child predeceases Earl,

that child's heirs will inherit Earl's property per capita. Cathy died two years before Earl. Cathy

had three children. At Earls death, Kenny will receive 1/6 of Earls estate.

44.Kevin transferred $4,000,000 to a GRAT naming his four children as the remainder

beneficiaries. Kevin retained an annuity from the GRAT valued at $1,500,000. If this is his only

transfer during the year, what is Kevins total taxable gifts for the year?

a. $1,444,000.

b. $1,500,000.

c. $2,440,000.

d. $2,500,000.

44. True or False: The Prudent Man Rule describes the standard of performance to which

beneficiaries of a trust should be held.

1. Sharon wants to make sure that she makes full use

of the applicable estate tax credit upon her death,

but also wants to make sure that her husband, Oswald, has access to her property. Which of the

following would you recommend?

a. A Bypass Trust.

b. A Life Insurance Trust.

c. A Revocable Living Trust.

d. A Section 2503(b) Trust.