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On January 1, 2004 a father gave his daughter a $200,000 straight (ordinary) life insurance policy on his life. Premiums are paid annually. The pertinent facts about the policy are:
Date of issue: July 1, 1992
Premium paid on July 1, 2003 $3200
Terminal reserve on July 1, 2003 20,000
Terminal reserve on July 1, 2004 24,000
What is the value of the policy for federal gift tax purposes?
Suggested Answer: C
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30 comments · newest first
IR
Iraida
10 months ago
Wait, how does the terminal reserve affect the gift tax value?
SA
Samira
10 months ago
I'm leaning towards option C, $23,600.
SH
Shoshana
10 months ago
I think it's definitely not $200,000 for gift tax purposes.
GL
Glen
10 months ago
Really? $23,600 seems low for a policy worth $200k.
CA
Carlton
11 months ago
The terminal reserve on July 1, 2004 is $24,000.
TO
Toi
11 months ago
I think the value for gift tax purposes is usually the cash value or the terminal reserve, but I’m confused about which figure to use in this case.
TH
Theresia
11 months ago
I feel like the answer should be around $23,000, but I can't recall if we add or subtract the terminal reserve.
MA
Maia
11 months ago
This seems similar to a practice question we did on gift tax valuations. I think we might need to subtract the terminal reserve from the face value?
KR
Krystina
12 months ago
I remember something about calculating the value based on the terminal reserve and the premiums paid, but I'm not sure how to apply it here.
AN
Angella
12 months ago
This seems tricky, but I'm confident I can work through it step-by-step. I'll start by calculating the terminal reserve on the policy date to get a better understanding of the policy's value.
AN
Annamaria
12 months ago
Okay, I think I've got this. The key is to find the difference between the terminal reserves on July 1, 2003 and July 1, 2004. That should give me the value of the policy for gift tax purposes.
JE
Jesusita
1 year ago
Hmm, I'm a bit confused by all the dates and numbers here. I'll need to carefully review the information and make sure I understand how to apply the formulas for this type of problem.
FL
Flo
1 year ago
This looks like a straightforward life insurance policy question. I'll need to calculate the terminal reserve on the policy to determine the gift tax value.
MI
Mica
1 year ago
Wait, wait, wait... is this a trick question? What kind of insurance policy has a terminal reserve? I need a refresher on this before I can even attempt an answer.
CA
Carey
1 year ago
Hah, this question is a piece of cake! The answer is clearly C) $17,700. Anyone who doesn't get this is a real numbskull, am I right?
WA
Wava
1 year ago
I think the answer is B) $17,400. The terminal reserve on July 1, 2003 was $20,000, and the premium paid on July 1, 2003 was $3,200. So the value of the policy should be $20,000 + $3,200 = $17,400.
KE
Keneth
1 year ago
Actually, I think the correct calculation should be $24,000 - $20,000 + $3,200 = $7,200.
KA
Kami
1 year ago
You're right, I forgot about that. So the value of the policy should be $24,000 + $3,200 = $27,200.
CR
Cristen
1 year ago
Yes, the value of the policy for federal gift tax purposes is $17,400.
EL
Elke
1 year ago
But what about the terminal reserve on July 1, 2004? Doesn't that need to be considered as well?
LA
Lashawnda
1 year ago
That makes sense, the terminal reserve and premium add up to $17,400.
TI
Timmy
1 year ago
I agree with you, the answer is B) $17,400.
MA
Maile
1 year ago
I agree, the answer is B) $17,400.
SA
Sabra
1 year ago
That's a good point, Florencia. The premium paid in 2003 should also be factored in when calculating the value of the policy.
FL
Florencia
1 year ago
I'm not sure, but I think we need to consider the premium paid in 2003 as well.
KA
Karl
1 year ago
I agree with Sabra, the terminal reserve increased by $4,000 from 2003 to 2004.
RO
Rolf
1 year ago
The correct answer is C) $17,700. The value of the policy is the terminal reserve on July 1, 2004, which is $24,000. Since the father paid a premium of $3,200 on July 1, 2003, the value of the policy for federal gift tax purposes is $24,000 - $3,200 = $17,700.
HE
Herminia
1 year ago
Yes, you're correct. The value of the policy is $17,700.
VE
Veda
1 year ago
I think the answer is C) $17,700.
SA
Sabra
1 year ago
I think the answer is C) $17,700.