Answered: Don and Bob own a small business as…

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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Question

Don and Bob own a small business as equal partners. They entered into a cross-purchase buy-sell agreement several years ago and funded the agreement with life insurance. Don has now died, and the personal representative of his estate has demanded that Bob honor the agreement by purchasing Don's half interest in the partnership for the price stated in the agreement.

Which one of the following statements about the income, gift, or estate tax implications of this business planning technique is correct?

If Bob purchases the life insurance policy on his life from Don’s estate at its replacement cost, a portion of the death benefits from this policy (when Bob dies) will be taxable income to the recipient.

If the price established in the agreement for Don’s interest does not undervalue the interest, no gift tax will be due from this transaction.

The death benefits received by Bob from the life insurance policy on Don will be taxable income to Bob since a transfer for value has occurred.

The death benefits received by Bob from the life insurance policy on Don will be included in Don’s gross estate as life insurance since they will be paid to Don’s estate.

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