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CLU Estate Planning Practice Questions

Official outline
The American College CLU designation (courses)
Questions on this page
6
Updated
Nov 3, 2026

  1. Question 1, hard

    A client wants to use life insurance to fund estate liquidity through an ILIT while completely avoiding any risk of the three-year lookback rule under IRC Section 2035. Which strategy accomplishes this?

    • A.Have the ILIT apply for and be named as the original applicant, owner, and beneficiary of a brand-new policy on the client's life, rather than transferring an existing policy into the trust
    • B.Purchase the policy in the client's own name first, then change the beneficiary designation to the ILIT immediately after issue
    • C.Transfer an existing policy to the ILIT, but have the client continue paying all future premiums directly to the insurer
    • D.Transfer an existing policy to the ILIT, name the client as trustee with power to change beneficiaries, and rely on the client surviving three years after the transfer
    Show answer and explanationHide answer

    Correct answer: A. Have the ILIT apply for and be named as the original applicant, owner, and beneficiary of a brand-new policy on the client's life, rather than transferring an existing policy into the trust

    The Section 2035 three-year lookback applies only when the insured transfers an existing policy (or relinquishes incidents of ownership in one) that he or she previously owned. If the ILIT itself is the original applicant and owner from inception, the insured never personally owned the policy or held incidents of ownership. There is then no 'transfer' to look back on, so Section 2035 is never implicated, regardless of how soon death occurs. Buying the policy in the client's own name first still involves the client owning it, so a later beneficiary change is a transfer. Transferring an existing policy while the client keeps paying premiums doesn't fix the fact that a transfer occurred (grantor premium payments are a separate gift-tax issue, not a cure for 2035). Transferring an existing policy and naming the client as trustee with power to change beneficiaries is the weakest approach. It relies on surviving an uncertain three-year window, and the retained power over beneficiaries is an incident of ownership that can pull the proceeds into the estate under Section 2042 even if the client outlives the window.

    • A. Correct. If the ILIT applies for, owns, and is named beneficiary of a brand-new policy from day one, the insured never personally owned or transferred the policy, so there is nothing that could trigger the §2035 three-year lookback.
    • B. Incorrect. Retaining ownership and merely changing the beneficiary designation doesn't remove the policy from the insured's estate at all, since the insured still holds incidents of ownership under §2042.
    • C. Incorrect. Transferring an existing policy to the ILIT still starts the three-year clock under §2035, and having the client keep paying premiums directly can create additional gift and inclusion issues.
    • D. Incorrect. Transferring an existing policy exposes the proceeds to the §2035 lookback for three years. Naming the client as trustee with power to change beneficiaries also leaves the client with incidents of ownership under §2042. That can pull the proceeds into the estate no matter how long the client survives, so this approach does not eliminate the risk.

  2. Question 2, medium

    When an existing, previously-issued life insurance policy is gifted to an ILIT, what value is used to determine the amount of the taxable gift?

    • A.The policy's interpolated terminal reserve value plus any unearned premium. Approximately the policy's cash value, not the death benefit
    • B.The full face amount of the death benefit
    • C.The total premiums the insured would have paid over his or her remaining life expectancy
    • D.Zero, because transfers to an irrevocable trust are never treated as gifts
    Show answer and explanationHide answer

    Correct answer: A. The policy's interpolated terminal reserve value plus any unearned premium. Approximately the policy's cash value, not the death benefit

    For gift tax purposes, an existing, previously-issued policy is valued at its interpolated terminal reserve plus any unearned premium. That figure closely tracks the policy's cash surrender value, not its face amount. It is far lower than the death benefit, so gifting an in-force policy is often gift-tax-efficient relative to the protection it provides. By contrast, a newly issued policy is generally valued at roughly the gross premium paid. Valuing the gift at the full death benefit would overstate what was actually transferred. Projected future premiums are not the valuation measure. A transfer of a valuable asset to an irrevocable trust is a completed gift, not a zero-value event.

    • A. The taxable gift value of an existing policy transferred to an ILIT is measured by its interpolated terminal reserve plus any unearned premium. Essentially the policy's cash value, not its face amount.
    • B. The full face amount of the death benefit isn't used to value the gift of an in-force existing policy; that would drastically overstate the value transferred.
    • C. Total future premiums over life expectancy isn't the valuation method for gifting an existing, previously-issued policy.
    • D. Transferring an existing policy with real value into an irrevocable trust is generally a taxable gift; it isn't automatically valued at zero.

  3. Question 3, medium

    How does a QTIP (Qualified Terminable Interest Property) trust differ from a standard bypass (credit shelter) trust in estate planning?

    • A.A QTIP trust qualifies for the marital deduction while giving the grantor control over the ultimate remainder beneficiaries, whereas a bypass trust uses the decedent's own applicable exclusion amount and does not qualify for the marital deduction
    • B.A bypass trust qualifies for the marital deduction and defers tax until the surviving spouse's death, whereas a QTIP trust uses the decedent's applicable exclusion amount and does not qualify for the marital deduction, and the surviving spouse alone chooses the remainder beneficiaries of the bypass trust
    • C.The two trusts are treated the same way for estate tax purposes, since each qualifies for the marital deduction and allows the surviving spouse to decide who receives the remainder at death
    • D.A QTIP trust is typically funded with life insurance proceeds payable to the surviving spouse, whereas a bypass trust is typically funded with the decedent's retirement accounts rather than insurance
    Show answer and explanationHide answer

    Correct answer: A. A QTIP trust qualifies for the marital deduction while giving the grantor control over the ultimate remainder beneficiaries, whereas a bypass trust uses the decedent's own applicable exclusion amount and does not qualify for the marital deduction

    A QTIP trust lets the decedent secure the marital deduction (deferring tax to the surviving spouse's death) while still dictating who receives the trust remainder after the spouse dies. Useful in blended-family planning. A bypass/credit shelter trust instead uses the decedent's own applicable exclusion amount at the first death, deliberately not qualifying for the marital deduction, so those assets (and their appreciation) escape tax at the second spouse's death too.

    • A. Correct. A QTIP trust qualifies for the marital deduction while letting the grantor control who ultimately receives the remainder, whereas a bypass trust uses the decedent's own applicable exclusion amount and does not qualify for the marital deduction.
    • B. This reverses the roles. It's the QTIP trust, not the bypass trust, that qualifies for the marital deduction, and the grantor, not the surviving spouse, generally controls the remainder beneficiaries.
    • C. The two trust types serve materially different purposes: a QTIP qualifies for the marital deduction with grantor-controlled remainder, while a bypass trust uses the exclusion amount and does not qualify for the marital deduction.
    • D. The distinction between the trusts is not the type of asset funding them; a QTIP trust can hold a variety of estate assets, and the real differences are marital deduction treatment and use of the exclusion amount.

  4. Question 4, medium

    The annual gift tax exclusion allows a donor to give up to a set amount per donee, per year, without using any of the donor's lifetime unified credit or filing a gift tax return, provided the gift qualifies as a present interest. Which statement correctly reflects a limitation on this exclusion?

    • A.Gifts of a future interest, such as most contributions to certain trusts without withdrawal rights, do not qualify for the annual exclusion
    • B.The exclusion applies automatically to gift-splitting by a married couple, so no consent, election, or gift tax return is required from the spouses
    • C.The exclusion applies only to outright gifts of cash, and never to gifts of other property or to life insurance premiums paid on a policy owned by the donee
    • D.The exclusion amount is fixed permanently by statute and never adjusts for inflation, so it has stayed the same since it was first enacted
    Show answer and explanationHide answer

    Correct answer: A. Gifts of a future interest, such as most contributions to certain trusts without withdrawal rights, do not qualify for the annual exclusion

    The annual gift tax exclusion is available only for gifts of a present interest. Meaning the donee has an immediate, unrestricted right to use, possess, or enjoy the gift. Contributions to most irrevocable trusts are future interests unless the trust includes a mechanism, such as Crummey withdrawal rights, that converts the gift into a present interest. Gift-splitting between spouses is a real technique that can double the effective exclusion, but it requires the couple's consent/election, not automatic application.

    • A. Correct. Present-interest requirement is the key limitation, and future-interest gifts (without a present-interest mechanism like Crummey powers) don't qualify.
    • B. Incorrect. Gift-splitting requires spousal consent and election (typically on a gift tax return); it is not automatic.
    • C. Incorrect. The exclusion applies to gifts of property generally, including insurance premiums paid for another's benefit, not only cash.
    • D. Incorrect. The exclusion amount is periodically adjusted for inflation, and has changed over time.

  5. Question 5, easy

    A key non-tax reason for using life insurance in estate planning, even for estates well below the federal estate tax exemption amount, is to:

    • A.Increase the size of the taxable estate, which raises the amount of property that passes to heirs outside of probate
    • B.Eliminate the need for a will or other estate planning documents, since proceeds pass directly to the named beneficiaries outside the estate, and so avoid any need for probate
    • C.Qualify the estate for probate proceedings, which must be opened before the insurer can pay proceeds to the named beneficiaries
    • D.Provide liquidity to pay final expenses, debts, and any taxes due without forcing a hurried sale of illiquid assets such as a family business or real estate
    Show answer and explanationHide answer

    Correct answer: D. Provide liquidity to pay final expenses, debts, and any taxes due without forcing a hurried sale of illiquid assets such as a family business or real estate

    Estate liquidity is a core non-tax justification for life insurance: illiquid estates (closely held businesses, real estate) can be forced into fire-sale liquidations to cover settlement costs, debts, and taxes if cash isn't otherwise available. Life insurance proceeds provide immediate cash exactly when needed.

    • A. Incorrect. Increasing the taxable estate is not a goal; proceeds can add to a taxable estate if incidents of ownership are retained, which is a cost, not the reason for using insurance.
    • B. Incorrect. Insurance supplements, but doesn't replace, wills and other estate documents, and the rest of the estate may still need probate.
    • C. Incorrect. Insurance proceeds paid to a named beneficiary typically avoid probate; no probate proceeding is required for the insurer to pay.
    • D. Correct. Liquidity provision is the primary non-tax rationale.

  6. Question 6, easy

    Assets passing outright from a deceased spouse to a surviving U.S. citizen spouse generally qualify for which estate tax provision, deferring estate taxation until the second spouse's death?

    • A.The unlimited marital deduction
    • B.The annual gift tax exclusion
    • C.The unified credit (applicable exclusion amount)
    • D.The charitable deduction
    Show answer and explanationHide answer

    Correct answer: A. The unlimited marital deduction

    The unlimited marital deduction allows an unlimited amount of property to pass from a decedent to a surviving U.S. citizen spouse free of federal estate tax at the first death, effectively deferring taxation until the surviving spouse's death or subsequent transfer of the property.

    • A. Correct. The unlimited marital deduction is specifically designed for interspousal transfers.
    • B. Incorrect. The annual gift tax exclusion applies to lifetime gifts up to a set dollar amount per donee, not to unlimited marital transfers at death.
    • C. Incorrect. The unified credit shelters a set exclusion amount from tax for any beneficiary, not an unlimited spousal amount.
    • D. Incorrect. The charitable deduction applies to transfers to qualifying charities, not to a surviving spouse.

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