Question

Which of the following is (are) advantages of irrevocable insurance trusts?

1) Provide estate liquidity.
2) Insurance proceeds are removed from the estate of the insured for tax purposes.
3) The insured has the flexibility to alter the trust arrangements.
4) Once set up, no changes may be made.

Answer 1

Irrevocable insurance trusts provide estate liquidity, remove insurance proceeds from the estate for tax purposes, and have an irrevocable nature.

Step-by-step explanation:

An irrevocable insurance trust (IIT) can provide several advantages:

1. Provide estate liquidity: By designating the trust as the beneficiary of the life insurance policy, the proceeds from the policy can be used to pay any estate taxes and expenses, ensuring there is enough liquidity to cover these costs without having to sell assets.
2. Insurance proceeds are removed from the estate: By transferring the ownership of the life insurance policy to the trust, the policy proceeds are not considered part of the insured's estate for tax purposes. This can help reduce estate taxes and increase the amount of wealth that can be passed to beneficiaries.
3. Irrevocable nature: Once the irrevocable insurance trust is set up, no changes can be made. This provides certainty and stability in the planning process, ensuring that the assets are protected and distributed according to the wishes of the insured.