Questions: Problematic Beneficiary Designations, 3rd Edition Online Certification Exam 00:00:53 Test ld: 323249456 Question #1 of 25 Question ID: 594353 Valentina and Nicholas are concerned about estate taxes depleting assets for their children. They are considering the use of an irrevocable life insurance trust (ILIT) as the owner and beneficiary of their life insurance policies. If they tran fer ownership to an ILIT at least 3 years prior to their deaths, what effect will their decision have? A) Removes the value of the insurance proceeds from the estate of the owner B) Makes insurance policy proceeds taxable as a gift to the trust C) Confers qualified plan status on life insurance, making all benefits subject to ordinary income tax upon distribution D) Prevents heirs from fighting over the money because they are not the beneficiaries Next Previous Check for Review Friday, January 3, 2025 2:29 PM Kaplan, Inc. All Rights Reserved. Privacy Policies • Terms Conditions • Contact Information

The answer is A) Removes the value of the insurance proceeds from the estate of the owner.

This is correct. An irrevocable life insurance trust (ILIT) is a common estate planning tool used to exclude life insurance proceeds from the taxable estate of the insured. By transferring ownership of the life insurance policy to an ILIT and ensuring that the transfer occurs at least three years before the insured's death, the proceeds are not included in the estate, thus avoiding estate taxes.

This is incorrect. While transferring a life insurance policy to an ILIT can be considered a gift, the proceeds themselves are not taxable as a gift. The gift tax implications are generally related to the value of the policy at the time of transfer, not the proceeds.

This is incorrect. Life insurance policies do not become qualified plans by being placed in an ILIT, and the proceeds are generally not subject to ordinary income tax. Life insurance proceeds are typically received income tax-free by the beneficiaries.

This is incorrect. While an ILIT can help manage how proceeds are distributed, it does not inherently prevent disputes among heirs. The trust's terms and the trustee's management play a more significant role in preventing conflicts.