From one of the CFAI papers:
1) Discuss two benefits, specific to the Xs’ circumstances, of Y purchasing the life insurance policy.
Suggested response from CFAI:
• Upon Bert’s death, the death benefit proceeds could be used to pay estate taxes. Having the insurance policy proceeds addresses Bert’s concerns about a potential lack of liquidity to pay estate taxes upon his death, and for possibly having to sell shares of the family-owned business.
• The payment of insurance premiums would serve to reduce the value of the estate, which would result in lower future estate taxes, particularly since death benefit proceeds paid to life insurance beneficiaries are tax exempt.
Would these two points below suffice? Or would it require more elaboration?
• Upon death, the death benefit proceeds could be used to pay estate taxes.
• The payment of insurance premiums would serve to reduce the value of the estate.
2) Discuss two benefits, specific to the Xs’ circumstances, of establishing a trust.
Suggested response from CFAI:
• Protection of the assets within the trust from claims outside the family, such as potential creditors. Bert wants to secure a financial future for Emma and their three children and worries about claims coming from outside of the family
• Transfer of assets to his wife and children without the potential publicity associated with probate. Bert prefers to keep family’s financial affairs private.
My response:
• An irrevocable trust is immune to legal claims against X’s estate upon death.
• It also bypass the probate process.
How do you think it be graded?
Many thanks in advance.