Ernie has a wife named Wendy and a daughter from a previous relationship named Donna. Ernie has
passed away Wendy and Donna are at odds with one another regarding the assets of Ernie. Upon
Ernie’s passing, he has assets totalling $20 million of which the majority is working interest in oil
wells. Ernie and Wendy reside in a state where upon the death of a spouse the surviving partner
receives 50% of the estate no matter if there is a will. Donna has a handwritten will on a napkin she
obtained from Ernie which states he leaves all his worldly goods to her.
Estate Tax 2018
If Wendy received the estate, then in accordance with 26 U.S. Code S 2056 Wendy, then there would
be $0 estate tax due because marital deduction is unlimited for this scenario. On the other hand, if
the estate was solely given to Donna’s estate tax amount would be $3,528,000. We derive that
amount by taking gross estate of $20 mill less the 2018 exclusion amount of $11,180,000. Also, this
scenario does not have deductions such as expense indebtedness and taxes as outlined in Sec 2053,
or losses outlined in Sec 2054, therefore no further deduction is required. After all, deductions have
been deducted from a gross estate, we then would multiply the amount by 40%.
Consequences
If the settlement was reached between the two due to the marital deduction Wendy still would not
pay any estate taxes. Donna would still have to pay based on the amount received using the above
calculations if it was split 50/50.
Conflict
There is a conflict about representing them as clients. The conflict of interest is due to them being at
odds over how the estate should be decided. A professional would not want to give the perception
that she is biased to the other side or the public.
Alternative Valuation The estate can choose to elect the alternative valuation versus the date of
death by selecting the irrevocable option on the estate return (Anderson, 2023). The option for
alternative valuation is obsolete if the return Is filed more than a year after the due date (Anderson,
2023). Wendy as Ernie’s spouse will receive the marital deduction, therefore $0 tax due. Donna
Ernie’s daughter would also pay $0 as well, due to the 2018 exclusion amount of $11,180,000.
All US citizens or residents are taxed on the transfer of an estate imposed by IRC §2001(a) of which
the base is equated to the amount of the taxable estate and adjusted taxable gifts less various
deductions in excess of the basic exclusion amount at the time of the death. IRC §2053(a)(1-4)
allows for funeral, administration, claims against the estate, and unpaid mortgage expenses and IRC
§2055 allows for the deduction of transfers made for public, charitable, and religious uses.
Furthermore, IRC §2056 provides a deduction to the gross estate equal to the value of interest that
is transferred to a surviving spouse.
If Wendy were to receive 100% of Ernie’s estate, she would be subject to no tax liabilities under the
marital deduction. If Donna were to receive 100% of the estate, she would be subject to significant
tax liabilities. The 2017 unified credit threshold was $5,490,000, so Donna’s base is $14,510,000 as
no other deductions are indicated (IRS, 2022). She would be responsible for $345,800 plus 40% on
the excess above $1,000,000 ($13,510,000) which is $5,749,800 (Caplinger, 2017).
If a settlement was reached between the two opposing parties, first the taxable estate would be
reduced by applying deductions. Wendy would still owe $0 for any portion awarded due to the
marital deduction. Donna would be responsible for liabilities of $345,800 plus 40% on the excess
above $1,000,000.
The AICPA Code of Professional Conduct applies to all members, including public, business, and all
other practices under Rule 0.100.010. Under both sections for public and business (1.100.001.01
and 2.100.001.01, respectively), members must maintain objectivity and integrity, and be free of
conflicts of interest (AICPA, 2014). The Code provides that providing tax or personal financial
planning services for several members of a family whom the member knows have opposing interests
is a situation where a conflict of interest may arise under 1.110.010.010 (AICPA, 2014). The matter
of Ernie’s estate is considered a conflict of interest, however, the significance of the threat caused by
the conflict can be evaluated and if it is not at an acceptable level the member may provide
safeguards to mitigate potential issues and ultimately provide disclosures and consent from both
parties to proceed (AICPA, 2014).
IRC §2032 allows for and alternative valuation when determining the gross estate. If elected, the
evaluation of property can be determined up to 6 months post death. The threshold increased to
$11,180,000 in 2018 (IRS, 2022). Wendy would remain unaffected regardless of the year, however,
Donna would benefit from both the decreased valuation of the estate and the increased unified
credit. If Donna were to receive 100% of the estate at the $10,000,000 valuation, her tax liability
would be $0.
References
AICPA. (2014). Code of Professional Conduct. Retrieved from
https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf
IRS. (2022). Estate Tax. Retrieved from https://www.irs.gov/businesses/small-businesses-self-
employed/estate-tax
IRC §2001
IRC §2032
IRC §2053(a)(1-4)
IRC §2055
IRC §2056
Caplinger, D. (2017). 2017 Estate Tax Rates. Retrieved from
https://www.fool.com/retirement/2016/11/11/2017-estate-tax-rates.aspx
Anderson, K. E. (2023). 2023 Corporate, Partnership, Estate, & Trusts. New York: Pearson.
