Running Head: Tax 1
Module Six – Short Paper
Tax 2
Client’s Estate Tax Liability
The father of the client has passed away. He has come to the office in order to ascertain
the estate tax liability that he will own, as his father had a $ 10 million life insurance along with
$ 10 million in other assets in his estate at the time of his demise. The son has inherited the
property of his father after he died, and hence it is essential for him to be aware of the estate tax
liability that will accompany the inheritance. Based on the available information, his father had
made no deductions, and the father had not used any of the unified credit. The total amount that
is exempted is associated with the estate is $ 5,450,000.
Total value of estate = $ 20 million
(Less) Estate Tax exemption = $ 5,450,000
Thus, the remaining value of the estate that is taxable is $ 14,550,000. While computing the tax
rate at 40 %, the tax liability that the client will have to pay is $ 5,820,000. The remaining estate
value that the client will have to himself after adjusting the tax liability is $ 14,180,000.
Insurance Proceeds
In order to make sure that the $ 10 million insurance proceeds are not included in the
father’s estate, the chief requirement is that the expired individual must not have any ‘incidence
of ownership.’ There exists an incidence of ownership in case an individual has the right to alter
the beneficiaries on a life insurance policy (Rojeck, 2019). A method that can be adopted for
averting the inclusion of an insurance policy in the estate is to name someone as the beneficiary
other than the estate. If the insurance policy is included in the estate, the value of the estate gets
magnified. However, by removing the insurance value from the estate value, the gross estate
value stands at $ 10 million. The amount of tax that is exempted from the estate is $ 5,450,000.
Hence, the remaining value of the estate on which tax will be computed is $ 4,550,000. When
the estate tax is computed at 40 %, the taxable amount that is arrived at is $ 1,820,000. Hence, if
the insurance policy is removed from the estate value, the final amount that is left with the son is
Tax 3
$ 8,180,000 in assets in the estate in addition to $ 10 million relating to the life insurance
proceeds. The total amount that is available with the son comes to $ 18,180,000. If the insurance
proceeds are kept separate from the estate, there is a possibility for the son to get an additional $
4 million as an inheritance. However, if the insurance money is treated along with the estate
assets, the son loses the $ 4 million inheritance, which is a significant loss.
Incidents of Ownership
In the father’s insurance policy, the son will need to have certain incidents of ownership.
Some of the main incidents of ownership include when a person has the right to alter the
beneficiary, transfer the ownership of the policy, utilize the value of the policy as collateral for
loan purposes, or any conventional rights relating to ownership. In the specific case scenario,
the father has died, which has the potential to impact the life insurance ownership (Song et al.,
2015). In case the son wants that the insurance proceeds must not be counted in the estate value,
he can name a certain beneficiary, and he will not be able to retain incidents of ownership.
Another more suitable approach that can be adopted by the son to exclude the insurance
proceeds from the gross value of the estate involves the establishment of a trust, and it must be
selected as the beneficiary of the life insurance policy.
Proper planning of wealth is essential to make sure that the tax amount can be reduced in
a legal and ethical manner (Scheuer & Slemrod, 2021). It is essential to take into consideration
legal requirements and rules when an individual retains the incidents of ownership so that the
son can derive benefits and the tax burden on him can be reduced. According to AICPA, it is
essential to demonstrate professional conduct so that integrity, due care, and objectivity can be
reflected (AICPA). f
Reference
Tax 4
Professional responsibilities (no date) AICPA. Available at:
https://us.aicpa.org/interestareas/personalfinancialplanning/resources/practicecenter/pr
ofessionalresponsibilities#:~:text=Additionally%2C%20all%20AICPA%20members
%20are,client%20confidentiality%2C%20disclose%20to%20the (Accessed: 25 May
2023).
Rojeck, R. P. (2019). Life Insurance. Wealth: The Ultra-High Net Worth Guide to Growing and
Protecting Assets, 55-62.
Scheuer, F., & Slemrod, J. (2021). Taxing our wealth. Journal of Economic Perspectives, 35(1),
207-30.
Song, I. J., Park, H., Park, N., & Heo, W. (2019). The effect of experiencing death on life
insurance ownership. Journal of Behavioral and Experimental Finance, 22, 170-176.
