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
Tax 3
amount that is left with the son is $ 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). g
Tax 4
Reference
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.
