 Hello and welcome to this session. This is Professor Farhad. In this session we would look at CPA simulations that deal with taxable estate. This topic is covered in a corporate income tax course. The CPA exam regulation section and usually this topic is not covered well in school as well as the enrolled agent exam. As always, I would like to remind you to connect with me only then if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, tax and finance lectures. Please like my lectures if you like them. It doesn't cost you anything. Click on the like button. Share them. If they benefit you, it means they might benefit other people. So share the wealth and please connect with me on Instagram. On my website, you will have access to additional resources, powerpoint slides, true, false, multiple choice, additional exercises. And if you're studying for your CPA exam, 2,000 plus CPA questions. If you are serious about your certification, check out my website. You may need those extra points. I can provide them to you. So let's take a look at this exercise or simulation. You might be saying, why would this be a simulation? This is what the simulation would look like on the simulation exam. It might be in a different format, but basically the same thing. For example here, we are told in each independent situation below determine the federal estate and gift tax consequences of what has occurred. In all cases assume we have Jean and Mary. So we have Jean plus Mary who are married and their daughter is Ashley. So here's what we are assuming here. Now I can give you this or I can give you a family tree or I can give you a family tree and an exhibit, okay? Now, Mary purchased an insurance policy on Jean's life and designated Ashley as the beneficiary. Mary dies first and under her will, the policy passes to Jean. So this is a statement. What else I can give you? I can show you the insurance policy. They can show you the death certificate that Mary's died or I can tell you this information either or it's the same thing, but I'm giving you the information in a different and basically a different format. That's all what's to it. So let's take a look at this exercise and see what's going on here. So Mary purchased the insurance policy. Here's Mary, the wife on Jean's life, on her husband's life and designated Ashley. So if something happened to Jean, if something happened to Jean, the money goes to Ashley. Guess what? Mary's dies first. So Jean did not die. Mary's died, the purchaser of the insurance policy, okay? And under her will, the policy goes to Jean. The policy goes to Jean. So what happened here? Well, there is no transfer tax, okay? Why? Because when she passed away, when Mary passed away, the policy did not mature because the policy did not mature because she bought the policy on Jean's life, not on her life. Therefore, what will be included in her gross estate is the cash value of the policy and the cash value is usually determined by the insurance company and usually they will give you the cash value. So if they've given you an exhibit, they will tell you the cash value of this policy. They will tell you literally the cash value. For example, they'll have the cash, something called the cash value or the fair market value of the policy, cash value or fair market value. So that's what will be included in her gross estate. And remember, then that's going to be passed to her husband. Then let's assume it's 50,000. It's going to be included in her gross estate. Then she's going to get, she's going to get a marital deduction, a marital deduction, okay? So what's included in her gross estate, the immature value or the cash value and it will then it will be deducted because it's going to go to her husband, okay? Again, we have another example. We have Jean, the husband, purchase an insurance policy on his wife, on Mary's life and designated Ashley, basically the opposite. He purchased the policy in case something happened to his wife and the money goes to Ashley. Unfortunately, the daughter dies first. Ashley dies first. So Ashley dies first. What happened here? There's no transfer tax consequences, okay? Why? Because Ashley does not have property interests in her name. Nothing is transferred to her. She dies first. She was the beneficiary and she dies first, okay? Now let's change the scenario a little bit. Let's assume two years later, now let's assume two years later Mary dies. So two years later Mary dies because Jean has not designated a new beneficiary. The insurance proceeds are paid to him because he did not designated a new beneficiary. Now what happened, she died and Ashley died two years earlier. Now the money goes to Jean. What would happen in those situations, okay? Again, the proceeds here will not be subject to the transfer tax, okay? Neither Mary nor Ashley had any property interests in the policy. So they did not receive anything from the policy, okay? So the policy is paid to Jean and guess what? Since the policy is paid to Jean, life insurance is not taxable. So life insurance proceeds are not taxable. Therefore there's no really no tax consequences and Jean got the money, okay? Let's look at D. D, Jean, the husband, purchased an insurance policy on his life in case something happened to him and designated Mary his wife as the beneficiary. Jean dies first and the policy proceeds are paid to Mary, okay? So guess what? First the proceeds are included in Jean's gross estate but they are transferred. They have a marital deduction which we talked about in the prior session. So we will include, for example, a million dollar, then we deduct a million dollar. So the net effect on his estate is zero because it goes to him, then they got deducted in the marital deduction. So hopefully this exercise clarified certain concepts. Once again, rather than giving you the information in one statement, they can give you an exhibit, the actual insurance policy and they can tell you who's the owner, who's the beneficiary, and who purchased it. And they simply put it's the same information given to you in a different format. So let's take a look at this example. While vacationing in Florida in November, Sally was seriously injured in an automobile accident. Sally dies several days later. Apply the federal estate tax rule in each of these situations. The first one is Bruce Herson, the executor incurred $6,200 in travel expenses in flying to Florida, retrieving the body and returning the Frankfurt, Kentucky Fort burial. What can we do with the $6,200? Those are deductible to arrive to the taxable estate. I'm not sure if you remember when I talked about line two. Those are expenses that are deductible online too, which is burial expenses. B, Sally has pledged $50,000 to the building fund of her church. Bruce paid the pledge from the asset. What can we do with this? That's fine. This charitable contribution is deductible under the estate because she made the pledge and basically now it will be deducted on her estate because if she lived and she did give $50,000, it would have been deducted on her $10,40. Therefore it's part of the deduction of the estate. C, prior to her death, prior to her death, Sally had promised to give her nephew Gary $20,000 when he passed the bar exam. Gary passed the exam late in the year and Bruce kept Sally's promise by paying him $20,000 from the estate. Look, if you want to pay, what's his name? Gary, that's fine, but it's not deductible because it was not legally enforceable. B, because she pledged, she made the pledge and therefore it was not conditional. Under C, it was a conditional pledge, so it was not complete, it was not enforceable when she made the pledge. Therefore that's not deductible on the estate. D, at the scene of the accident and before the ambulance arrived, someone took Sally's jewelry, so she was alive. Rolex watch and wedding ring and money, the property valued at $33,000 was not insured and was never recovered. Notice here, what's important is, it's disgusting, but the thing is it happened before the ambulance arrived, so before she died because she died several days later. What happened here is it's not part of the estate and there was no insurance recovery, so they're gone, they're not part of the estate. E, as a result of the accident, Sally's auto was totally destroyed. The auto had basis of 52, fair value of 28. In January of next year, the insurance company pays Sally's estate $27,000. What's going to happen? The insurance recovery will be part of her gross estate. That's what we do with these items as far as the gross estate. I hope those two exercises help you understand how to compute taxable estate. If you have any questions or if you need more resources by all means, please visit my website farhatlectures.com for additional resources. Remember that you invest for your CPA once in your lifetime and it's a lifetime investment. Do it properly, study hard and good luck.