 Hello and welcome to the session. This is Professor Farhad and the session would look at CPA simulations that deals with gross estate Now gross estate is a topic. That's usually not covered in details in college And the reason is it's either the course is not covered or you take this topic last semester And you really don't care and you really don't pay attention and what happened is when you get to the CPA exam That topic is very challenging. So hopefully By going over these simulations, it's gonna help you reinforce and learn this concepts Also, I do have a an explanation about the topic so you could click the click the description to see the Explanation so I went over I explained what gross estate is now I'm gonna be working simulations or exercises these topics are typically covered in corporate accounting Obviously the CPA exam and the enrolled agent exam as always I would like to remind you to connect with me on LinkedIn if you haven't done so YouTube, please subscribe. I have 1600 plus accounting, auditing, tax and finance lectures. If you like my lectures, please like them Share them. It doesn't cost you anything and if it benefits you it means it might benefit other people So share the wealth and connect with me on Instagram on my website. You have resources such as CPA exam questions through false multiple choice practices notes if you're looking to practice for the exam CPA exam 2000 plus 2000 plus CPA Questions so I strongly suggest you Give it a look So let's take a look at the estate formula formula that we looked at in the prior session And this is the estate formula basically we start with the fair market of gross estate Which I called line one if you want to learn about this go to the prior session It's listed in the description and so the exercises will be about this topic now in the next session I would look at line two and basically once you go through line one and line two the rest is basically Computation so after the session I would look at expenses losses and deduction when it comes to gross when it comes to gross estate So that's what I would do next so to illustrate the concepts The best way is to look at Exercises or what actually they are exercises are actually CPA simulations So let's take a look at the simulation and you might be asking how can you call an exercise the CPA simulation? That's exactly what a CPA simulation is. It's an exercise that you would see in college Sometimes it's it's listed exactly as it is on the screen Sometime what they do is they will give you exhibits rather than giving you the information They they would give you exhibit and you have to take the information out of the exhibit So I will give you a few examples, but I can't keep giving you the examples because it will go forever At the time of his death this year on September 4th Canis owned the following assets for example rather than telling you he died September 4th I can give you a death certificate. That will be an exhibit And when he died he had city of Boston Bonds the fair market value 2.5 million rather than giving you this information I can show you I can show you Kenneth the brokerage account and The date of death. What was the fair market value that and I'll can give you a whole sheet That's very complicated, but basically it boils down to He owned city of Boston Bonds and the valued at 2.5 million same thing with the stocks and Brown corporation 900,000 now I can give you those both of these information on the same brokerage account For example, he held those accounts with Vanguard or with fidelity Okay, and that's all what they are now What's given to you here or I can give you three page exhibit to show you this information? Promissory note issue by brand Kenneth's son 600,000. It seems he was lending his son 600,000 I can also give you an agreement a legal document showing you that his son borrowed money from him for 600,000 So those are the three assets Or the three yes the three assets that are part of his estate and with the fair market value in October The executor of Kenneth estate received $120,000 of interest on the city of Boston Bond 10,000 was accrued since Since September the fourth remember Kenneth died September the fourth So we're gonna count all the interest up to September the fourth Well, guess what of the 120 of the 120 10,000 was accrued since September the fourth. What does that mean? It means 110 is not included So of the 120 of the 120 110 110,000 just see if I can do better with this 110,000 110 not include. I'm sorry included 10,000 is not so this 10,000 I will not include it 7,000 cash on dividend on the brown stock dated Date of record September 5th. Well by September 5th. He passed away again I cannot include those because he passed away by September the fourth if he was living on September the fifth It would have been fine the declaration date on August 12th. It doesn't really matter. It's on record state He did not exist. So on the record state, that's is when you say, you know, if that person exists I'm gonna pay them did not exist. Therefore the dividend is out The $600,000 loan was made to Brad in late 2015 and he used the money to create a very successful business The note was forgiven by Kenneth and his will. So Kenneth said I don't want the money. My son doesn't have to pay me back Well, yeah, well, let's see what's gonna happen now. What are the estate tax consequences? Well So what's included in Kenneth estate? Would we include the city of Boston Bonds? Of course, we would that's 2.5 million Included that's included. Would we include the stock in Brown Corporation? Yes, would we include the promissory note issued by Brad that he forgave for his son? Sure. It's as if his son gave it to him. Then he gave it back to his son. So it's his money So that's also included and we add to this the 110,000 in Interest that he received the 110,000 and this is my pen is acting up 110,000 110,000 of interest So that's what's included. That's what's included in his in his estate The dividend is not because we have to look at the records date the records date What we have to understand what what is the records date? The record state is when the company the issuant company They look at the record and they see if that individual exists. Who's that individual? Well, really on September the 5th. Kenneth did not exist. Kenneth did not exist. Why because he passed away Therefore there is no no dividend involved. No dividend involved Let's take a look at the second question at this question at the time of her death on September the 4th Now very very important to remember those states are important. Okay, Alicia had the following asset now We're talking about Alicia She had a bonds of emerald emerald tool corporation with a fair market value of 900,000 now I can give you this information or I can give you her brokerage statement. Okay Stock and drab corporation fair market value 1 million 1 1 million 100,000 insurance policy face amount 400,000 on the life of her father Mitch and They're saying the fair market value is 80 and that's the cash surrender fair market value because if Mitch passed away It's 400,000 if she wants to cash out if she wants the value of that insurance That's assumed before she died. She can get 80,000 because that's the value of the insurance How did we know the value is 80,000? It will be given to you now also rather than give you this information I can show you an insurance statement and part of that insurance statements will show what's called cash Value and I will show you the cash value is 80,000. So I think I can turn it into an exhibit Traditional IRA. She has 300,000. Okay, Alicia was also the life tenant of a trust The fair market value of that trust is 2 million created by her late husband the executors of births estate Which is her husband has made a q-tip election now. We need to talk a little bit about q-tip real quick I did not cover it in the in the In the recording. So let's the q-tip. It's a qualified turnable interest property. And how does it work? We have husband and wife. Let's assume just kind of for the sake of illustration here. We have Bert and Alicia. Okay husband Husband and wife We have the husband is Bert. Alicia is the wife now Bert passed away and Bert what he wanted to do he had some assets, but he wanted this asset To be first to be used by his wife Then eventually distributed to his kids. So and usually this the q-tip usually use it doesn't have to but usually what happened is Usually it's when you have a second wife and you want to protect your kids from your first wife Okay, or the first spouse wants to from the first spouse So what happened is that's Bert died but he won't let's is it doesn't have to be but that's usually when it happens So what Bert wants to do he Bert's wants to keep the money To Alicia but once Alicia dies he wanted to make sure that the money goes to his kids Whether they're from the first marriage or second marriage. It doesn't it doesn't really matter whether the The kids from the first or the second marriage. I'm just giving you an example To illustrate the point so what we what what you would do is you would Set up a trust called the cute and you will have a q-tip election Basically, what's the q-tip election? It means Alicia can enjoy the benefit of the trust for example, if it's stocks or bonds She can get the dividend she can get the interest and live of that So Bert wants to protect her while she is alive make sure she has enough income, but once she passed away Bert wants to make sure that the asset goes to his kids. So so Alicia doesn't get married and run away, right? That's that's basically the idea. Okay, so that's the q-tip election and basically so basically what happened is when Bert transferred the money to Alicia Then he did not have to pay any taxes on it now because he did not include that in his estate So it was passed to Alicia simply in the form of a marital deduction So we'll talk about the marital deduction next but basically when you pass assets to your spouse It's it doesn't include in your gross estate now Alicia also expired now It has to be included in her estate so simply put the two million will have to be included if the question is it is asking about this So Bert did not have to include in his state, but now Alicia will okay But October Alicia estate received an interest of eleven thousand five hundred six thousand accrued before September 4th Which obviously will be included paid by the paid by emmerland and a cash dividend of six thousand from drab Well, also that's gonna be included the drab was declared on let's see when when the date of record date of record was September 3rd So that's gonna be included. So date of record of the dividend. She was alive on September 3rd. Therefore. She's gonna include that Although Mitch survives Alicia. She's designated beneficiary of the policy. So Mitch survived her father, you know He's he's not did not die yet the IRA are distributed to Alicia's children. It doesn't matter what amount is included in Alicia's estate That's the question that we need to answer. Well, what should be included? Well The nine hundred thousand of course, it will be included. Okay the stock and drape corporation. It will be included Now the insurance only the cash surrender value because she would only collect the four hundred thousand if her father passed away So she's only gonna collect eighty thousand the cash value the traditional IRA. It will be included Bert the state of two million that was transferred to her in a q-tip election. It will be included The interest payment only six thousand will be included and the dividend she was alive Nine thousand will be included. So if we add them all up, they will they should add up to four million three hundred Ninety-five thousand if my math is right four million Three hundred and Ninety-five thousand hopefully added nuts did not miss anything the nine hundred thousand the one point one the six thousand the nine thousand the eighty thousand The three hundred thousand and the two million. That's the what's included in Alicia's gross estate Let's take a look at another example at the time of Matthew's that he was involved in the following transactions Matthew was a participant in his employer's contributory qualified pension plan The plan balance was two million is paid to Olivia, which is his daughter and beneficiary Very important. His daughter is different than his wife. The distribution consists of the following. Okay, so he got two million worth of value The the employer contributed nine hundred thousand Matthew's after tax contribution He contributed six hundred thousand after tax an income earned by the plan over the years Half a million so overall his pension was two million and it's gonna go to his daughter Olivia Okay, Matthew was covered by his employer group life insurance plan for for him for employees the 200 proceeds paid to Olivia the designated beneficiary So Olivia gets the group Group term life insurance for her father. That's fine. What are the federal tax consequences of these events? Well, we need to know What are the federal? Consequences well, guess what? He's gonna have to include in his estate 2.2 million dollar why it's the two million from the employer the plan the pension all of it Plus 200,000 of the gross proceeds. That's included in his estate. That's the federal estate Consequences, it's gonna be included and obviously that's way below the No tax consequences from the federal estate perspective because that's below the amount That's required 11.4 million in 2019, which is way below not even 20% of that or close to 20% Be the income tax consequences. What are the income tax consequences? Remember Matt, you will have to file his final return and what's gonna include what's gonna be included in his final return Guess what? Let's go back here He's gonna include he's gonna include the 900,000 what the employer contributed Okay, and he's gonna have to include the income earned by the plan those two are taxable why because he's gonna have to file his final return and That's that's his income for the for that for that year now. Remember the 600,000 is after tax contribution That means he already paid money on that amount already paid money on that amount But the full thing will be included in this estate. That's different So the full thing will be included in his estate, but when he filed his final return That's what's taxable because the question is what's the taxable? What would the answer to part a change if Olivia was his surviving spouse not his daughter? Well, if it was if Olivia was his surviving spouse That's fine. It basically there is no tax state anyway But the point is that we're gonna be kind of planting the seed for the next session Everything will be included in his gross estate then everything will be deducted. What am I what are what am I talking about here? Here's what's gonna happen. So if Olivia what his what was his wife? It's gonna be 2 million Remember the 2 million the tomb. Let me just clear this Okay, so that we would include the 2 million Right here We would include the 2 million here Then whatever the full amount 2.2 million then it will be less It'll be less 2.2 million. So the 2.2 will be included in the first line Then it'll be deducted in the second line. So it'll be zero because that's his wife And anyway, it's gonna zero out because of the unified tax credit He's gonna get enough credit that if we look at the unified tax credit here That's gonna wipe out because remember his estate is 2.2 million and they'll give you a credit up to 11.4 million So it's not a big deal. Okay, so that's the that those are the consequences here Let's take a look at this question at the time of his death on July 9th. Aiden held Rights in the following real estate. Okay apartment building the fair market value to point 1 million Three farm 1.5 million pastor land 750 and as personal residency of 900,000 The apartment building was purchased by Cleo Which is his mother and his own in joint tenancy with her So So the mother paid for it But he he had a joint tenancy the three farm and the pastor land those two Were gift from Cleo to his to Aiden and his two sisters The three farm is held in a joint tenancy And the pastor land is tenants in common Aiden purchased residency And owns it with his wife. So the residents see him and his wife and The as standard by entirety how much is included and Aiden gross estate based on the following assumption again This could be a typical CPA simulation on the exam They would say, you know, if the amount and whether it's you know, what's what's the amount if any So on and so forth Let's assume Aiden dies first and is survived by his mother His sisters and his wife. So he died first if he dies first. Here's what's gonna happen the apartment building because it's It's a joint tenancy with with with his mother It's gonna go to his mother basically because she's the sole owner So for the apartment building he's gonna he's gonna include zero. He doesn't have anything because It's it's owned by the technically owned by his mother and he dies before her. That's out The three farm. Well, the three farm. Let's see the three farm and the pastor land we said Let's go back here The three farm and we're gift to chloe the tree is a joint tenancy is a joint tenancy and the pastor is owned joint The three farm is held in a joint tenancy and the pastor is owned as a tenants in common tenants in common Well, what's gonna happen then it's gonna be because three of them It's gonna be one third one third one third for each one of them. So from the three farm We're gonna include 500 000 and from pastor land easy numbers 250 one third Now the residency it's owned him and his wife joined Joined by entirety then it's we're gonna include 450 Which is 50 it's owned 50 50 by each one under scenario a we would include 1.2 million now if we look at scenario b Aiden dies after clothe after his mother but before his sisters and his wife Well, if he died if his mother died first then this one 2.1 million it was his now So he's gonna have to include this because now he owns the whole thing 2.1 million And what happened to the rest basically the rest are the same the rest are the same in a sense that 500 000 uh 500 000 for uh the three farms 250 and 450 so the rest are the same Let's assume on the c scenario aiden dies after his mother and his sisters but before his wife Well, if that's the case his sister died it dies And his mother died so he's gonna include the 2.1 million He's gonna include the full one the full 1.5 million We're gonna add the full amount now the 1.5 Because now it's his the 750 but His wife would still share half of the house which is 450 Okay, last scenario aiden dies last which is his mother dies So the apartment building is his his sister dies now. He owns both of these and his wife dies He got everything under scenario d all of those are included in his estate So it's very interesting to see how this you know plays out see how this plays out Now in the next session we're going to be computing the taxable estate And part of the taxable estate basically taxable estate is line 1 minus line 2 Which is this is what i'm talking about here line 1 which is gross estate We talked about the gross estate less the expenses so we need to talk about line 2 This is what we're talking about here This is the second session and hopefully it will start to put this whole picture together the whole formula As always i would like to remind you to like the videos if you like them share them put them in playlists If you're studying for your cpa exam Visit my website Invest in your career. It's worth it cpa is a lifetime investment. Good luck and study hard