In Reading 10, section 4.1.3, the curriculum says that the size of the partial gift credit = size of the gift x TgTe
However the formula works ONLY when the tax rates (Tg and Te) are equal. Am I doing something wrong or is there a fallacy in the formula???
The curriculum develops an example like this:
Scenario 1 - Partial gift and then bequest
Estate value = 500,000
Gift = 100,000
Gift Tax (40%) = 40,000
Total Disbursement = 100K +40K = 140,000
Taxable Estate = 500K - 140K = 360,000
Estate Tax (40%) = 144,000
Net After-Tax Amount = 216,000
After-Tax Estate + Gift = 216K + 100K = 316,000
Scenario 2 - all assets left in estate until bequeathed at death
Taxable Estate = 500,000
Estate Tax (40%) = 200,000
Net After-Tax Amount = 300,000
After-Tax Estate (+ Gift) = 300,000 (no gift in this scenario)
Gift credit Tax savings from gift = size of the gift x TgTe = 100,000 x 40% x 40% = 16,000
which is exactly = 316,000 - 300,000 = 16,000
However, if I pick different rates (say 40% and 60%), here’s what you get:
Scenario 1 - Partial gift and then bequest
Estate value = 500,000
Gift = 100,000
Gift Tax (40%) = 40,000
Total Disbursement = 100K +40K = 140,000
Taxable Estate = 500K - 140K = 360,000
Estate Tax (60%) = 216,000
Net After-Tax Amount = 144,000
After-Tax Estate + Gift = 144K + 100K = 244,000
Scenario 2 - all assets left in estate until bequeathed at death
Taxable Estate = 500,000
Estate Tax (60%) = 300,000
Net After-Tax Amount = 200,000
After-Tax Estate (+ Gift) = 200,000 (no gift in this scenario)
Gift credit Tax savings from gift = size of the gift x TgTe = 100,000 x 40% x 60% = 24,000
But 244,000 - 200,000 = 44,000 ≠ 24,000 … ???
When I develop the calculations of the example, I see that actually
tax savings = size of gift x [1 - (1+Tg) x (1-Te)]… and the formula given in the curriculum works only for Tg=Te
So… is the curriculum teaching completely wrong stuff!!! I’m losing my mind… Please help!
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