# Estate Planning - Two Questions

Can’t figure this statement out, CFAI text page 238: “If the donee pays the gratuitous transfer tax, the pv of the future inheritence tax obligation equals the gift tax”? how come? Page 240: “If the tax liabililty is imposed on the donor’s taxable estate rather than on the recipient, the tax benefit of the lifetime gift vs the bequest increases”. Thanks in advance. I consider Estate Planning to be prime testable material this year.

P238: Donee is the recipient of the gift. If the donee pays the transfer tax - then he is paying a tax on the inheritance received which would be the gift tax itself. and since both of these are paid when the gift is received - and it will be at the donee’s tax rate - the future inheritance tax = gift tax. P240 - Exhibit 6: gives an illustration. couple transfers 100 mill to their child. gift = 100 they have a 500 Mill estate. if they bequest it to their child -> child gets 500 * (1-0.45) = 275 If they gift 100 Mill to their child - their estate reduces to 400 Mill. A further 45 Mill is reduced from that since they pay the gift tax. So 355 * (1-0.45) = 195 is what the child gets from estate. + gift of 100 Mill (on which child pays nothing) = 295 Mill. 295 > 275.

inbead Wrote: ------------------------------------------------------- > Can’t figure this statement out, CFAI text page > 238: “If the donee pays the gratuitous transfer > tax, the pv of the future inheritence tax > obligation equals the gift tax”? how come? > > Page 240: “If the tax liabililty is imposed on the > donor’s taxable estate rather than on the > recipient, the tax benefit of the lifetime gift vs > the bequest increases”. > > Thanks in advance. I consider Estate Planning to > be prime testable material this year. Question 1: Donee = recipient. This is the person responsible for the tax on estate transfer. If the gift is \$1m today and assuming the tax rate is 40%, recipient receives \$600K today. If the estate was not gifted but instead bequeathed at death, assume the estate grew by 100% in 20 years to \$2m, with tax rate at 40%, donee receives \$1.2. If gifted tax liability is \$400k but if bequeathed tax liability becomes \$800K. Discount the bequeath tax liability at the growth rate of investment and you get a present value of gift tax, which is \$400K. Question2: If the tax liability is borne by the donor, one, the recipient will have 100% access to the gift, which will grow at investment rates (less taxes on income) and two, the estate, which will bear the tax liabilities will be lesser in value, hence reduce future tax liabilities. Why do you think this material will be tested?