Gift Tax paid by the giver/donor

CFA Level III
#1

Reference: p. 309 Schweser, Book 1

There are three formulas to calculate the Relative After-tax Value ratios for the following scenarios:

  1. No gift tax

  2. Gift tax to be paid for by the receiver

  3. Gift tax to be paid for by the donor.

I have a question on numerator of the 3rd equation.

(1 - Tg + Tg*Te ) * [1 + rg *(1 - tig)]^n

How is Tg*Te derived?

At first, I though it comes from (1 - Tg) * (1 - Te) but it’s not the case. It wouldn’t make sense anyway as the estate tax shouldn’t reduce the value of the gift. I also understand that Tg*Te represents a partial credit on estate tax from gifting now.

I am prepared to “just memorize it” but having an explanation would be very helpful.

#2

it is the relative value of the extra money (Tg) that the donor paid on behalf of the donee. Donee would receive an amount of Tg * Te.

#3

Great. Thanks

#4

This is a rearrangement of another formula. It is derived from a formula where the denominator is decreased by this value. It was simplified by adjusting the numerators for the sake of keeping all the denominators of estate transfer formulas the same for comparison purposes