In the estate planning reading (12), the text discusses two scenarios when comparing whether one should gift now or bequest in the future, and the impact of taxes. (i) when the receiver pays the gift tax and (ii) when the donor pays.
It seems to me that in order to compare, gifting vs bequeathing should be treated as mutually exclusive…you wouldn’t have anything to bequest if its already been gifted, right?!? And this holds i feel like until the formula that accounts for the reduction in taxes if the donor pays them and the related increase to the receiver. I understand what it’s capturing but I feel like it violates the comparison bc if you say we’re gifting then you wouldn’t have an estate left to tax!
Gİfting today or leaving it in a bequest need relative value analysis…you compare gift (with tax or no tax) to bequested value.
For example you get it today or in 20 years…
For numerator(gift stuff) It starts with basic future value formula PV(1+r(1-T))^n, FV=2,75
2-Now we have two extensions to above formula, we just add it
Assume there is gift taxes, so before our gift starts compounding for 20 years, we slash down a portion by gift tax at the beginning— PV(1-Tg) same the rest FV=1,25
Other extension deals with the guy who pays the tax…above receipient had paid, now donor pays…FV will increase …but by how much? by product of taxes(estate and gift tax) FV=1,42
3- We have 3 diffrent FV depending on tax situation…We now compare it to bequest value…So donor keeps the stock for 20 years… PV(1+r(1-T)^n, then bequest tax paid at the end …by a factor of (1-Tb) so FV=1,65
4- To make a decision we compare 3 gift values with bequest (a/b)…and select the choice with highest relative value which is gifting today (no gift tax situation)