Level 3: V5 R30 S4.1.1 Tax-Free Gifts page 303

In the Tax-Free Gift in the text, I’m having difficulties calculating the real appreciation of US$159,000 real appreciation assuming 2% real after-tax return. Here is the example:

For example, a donor’s annual gift exclusions are limited to US$14,000 per year as of 2017, per donee (e.g., a parent may annually transfer US$14,000 to each child or US$28,000 from both parents). Exhibit 4 shows that an annual gifting program of transferring US$14,000 per year tax free at the beginning of each year over a 30-year period transfers almost US$580,000 inflation-adjusted dollars at a 6 percent nominal return that is taxed at 25 percent annually with a 2.5 percent inflation rate. These assumptions result in a 4.5 percent nominal after-tax rate of return (i.e., 6% × [1 – 25%]) and a 2 percent real after-tax return (i.e., 4.5% – 2.5%).

After 30 years, gifts total US$420,000 = US$14,000 × 30. If the donor had kept this amount, it would have increased the value in his estate and estate tax liability. Any appreciation of the gifted amounts also escapes estate tax. Assuming a 2 percent real after-tax return would add approximately US$159,000 of real appreciation (appreciation after adjusting for inflation), for a total value of US$579,000.

Thank you in advance

It’s a very simple calculation.

So, since they have said beginning of each month we need to set our Calci in BGN mode here

Now. take PMT= -14000, PV= 0 N= 30 I/Y = 2 and CPT FV -

you will FV = 579312 or 579,000

Since we already know that gift of 14,000 for 30 year excluding investment returns are 14,000 x 30 = 420,000

So the real value of 2% that is added is = 579,000 -420,000 = 159,000

Hope this helps

Oh my, yes. Extremely simple. I think in my exhaustion of studying, I couldn’t see the tree through the forest. I appreciate you taking the time to respond!

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