recipient pay gift tax

CFA Level III
#1

donor pay gift tax= (1-Tg) recipient pay gift tax=(1-Tg+TgTe) Isn’t it funny the recipient just have to declare to the government that he is the one paying gift tax to save TgTe

#2

You got them reversed. PV of gift vs bequest becomes more attractive when gift tax is paid by donor.

#3

Thanks for spotting my error. Anyone know why do we have to multiply te*tg? Totally dun make sense to me

#4

You have to read the CFAI example to understand fully. It’s an approximation of the tax saving.

#5

“Anyone know why do we have to multiply te*tg? Totally dun make sense to me” -Because the donor pays the gift tax in ADDITION to the gift For example: donor gifts $100Mill The taxes paid do not come out of the $100mill - they are paid by the donor in addition to the $100mill. So the dodnor actually pays $100mill(1+Tg) to gift the money. The effect of this is to reduce the donors estate by more than the gift, so the final estate will be $100(1+Tg) lower, which would have been taxed at Te or: [Final Estate- Gift(1+Tg)]*Te Multiplying this out you get: Final Estate*Te - Gift*Te - Gift*TgTe This shows that the taxes paid from the final estate is lowered by both the amount of taxes that would have been paid on the gift AND also by the amount the estate would have paid on the money used to pay the taxes on the gift. In the formula they give they show this amount (Tg*Te) as a credit to the recipient of the gift (which is why you add it to the 1 - Tg term in the numerator)