Does anybody understand how the CFAI derived the numerator in the formula about gift taxes paid by the donor in estate planning ? Thanks in advance, I become crazy !
all they say is “the gift received a partial tax credit because it reduces the size of the estate” I guess the benefit is the …(+ .30 X .30) at top of page 267? Reading 16? I thought I had this down until I went to the book…lol…got it confused with the charitable gift formula with the Toi variable.
You got me thinking on why I couldn’t remember this. CFAI touches so light on this concept I think your time is best served memorizing the formula and backing into any conceptual question this way with a bet that they will not test conceptually on this but instead ask u to calculate the liability. I remember the only diff. Between this and the taxable gift formula is the “+ TgTe”. I say memorize that and move on to the harder stuff. There is plenty of it.
Your method for memorizing is exactly how i approach the more complex tax formulas. Accrual, wealth, and CG tax formulas are intuitive once you understand the formula, as is Taxable Gift… so memorize Taxable gift and then just add the “changes” eg tgte as you have above, then you really are only memorizing a slight modification since you should already know the taxable gift formula. Did the same thing for the ridiculously tedious “charitable bequest”. I forgot that one, but i think it’s the bequest formula times toi + 1+r^g Easier to memorize the “bread and butter” problems and then just tack on the changes for the heavy stuff.
yeah the way I remember the charitable request is (1+r)^n + Toi X[same]/[same] the only difference is really that first part
Thanks guys. It’s so painful for me to learn something without understanding it… It makes me smile, imagining the formula is incorrect (for any reason) and decades of CFA Charterholders using it … Thanks anyway. You have right, there are a lot of other things to learn that are more important. Good luck !
The key lies with the tax-credit obtained by the donor when he pays the gift taxes. The donor gets a tax exemption on the amount of gift taxes he/she paid to the recipient. The donor’s taxable estate is reduced by this amount. Hence, FV = PV[1+r(1-tig)]^n + Tax benefit arising out of the Gift Taxes Reducing the Taxable Estate = PV[1-Tg][1+r(1-tig)]^n+ [PVXTgX[1+r(1-tig)]^n]XTe
Thanks a lot. I feel free now.
Receiver pay tax: RV=[1-Tg]*** Receiver pay tax: RV=[1-Tg*(1-Te)]*** Tg*Te is not from the gift itself. It’s paid from the donor’s pocket. To IRS, it’s the same “Tg”. Simply put: Tg = Tg*(1-Te) + Tg*Te As for Toi, think of: cap -> caplet floor -> floorlet lol.
Correction: the second line shall be ’ Donor pay tax’ …