Could someone please explain the Relative value formula when the donor is paying gift tax instead of recipient and why should there be a tax benefit to the recipient of Tg x Te instead of this being accounted by the donor on the denominator???
i answered this same thing on another thread as well.
(1 - tax rate of donee) -> this part should be very clear… it is the tax that the donee pays.
If the person were gifted something too - this would apply.
The additional amount that the donee now gets - if the amount of gift tax (that the donor paid) and that he would get after the estate tax is paid. That is the gift tax * estate tax part - whch he now gets to enjoy.
Thanks but still don’t get it. Let’s talk numbers- if donor set aside $100 to donate and gift tax is 45%; and donor pays gift tax.The donor removes $45 and pays taxman and the $55 goes to donee. Donor’s estate is only reduced by $100 and hence no additional tax benefit when estate tax is paid… Where is this additional benefit of TgxTe and how does the donee get it.
Lets say total estate is 300. He gifted 100, remaining estate is 200. & for simplification, lets assume the gift tax equals the estate tax = 45%
The 100 stays as is. The donor pays the 45 from the remaining estate value. Hence the remaining estate becomes 200-45= 155
the Tg X Te credit comes from the fact that the estate was reduced by 45
so, The donee will receive 100 gifted, and (after the donor passes away) will receive 155X0.55= 85.3. Total of 185.3
This is versus = 300 X 0.55 = 165 without this strategy.
The trick (loophole) is: The donor’s tax payment of 45 is NOT taxed. If he had gifted this amount (or kept it within his estate) instead of paying it as a tax, this amount itself will be subject to taxation. That’s a saving of TeXTg
Now understand my personal pain, in the UAE we don’t have taxes. The only taxes we have are on cigarettes, alcohol and the conventional municipal taxes on hotels. I’m sharing your pain without expected return.
Thanks but I don’t agree with you on the treatment of the $300. If the donor is gifting $100… We are only concerned with this $100, you are assuming that the donee also gets the remaining estate which is not true. Besides the formula for the donee receipt is 1- Te ie he will get $55 now and not $100 even if the donor PAYS gift tax…
I agree with broadex. Why take into account the estate tax here? the gift is already made & taxes paid by the donor, so added back. Then why the estate tax multiplication?
You’re missing the point of the relative-value formula, everything in these equations relates back to if the tax was paid through bequest vs if gifted. The relative value of the estate would be worth Tg*Te more if gifted now versus through a bequest.
FV of gift after tax to the receiver if gifted now / FV of bequest after tax to the receiver if bequested at death
As I said in the other post on this topic:
From the text: represents the tax benefit from reducing the value of the taxable estate by the amount of the gift tax.
Tg*Te = Tax on gifts * tax on estate = tax benefit
But Galli, when you calculate gifting, in teh denominator of the RV, donor pays gift tax, so added back. I’m fine with that. Estate is already gifted, so where is the q of estate tax? There is no estate at that point. !!
Situation 1: donee paid the gift tax now.
Situation 2: donor paid the gift tax before.
in both scenarios funds are received after the estate tax is paid.
the difference between the two (relatively valuing) would be an addition of the gift tax * estate tax benefit to the donee.
do you get it now?
The estate is a relative figure in this equation, have to consider the entire “value” of the transaction. Gift * tax + tax NOT paid if bequested.
If you gifted $100 now, paid $25 in gift tax, instead of $35 in tax during a bequest, this $10 difference is a net benefit over simply bequesting. The equation simply adds the tax benefit to the nominator to compare back to the “what-if we simply bequested” in the denominator.
The entire point of these equations is to find out how much better/worse it is to bequest or to gift with one tangent being the donee pays the tax.
The whole point of estate planning is to reduce taxes. It’s about the ultimate choice between gifting and bebequest. It’s not about Xmas or valentine. It’s about transfer of wealth in a tax efficient way.
fulz