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