Hey guys,
i was racking my brain earlier trying to make sense of the relative value formula and aftre searching previous threads, it looked like a lot of people have gotten stuck on this one and I couldn’t find any clear definitive explanations - I think I may have figured out how to properly conceptualize this one and hopefully I can help out. What makes this one a little strange is that, with previous RV formulas we were just saying “hey, I give you a sum of money this way vs a sum of money another way” but, in this formula there’s kind of another benefit that’s implied but I don’t think clearly stated. And that’s that they’re taking into account the additional money that could be bequeathed due to the estate tax savings from the donor paying the gift tax. Essentially the formula is the relative value of a gift where the donee pays to the value of the gift PLUS the additional amount that can be inherited down the road associated with the tax savings from the gifted amount.
Using the numbers from the text dealing with the Japanese family’s estate you get the ratio (1 - TG + TG(TE))/(1-TE) = 1.37 but I couldn’t figure out what the hell that applied to. If you use a $100 gift as an example - donee pays yields $55. If donor pays, this will yield $55 PLUS an estatebtax savings equal to $45 * .45 of $20 that can go to the donee down the road for a total of $75. 75/55 = 1.37. Hopefully this can help someone out there
-Andrew