Date: 05/10/99 at 10:22:21 From: John I. Brichacek Subject: Estate distribution For a decedent's estate, the Will provides that after payment of debts and estate taxes the estate should be divided as follows: A: 30% of net estate to child B: 60% of net estate to grandchild C: 10% of net estate to church The net estate after payment of debts, but before taxes, is $121,403.09. The estate tax rate is $2,600.00 + 4% of the excess net estate over $100,000.00. The problem that I have is that the bequest to the church is a charitable deduction to the estate, and is not to be used in calculating the taxes. I can't calculate the 10% to the church without knowing the amount of taxes, and I can't calculate the estate taxes without knowing the charitable amount to deduct from the net estate. Can you give me a formula for doing this, or advise as to someone who might help me?
Date: 05/10/99 at 13:21:18 From: Doctor Peterson Subject: Re: Estate distribution Hi, John. Unusual question! I'll assume you've checked the legal and financial aspects thoroughly; I can't quite believe that the government wouldn't have some standard way to interpret this to their own benefit; on the other hand, I'd think it could be interpreted so that 10% before taxes went to the church, and the taxes were taken out of the other parts only. I'm sure this isn't the first time this has happened. To keep the typing simple, let's call the net estate before taxes N = $121,403.09. Then call the amount given to the church C. Now the taxable amount will be (N - C), and the taxes are T = 2600 + 0.04 * ((N - C) - 100000) (as long as N-C is greater than 100,000). On the other hand, if it's true that the church gets 10% of what is left after taxes, we want C = 0.10 * (N - T) Plugging in the expression for T, C = 0.10 * (N - (2600 + 0.04 * ((N - C) - 100000))) = 0.10 * (N - (2600 + 0.04N - 0.04C - 4000)) = 0.10 * (N - 2600 - 0.04N + 0.04C + 4000)) = 0.10 * (0.96 N + 0.04C + 1400) = 0.096N + 0.004C + 140 Subtracting 0.004C, 0.996C = 0.096N + 140 C = (0.096N + 140) / 0.996 = (0.096 * 121,403.09 + 140) / 0.996 = 11842.06 To check this, the taxable amount N-C is 109561.03 (which is in fact greater than 100,000; otherwise I would have to go back and change that equation). The tax T is T = 2600 + 0.04 * 9561.03 = 2982.44 and the amount after taxes is N-T = 118420.65, of which 10% is 11842.06. That works out just right. The church would lose $300 by having the taxes taken out before the distribution. - Doctor Peterson, The Math Forum http://mathforum.org/dr.math/
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