California Code of Regulations › Title 18 - Public Revenues › Division 2.5 - State Controller › Chapter 1 - Inheritance Tax › Article 4 - Transfers by Will and Laws of Succession › Section 13601.4 - Tax Free Bequest

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
A provision in a will bequeathing a sum free and clear of
					 the inheritance tax constitutes a gift of such an amount as, after the payment
					 of the tax thereon, would net the legatee the amount of the bequest. In effect,
					 the legatee in such case is given the amount of the bequest plus an additional
					 sum sufficient to pay the tax and the tax upon the tax
ad
					 infinitum
. The provisions of this paragraph may be illustrated by the
					 following examples:
EXAMPLE (1).
A, at his death in 1973, bequeathed $40,000 to B, his adult
					 daughter, and provided that is shall be free and clear of the inheritance tax.
					 B is deemed to receive a transfer of $41,250, computed as follows:
Bequest to
							 daughter..........................
$40,000
Trial tax $5,000 exempt
20,000 at 3%
$
							 600
15,000 at
							 4%
600
$1,200
To determine the bequest of tax, divide the trial tax by
					 the difference between 100 percent and highest tax rate, 4 percent in this
					 case.
100% - 4% = 96% or 0.96
1,200
= $1,250
0.96
Proof:
Bequest..........................
..........................$40,000
$5,000
							 exempt
Bequest of
							 tax..........................
..........................
1,250
..........................20,000 at
							 3%
$ 600
$41,250
16,250 at
							 4%
650
$1,250
The proof indicates $1,250 is correct since the final tax
					 is equal to the amount added as a bequest of tax.
EXAMPLE (2).
X, at his death in 1973, bequeathed $49,000 to Y, his adult
					 daughter, and provided that it shall be free and clear of the inheritance tax.
					 Y is deemed to receive a transfer of $50,638 computed as follows:
Bequest to
							 daughter..........................
$49,000
Trial tax $5,000 exempt
20,000 at 3%
$
							 600
24,000 at 4%
960
$1,560
The method demonstrated in Example (1) of this regulation
					 would require the division of $1,560 by the difference between 100 percent and
					 4 percent or 96 percent. The result would be $1,625. If this amount were added
					 as a bequest of tax, the total bequest would exceed $50,000 and part of the
					 bequest would be taxed at 6 percent. Thus $1,625 would not prove out. It is
					 obvious that some account must be taken of the fact that part of the amount to
					 be added as bequest of tax will be taxed at 4 percent and part at 6 percent.
					 This problem may be solved as follows:
Bequest..........................
..........................$49,000
Amount to be added in 4% bracket ($50,000 -
							 $49,000)..........................
$1,000
Tax at 4% on
							 $1,000..........................
..........................$40
Excess of trial tax over $1,000 ($1,560 -
							 $1,000)..........................
..........................560
$600
This sum will be taxed at 6 percent. To find the amount
					 after tax on $600 is added, the $600 should be divided by the difference
					 between 100 percent and 6 percent or 94 percent.
600
0.94
=
638
Total bequest of
							 tax..........................
$1,638
Proof:
Bequest..........................
$49,000
$5,000 exempt
Bequest of tax..
1,638
20,000 at 3%
$ 600
25,000
							 at 4%
1,000
$50,638
638 at 6%
38
$1,638
No bequest distributed under the residuary clause of a will
					 may receive a bequest of tax if the bequests of tax are payable from the
					 residue.
When part of a person's interest is subject to a bequest of
					 tax and part is not subject thereto, the bequest of tax is computed on the part
					 subject to the bequest of tax without considering the other interests.
NOTE: Reference: Section
					 13601,
					 Revenue and Taxation Code.