California Code of Regulations › Title 18 - Public Revenues › Division 2.5 - State Controller › Chapter 1 - Inheritance Tax › Article 2 - Imposition and Computation of Inheritance Tax › Section 13402.2 - Date of Death After 5:15 P.M., September 26, 1977-Examples

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
The provisions of Subsection (b) of Section
					 13402.1 are illustrated by the
					 following examples:
(a) Nonincludible
				  Transfers. As used in this regulation, the term "nonincludible transfer"
				  denotes a lifetime transfer subject to gift tax under which the rights of the
				  transferee are vested and under which the transferor does not postpone the
				  possession or enjoyment of the property transferred until the transferor's
				  death, nor retain any interest in the property transferred, nor reserve any
				  power to revoke, terminate, alter, amend, revise or change the interest of the
				  transferee, nor make the transfer in contemplation of death within three years
				  prior to death, nor make the transfer as an advancement or in lieu of or in
				  avoidance of probate, nor create a joint tenancy, and under which the
				  transferee does not promise to make payments to care for the transferor. Such a
				  transfer is not subject to inheritance tax upon the subsequent death of the
				  transferor. However, in the case of decedents with a date of death after 5:15
				  p.m., September 26, 1977, the date of gift value of nonincludible transfers
				  made after December 31, 1976, less any applicable annual exclusion, is added to
				  the clear market value of transfers subject to inheritance tax for the purpose
				  of determining the rates of taxation that shall apply to those transfers
				  subject to inheritance tax at the death of the transferor.
EXAMPLE (1). Gift of a nonincludible transfer made after
					 December 31, 1976.
In 1977, P makes a gift to C, adult child, of $60,000 cash,
					 for which a gift tax return is properly filed and gift tax paid.
Gift Tax Computation:
$60,000
Gross gift
-3,000
Annual exclusion
$57,000
Net gift
Gift Tax = $2,020
$5,000
Specific
							 exemption
20,000
x
3%
=
$600
25,000
x
4%
=
1,000
7,000
x
6%
=
420
$57,000
--
Total
							 --
$2,020
P dies in December, 1978, without having made any
					 additional gifts. The 1977 transfer is determined to be nonincludible for
					 inheritance tax purposes, and P's probate estate has a clear market value
					 (after allowable deductions) of $200,000, all of which goes to C. The
					 inheritance tax is computed as follows:
C (adult child)
$200,000
Probate
							 (CMV)
$5,000 Specific exemption
57,000
Prior net gift
Tentative tax on
							 balance
$18,300
$257,000
Total
Less tax on
							 prior gifts
2,020
Inheritance tax
							 due
$16,280
TENTATIVE TAX
							 COMPUTATION
$5,000
Specific
							 exemption
20,000
x
3%
=
$600
25,000
x
4%
=
1,000
50,000
x
6%
=
3,000
100,000
x
8%
=
8,000
57,000
x
10%
=
5,700
$257,000
--
Total --
$18,300
TAX ON PRIOR GIFTS
							 COMPUTATION
$5,000
Specific
							 exemption
20,000
x
3%
=
$600
25,000
x
4%
=
1,000
7,000
x
6%
=
420
$57,000
--
Total
							 --
$2,020
POINTS TO NOTE:
(A) The gift was made after December 31,
				  1976. Therefore, the net gift is aggregated with the death time transfer to
				  compute the inheritance tax.
(B)
				  Only the net gift (i.e., date of gift value of the gift less the allowable
				  $3,000 annual exclusion) is aggregated.
(C) The second (tax on prior gifts)
				  inheritance tax computation is a separate computation in which the specific
				  exemption applicable at date of death is allowed, and the tax on the excess
				  over the specific exemption commences at the beginning tax rates in effect at
				  date of death.
EXAMPLE (2). Gift of nonincludible transfer made after
					 December 31, 1976, change of exemption between date of gift and date of
					 death.
In 1977, P makes a gift to C, minor child, of $60,000 cash.
					 The gift tax return is properly filed and gift tax paid.
Gift Tax Computation:
$60,000
Gross gift
-3,000
Annual exclusion
$57,000
Net gift
Gift Tax = $1,810
$12,000
Specific
							 exemption
13,000
x
3%
=
$390
25,000
x
4%
=
1,000
7,000
x
6%
=
420
$57,000
--
Total
							 --
$1,810
P dies in December, 1978, without having made any
					 additional gifts. The 1977 transfer is determined to be nonincludible for
					 inheritance tax purposes, and P's probate estate has a clear market value of
					 $200,000, all of which goes to C who is an adult at P's date of death. The
					 inheritance tax is computed as follows:
C (adult child)
$200,000
Probate
							 (CMV)
$5,000 Specific exemption
57,000
Prior net gifts
Tentative tax on
							 balance
$18,300
$257,000
Total
Less tax on
							 prior gifts
2,020
Inheritance tax
							 due
$16,280
The Tentative Tax Computation and the Tax on Prior
					 Gifts Computation Are the Same As in Example (1).
POINTS TO NOTE:
(A) Although the $12,000 specific exemption
				  was allowed in computing the gift tax paid, only a $5,000 specific exemption is
				  used in computing the second (tax on prior gifts) inheritance tax computation
				  where the transferee is an adult at the date of death. This is necessary
				  because the "tax on prior gifts" reduction is similar to a credit applied
				  against the "tentative tax." If the larger exemption were used, the "credit"
				  would be reduced correspondingly, resulting in an imposition of a tax at death
				  on a portion ($7,000) of the specific exemption allowed at the date of gift.
				  The exemption and rate of tax applied in both inheritance tax computations are
				  those in effect and according to the beneficiary's status at the date of death,
				  regardless of what may have been the rate of tax and exemption in effect at
				  date of gift.
(B) The same
				  principle applies in cases where there is a change of tax rates between date of
				  gift and date of death, and in cases where there is a change of beneficiary's
				  relationship between date of gift and date of death. The prior net gifts are
				  added to the death transfers for the first (tentative tax) inheritance tax
				  computation, and the tax rates in effect at date of death are applied to the
				  sum of the value of those transfers, after allowance for the specific exemption
				  in effect at date of death. Consequently, the applicable specific exemption and
				  tax rates in effect at date of death must be used in computing the second (tax
				  on prior gifts) inheritance tax computation, regardless of what tax rates or
				  exemption may have applied at the date of gift. The tax on prior gifts
				  reduction of the tentative tax may be the same as, more than, or less than the
				  actual gift tax paid. Therefore, to insure the correct inheritance tax
				  computation, it is necessary to make separate computation rather than merely
				  apply a "credit" in the amount of the gift tax paid.
EXAMPLE (3). Gift of nonincludible transfer made after
					 December 31, 1976, change of beneficiary's relationship between date of gift
					 and date of death.
In 1977, X makes a gift to N, minor nephew, of $60,000
					 cash. The gift tax return is properly filed and gift tax paid.
Gift Tax Computation:
$60,000
Gross gift
-3,000
Annual exclusion
$57,000
Net gift
Gift Tax = $4,720
$2,000
Specific
							 exemption
23,000
x
6%
=
$1,380
25,000
x
10%
=
2,500
7,000
x
12%
=
840
$57,000
--
Total
							 --
$4,720
In 1978, X formally adopts N, who is a minor at the age of
					 adoption. X dies in 1979 without having made any additional gifts. X's probate
					 estate has a clear market value of $200,000, all of which goes to N. The 1977
					 transfer is determined to be nonincludible for inheritance tax purposes, and N
					 is an adult at the date of X's death. The inheritance tax is computed as
					 follows:
N (adult child, adopted)
$200,000
Probate
							 (CMV)
$5,000 Specific exemption
57,000
Prior net gifts
Tentative tax on
							 balance
$18,300
$257,000
Total
Less tax on
							 prior gifts
2,020
Inheritance tax
							 due
$16,280
The Tentative Tax Computation and the Tax on Prior
					 Gifts Computation Are the Same As in Example (1).
POINTS TO NOTE:
(A) At the date of death, N is an adult Class
				  A beneficiary, and therefore the tentative tax is computed upon the aggregate
				  of lifetime and death transfers at the Class A exemption and tax rates.
				  Consequently, Class A exemption and rates must be used in computing the
				  reduction due to the tax on prior gifts (second inheritance tax computation).
COMMENTS RE EXAMPLES (1), (2) and (3):
The first three illustrations demonstrate that the
					 reduction due to the tax on prior gifts (second inheritance tax computation)
					 may be the same as, more than, or less than the actual gift tax paid.
					 Therefore, to insure a correct inheritance tax determination, it is necessary
					 to make a separate computation rather than merely apply a "credit" in the
					 amount of gift tax paid.
Since the tentative tax (first inheritance tax computation)
					 is computed, on the aggregate of lifetime gifts made after December 31, 1976,
					 and death transfers, at the exemption and tax rates in effect and applicable at
					 date of death, the reduction for the tax on prior gifts (second inheritance tax
					 computation) must also be computed at the exemption and tax rates in effect and
					 applicable at date of death, regardless of what exemption or tax rates may have
					 applied at the date of gift.
In the first three illustrations, the date of gift
					 exemption status of the beneficiary and the tax rates applied at date of gift
					 varies resulting in a different amount of gift tax paid in cash case. However,
					 the date of death status of the beneficiary and the value of the property
					 received are identical in all three illustrations, i.e., an adult Class A
					 beneficiary having received net gifts from parent/adoptive parent during
					 lifetime and after December 31, 1976, of $57,000 and receiving a net probate
					 estate having a clear market value of $200,000. By proceeding in the manner
					 outlined, a uniform result is obtained, and the inheritance tax due in each
					 case is determined to be $16,280.
In the first three illustrations, there were no gifts made
					 prior to January 1, 1977. Nonincludible lifetime gifts made prior to January 1,
					 1977, are not aggregated with transfers subject to inheritance tax.
					 Consequently, the computation of the tax on prior gifts (second inheritance tax
					 computation) requires special consideration in the case of decedents dying
					 after 5:15 p.m., September 26, 1977, who during lifetime made gifts both before
					 January 1, 1977, and after December 31, 1976. See Example (4) below.
EXAMPLE (4). Gift of nonincludible transfer made prior to
					 January 1, 1977, plus gift of nonincludible transfer made after December 31,
					 1976.
In 1968, P makes a gift to C, adult child, of $33,000 cash,
					 for which a gift tax return is properly filed and gift tax paid.
Gift Tax Computation:
$33,000
Gross gift
-3,000
Annual exclusion
$30,000
Net gift
Gift Tax = $800
$5,000
Specific
							 exemption
20,000
x
3%
=
$600
5,000
x
4%
=
200
$30,000
--
Total
							 --
$800
In 1977, P makes a further cash gift to C of $60,000 for
					 which a gift tax return is properly filed and gift tax paid.
Gift Tax Computation:
$60,000
Gross gift
$5,000
							 Specific exemption
-3,000
Annual exclusion
Tax on total net
							 gifts
$3,820
Less tax on prior year
							 gifts
800
$57,000
Current year net
							 gift
Current year gift tax
$3,020
30,000
Prior year net gift
$87,000
Total net gifts
TOTAL NET GIFT
							 COMPUTATION
$5,000
Specific
							 exemption
20,000
x
3%
=
$600
25,000
x
4%
=
1,000
37,000
x
6%
=
2,220
$87,000
--
Total
							 --
$3,820
PRIOR YEAR NET GIFT
							 COMPUTATION
$5,000
Specific
							 exemption
20,000
x
3%
=
$600
5,000
x
4%
=
200
$30,000
--
Total
							 --
$800
P dies in December, 1978, without making any additional
					 gifts. The 1968 and 1977 transfers are determined to be nonincludible for
					 inheritance tax purposes, and P's probate estate has a clear market value of
					 $200,000, all of which goes to C. The inheritance tax is computed as
					 follows:
C (adult child)
$200,000
Probate
							 (CMV)
$5,000 Specific exemption
57,000
Prior net gifts
Tentative tax on
							 balance
$18,300
$257,000
Total
Less tax on
							 prior gifts
3,020
Inheritance tax
							 due
$15,280
TENTATIVE TAX
							 COMPUTATION
$5,000
Specific
							 exemption
20,000
x
3%
=
$600
25,000
x
4%
=
1,000
50,000
x
6%
=
3,000
100,000
x
8%
=
8,000
57,000
x
10%
=
5,700
$257,000
--
Total --
$18,300
TAX ON PRIOR GIFT
							 COMPUTATION
$57,000
Post-1976
							 gift
30,000
Pre-1977 gift
$87,000
Total
TAX ON TOTAL
$5,000
Specific
							 exemption
20,000
x
3%
=
$600
25,000
x
4%
=
1,000
37,000
x
6%
=
2,220
$87,000
--
Total
							 --
$3,820
LESS TAX ON PRE-1977 GIFT
$5,000
Specific
							 exemption
20,000
x
3%
=
$600
5,000
x
4%
=
200
$30,000
--
Total
							 --
800
Tax on Post-1976
							 Gift
$3,020
POINTS TO NOTE:
(A) The 1968 gift is determined to be
				  nonincludible for inheritance tax purposes. In the case of decedents with a
				  date of death after 5:15 p.m., September 26, 1977, nonincludible transfers made
				  prior to January 1, 1977 are not aggregated with the death transfers.
				  Therefore, the pre-1977 nonincludible transfer is not included in the measure
				  of the tentative tax and the tentative tax is not reduced by a tax computed
				  upon the net gift value of the pre-1977 nonincludible transfer.
(B) By reason of the progressive tax rate
				  structure of the gift tax, the pre-1977 nonincludible transfer results in the
				  subsequent (post-1976) nonincludible transfer being taxed in the higher tax
				  rate brackets. Therefore, to determine the amount of tax on prior gifts
				  reduction of the tentative tax with respect to the subsequent (post-1976)
				  transfer, it is necessary to take into account the effect of the pre-1977
				  transfer. In such a case, the tax on prior gifts reduction of the tentative tax
				  is determined in the following manner:
1. Add
				  to the sum of the net gift value of post-1976 transfers the sum of the net gift
				  value of pre-1977 transfers.
2.
				  Compute the tax on the total net gift value thus determined at the rate and
				  exemptions in effect at date of death.
3. Compute the tax on the sum of the net gift
				  value of all transfers made prior to January 1, 1977, at the rate and
				  exemptions in effect at date of death and commencing with the primary
				  rates.
4. The tax computed in step
				  2, is then reduced by the tax computed in step 3, and the result is the amount
				  of tax on prior gifts reduction of the tentative tax.
(C) As demonstrated in the previous examples,
				  the tax on prior gifts reduction of the tentative tax may be the same as, more
				  than, or less than the actual gift tax paid. Where there is no change in the
				  transferee's beneficiary status, and no change in the specific exemption, and
				  no change in the tax rates between the date of gift and date of death, the tax
				  on prior gifts reduction of the tentative tax will be the same as the gift tax
				  paid with respect to the transfers made after December 31,
				  1976.