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

(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.

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.

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:

(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:

(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.

(A) The transfer in which P reserved a life estate is subject to inheritance tax (Revenue and Taxation Code Section 13644). Consequently, the transfer is valued at date of death value in the first (tentative tax) inheritance tax computation.

(B) The date of gift value of the net gifts subject to gift tax must be used in the second (tax on prior gifts) inheritance tax computation even though the full date of death value is subject to inheritance tax.

(C) Since the lifetime gift is an includible transfer, subject to inheritance tax, the gift tax on the gift is also subject to inheritance tax (Revenue and Taxation Code Section 13648), and is included in the measure of the first (tentative tax) inheritance tax computation.

EXAMPLE (6). Gift of includible transfer made after December 31, 1976, plus gift of nonincludible transfer made after December 31, 1976.

In February, 1977, P makes a gift to C, adult child, of a residence, reserving a life estate. At the date of gift, the market value of the residence is $80,000, and the value of the remainder interest transferred to C is $34,116. A gift tax return is properly filed and gift tax paid.

THE COMPUTATION IS THE SAME AS IN EXAMPLE (5).

In December, 1977, P makes a further gift to C of $50,000 cash, for which a gift tax return is properly filed and gift tax paid.

P dies in December, 1978, without having made any additional gifts. The residence in which C received a remainder interest by gift made in February, 1977, has a date of death value of $90,000, and the cash gift made in December, 1977, is determined to be nonincludible for inheritance tax purposes. P's probate estate has a clear market value of $250,000, all of which goes to C. The inheritance tax is computed as follows:

(A) In the first (tentative tax) inheritance tax computation, the includible transfer is valued at the date of death value and the nonincludible transfer is valued at date of gift value.

(B) In the second (tax on prior gifts) inheritance tax computation, both lifetime gifts (includible and nonincludible) are valued at date of gift value.

(C) The gift tax paid with respect to includible transfers is subject to inheritance tax, and is included in the measure of the tentative tax. The gift tax paid with respect to nonincludible transfers is not subject to inheritance tax, and is not included in the measure of the tentative tax.

EXAMPLE (7). Gift of includible transfer made after December 31, 1976, plus gift of nonincludible transfer made prior to January 1, 1977. In 1976, 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.

In 1977, P makes an additional gift to C of a residence, reserving a life estate. At the date of gift, the market value of the residence is $80,000 and the value of the remainder interest transferred to C is $34,116. A gift tax return is properly filed and gift tax paid.

P dies in December, 1978, without having made any additional gifts. The residence in which C received a remainder interest by gift made in 1977 has a date of death value of $90,000, and the cash gift made in 1976 is determined to be nonincludible for inheritance tax purposes. P's probate estate has a clear market value of $250,000, all of which goes to C. The inheritance tax is computed as follows:

(A) The cash gift made in 1976 is determined to be nonincludible for inheritance tax purposes and therefore that transfer is not aggregated with the death transfers, and is not included in the measure of the tentative tax.

(B) The gift made prior to January 1, 1977, results in the gift made after December 31, 1976, being taxed for gift tax purposes in the higher tax rate brackets. Therefore, the tax on prior gifts reduction of the tentative tax must be computed in the manner demonstrated in Example (4) under subsection (a) of this section.

The tax on prior gifts reduction of the tentative tax must be computed in this manner in every case where transfers subject to gift tax were made during lifetime of the decedent both before January 1, 1977 and after December 31, 1976, and the date of death is after 5:15 p.m., September 26, 1977.

(A) Even though the includible transfer was made prior to January 1, 1977, it is nevertheless subject to inheritance tax, at its date of death value.

(B) Where the includible transfer is made prior to January 1, 1977, and the date of death is after 5:15 p.m., September 26, 1977, a tax on prior gifts computation is not made with respect to the includible transfer. In such a case, a gift tax credit is allowed for gift tax paid at the date of gift.

(C) In the case of pre-1977 includible gifts, the amount of gift tax paid which is allowed as a gift tax credit is added to other assets subject to inheritance tax, as a prepaid inheritance tax. Reference: Estate of Giolitti, 26 Cal. App. 3d 327 and Estate of Schmalenbach, 15 Cal. 3d 102.

EXAMPLE (9). Gift of includible transfer made prior to January 1, 1977 plus gift of nonincludible transfer made after December 31, 1976.

In 1974, P transfers real property to himself and C, adult child, as joint tenants. The date of gift value of the property transferred is $60,000. A gift tax return is properly filed and gift tax paid.

THE COMPUTATION IS THE SAME AS IN EXAMPLE (8).

In 1977, P makes a further gift to C of $33,000 cash, A gift tax return is properly filed and the gift tax paid.

P dies in December, 1978, without making any additional gifts. The date of death value of the joint tenancy property is $75,000, and the cash gift made in 1977 is determined to be nonincludible for inheritance tax purposes. P's probate estate has a clear market value of $250,000, all of which goes to C. The inheritance tax is computed as follows:

(A) The transfer into joint tenancy is an includible transfer subject to inheritance tax (see Revenue and Taxation Code Section 13671), and, therefore, it must be valued at the date of death value in the first (tentative tax) inheritance tax computation.

(B) The date of gift value of the includible transfer, less any applicable annual exclusion, continues to be used in the second (tax on prior gifts) inheritance tax computation even though the value of the property decreases between the date of gift and the date of death. However, the tax on prior gifts cannot be used to reduce the tentative tax below a zero tax.

(C) Although the value of the includible transfer decreases between the date of gift and date of death, the full amount of the gift tax paid, based upon the date of gift value of the includible transfer, is included as a taxable transfer (see Revenue and Taxation Code Section 13648).

EXAMPLE (12). Gift of includible transfer, decreased by invasion between date of gift and date of death.

In 1977, P transfers to T, trustee assets having a date of gift value of $100,000. Under the terms of the trust, income accumulates for the life of P. Upon P's death, the trust terminates, at which time accumulated income and corpus then remaining is to be paid to C, trustor's child, if living, otherwise to N, trustor's niece, or her issue, per stirpes, if N does not survive. During the term of the trust, the trustee is to pay so much income or principal as the trustee, in its discretion, deems necessary for the welfare, support, medical, hospitalization or other emergency needs of M, trustor's mother. The trust is expressly made irrevocable, and trustor retains no power to alter or amend the trust.

In the gift tax determination, the trust contingencies are compromised (see Revenue and Taxation Code Section 15951) upon the basis that C will receive the entire trust corpus. The gift tax paid is computed as follows:

In 1978, M suffers a serious illness, and the trustee expends all of the accumulated income and $25,000 of trust corpus for medical and hospital expenses incurred by M. M dies in December, 1978. P dies in January, 1979, without having made any additional gifts and with C surviving. P's probate estate has a clear market value of $100,000, all of which goes to C. The value of the trust assets remaining after the invasion for M's expenses is $75,000. The inheritance tax is computed as follows:

(A) In this illustration, the includible transfer is decreased between date of gift and date of death by reason of an invasion of trust corpus, thereby converting a portion of the original transfer to a nonincludible transfer. Therefore, only a portion of the original transfer is included in the first (tentative tax) inheritance tax computation as a transfer subject to inheritance tax. Consequently, in the second (tax on prior gifts) inheritance tax computation there must be an adjustment to prorate the tax on prior gift between the includible and nonincludible portion of the original transfer. The tax on the prior gift, measured by the date of gift value of the total original transfer and computed at the exemption and rates of tax applicable to the transferee at date of death, is first computed. That portion of the tax on prior gifts thus determined which bears the same ratio to the total tax thus computed as the date of gift value of the includible portion of the original transfer bears to the date of gift value of the total original transfer is used as the tax on prior gift reduction of the tentative tax computed with respect to the transferee of the includible transfer. (Compare with example (11) where all of the property transferred is included at date of death but the value of the property transferred is decreased between date of gift and date of death.)

(B) The illustration assumes no change in the value of trust assets from date of gift to date of death. If, at the date of invasion, the market value of the assets placed in trust is different from the market value at date of gift, the amount by which the date of gift value of the trust is reduced is an amount that bears the same ratio to the date of invasion value of the amount converted to a nonincludible transfer as the date of gift value of the trust bears to the date of invasion value of the trust immediately before the invasion. This value is determined by the following formula:

((Date of gift value of trust)/(Date of invasion value of trust)) x invasion (amount converted to a nonincludible transfer)

The result is the amount by which the date of gift value of the trust is reduced to determine the date of gift value of the includible transfer to be used in the second (tax on prior gifts) inheritance tax computation.

In the event that there are successive invasions of trust corpus, the adjusted date of gift value, as determined by the immediately preceding invasion of trust corpus, shall be used to determine the amount by which the value of the includible transfer is reduced by reason of converting a portion thereof to a nonincludible transfer.

(C) Only the gift tax paid with respect to the portion of the transfer which is included in the inheritance tax computation is added to the measure of the first (tentative tax) inheritance tax computation. This is determined by multiplying the actual gift tax paid by the fraction in which the numerator is the date of gift value of the includible portion of the original transfer and the denominator is the date of gift value of the total original transfer.

(D) In such a case, if the transferee of the portion of the transfer that was converted to a nonincludible transfer (M in the illustration) survives the transferor and receives other assets the transfer of which is subject to inheritance tax, the nonincludible portion of the original transfer would be added to the transfers subject to inheritance tax, in the same manner as illustrated in examples (1) through (4), inclusive, to determine the amount of inheritance tax due with respect to that transferee.

As in the case of the includible transfer, the second (tax on prior gifts) inheritance tax computation with respect to the transferee of the nonincludible portion of the original transfer must be adjusted to reflect only that portion of the tax on prior gifts that is attributable to the nonincludible portion of the original transfer. The tax on the prior gift, measured by the date of gift value of the total original transfer and computed at the exemption and rates of tax applicable to the nonincludible transferee at date of death, is first computed. That portion of the tax on prior gifts thus determined which bears the same ratio to the total tax thus computed as the date of gift value of the nonincludible portion of the original transfer bears to the date of gift value of the total original transfer is used as the tax on prior gift reduction of the tentative tax computed with respect to the transferee of the nonincludible transfer.