Cal. Code Regs. tit. 18 § 13601.4
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.
Cal. Code Regs. Tit. 18, § 13601.4