Transferring the Wealth: formula sheet

Key formulas

Probate estate

Probate estate = assets passing under the will or intestacy (usually sole-name assets)

Excludes assets with beneficiary designations, survivorship title or trust ownership.

Non-probate transfer test

Asset passes by contract or title (beneficiary named, joint with survivorship, held in trust) → non-probate

Contract or title overrides the will. A will cannot redirect these assets.

Estate value (planning view)

Net estate = Total assets owned or controlled − Debts and final expenses

Taxable estate may differ by jurisdiction. Use the exemptions and rules given in the question.

Estate subject to the will (community property)

Deceased's estate = ½ × community assets + deceased's separate assets

Applies in a simple community regime. Survivor keeps their own half; details vary by jurisdiction.

Disposable portion under forced heirship

Disposable portion = Net estate − Reserved portion

Reserved portion = legally fixed fraction of the deceased's estate set aside for protected heirs.

Reserved portion

Reserved portion = Net estate × legal reserved fraction

The fraction is set by the jurisdiction and often depends on the number of heirs. Use the fraction given in the question.

Common law vs civil law rule

Common law: testamentary freedom. Civil law: often forced heirship.

A tendency, not an absolute rule. Exceptions exist in both.

Separate property rule

Titled owner controls and bequeaths the asset

Surviving spouse may still have a statutory claim in many systems.

Taxable estate

Taxable estate = Gross estate − deductions − exemption

Deductions may include debts, expenses, transfers to a spouse or charity, depending on the regime given.

Estate tax payable

Tax payable = (Taxable estate × rate) − credits

Credits include gift tax already paid and foreign tax credits, usually capped by the domestic tax on that asset.

Cumulative base with lifetime gifts

Cumulative base = Taxable estate + lifetime taxable gifts

Used where gifts are added back. Tax on the cumulative base is reduced by gift tax already paid.

Taxable gift

Taxable gift = Gift value − annual exclusion − other exemption

Annual exclusions apply per donor and per recipient where the regime says so.

Estate versus inheritance tax

Estate tax: on the estate, paid by the estate. Inheritance tax: on each heir's share, paid by the heir

Check who is the taxpayer and what sets the rate.

Wealth tax

Wealth tax = (Net assets − threshold) × rate, each period

Levied on holding, not on transfer.

Gift cost, tax-exclusive

Total cost to donor = G × (1 + tg) so G = W ÷ (1 + tg)

G is the gift received, tg the gift tax rate, W the wealth the donor spends. Tax is paid on top of the gift.

Gift received, tax-inclusive

G = W × (1 − tg)

The tax is taken from the amount the donor sends. Heir receives less than W.

Future value of a gift

FV gift = G × [1 + r × (1 − tr)]^n

r is pre-tax return, tr is the tax rate on the recipient's return, n is years. Use the recipient's tax rate on growth.

Future value of a bequest

FV bequest = W × [1 + r × (1 − td)]^n × (1 − te)

td is the donor's tax rate on return while the asset is held. te is the estate tax rate, applied at the end.

Decision rule

Gift is better if FV gift > FV bequest

Compare using the same starting wealth W. Do not compare a gift G with a bequest W directly.

Estate freeze tax saving

Tax saved = te × (Future value − Value at freeze)

Only the growth after the freeze escapes estate tax. The frozen value is still taxed. Assumes growth shares pass to heirs with no gift tax on their value.

Trust roles

Settlor → transfers assets → Trustee (legal title, fiduciary) → Beneficiaries (benefit)

Name all three parties when asked to describe a trust.

Revocable vs irrevocable

Revocable = control kept, no estate or creditor protection. Irrevocable = control given up, possible estate and creditor protection.

Control and protection move in opposite directions. Tax detail varies by jurisdiction.

Discretionary vs fixed trust

Discretionary: trustee decides distributions. Fixed: terms set each share.

Discretionary suits spendthrift, young or at-risk beneficiaries.

Insurance liquidity need

Liquidity need = estate taxes + debts + expenses + cash bequests − liquid assets available

Use to size life insurance. Ignore illiquid assets you do not wish to sell.

Foundation vs trust

Foundation = separate legal entity with no owners. Trust = relationship, trustee holds title.

Foundations are mainly civil-law; trusts mainly common-law.

Credit method, home tax payable

Net home tax = Home tax on the asset − Foreign tax credit

Credit is usually limited to the lower of foreign tax paid and home tax on that asset. It cannot go below zero in the usual case.

Total tax under credit method

Total tax = Foreign tax + (Home tax − allowed credit)

If foreign tax is higher than home tax, total equals the foreign tax. If lower, total equals the home tax.

Exemption method

Home taxable base = Worldwide assets − Foreign-situs exempt assets

Home country does not tax the exempt assets. Total tax is home tax on the remaining base plus foreign tax on the exempt assets.

Tax liability by connection

Domiciled or resident: worldwide assets. Non-resident: only assets with local situs

This is the usual pattern. Always confirm the country's stated rule in the question.

After-tax estate

Net estate = Gross estate − Total transfer taxes (all countries)

Use this to compare structures and to show the heirs' net outcome.

Liquidity shortfall at death

Shortfall = (Estate taxes + Debts + Administration costs + Bequests of cash + Equalizing payments) − Liquid assets available

A positive result means the estate must sell assets, borrow or use insurance. Include only liquid assets that are actually available.

Equalizing amount for non-active heirs

Equalizing amount per non-active heir = (Total estate value ÷ Number of heirs) − Value of assets that heir already receives, if equal shares are intended

Use total estate value, not the business value alone. Applies only when the stated goal is equal value to each heir. The amount must be funded from somewhere: other estate assets, a payment from the active heir, or new outside money such as insurance.

After-tax cost of a gift

Net cost of giving = Amount given − Tax saved by the gift

Tax saved depends on the jurisdiction's deduction and any avoided capital gains tax. Use the rates given in the question.

Value of a growth freeze

Transfer tax saved = Future growth moved out of the estate × Transfer tax rate

Only growth after the freeze is removed from the owner's estate. Value at the freeze date stays with the owner.

Quick revision

• Start every case with the client's objectives and constraints, then choose the tool.
• Common law systems usually allow wide freedom to choose heirs; civil law systems often impose forced heirship for certain relatives.
• Marital property regimes decide what each spouse owns and what can pass in a will.
• Estate tax is levied on the estate of the deceased; inheritance tax is levied on what each recipient receives.
• Gift tax applies to lifetime transfers; wealth taxes apply to holdings regularly, not only at transfer.
• Gifting early can move future growth out of the estate, so compare after-tax values of gift and bequest.
• Freeze strategies fix the value of an asset in the estate so growth passes to heirs.
• Trusts separate legal ownership from benefit; check whether they are revocable or irrevocable.
• Cross-border plans must consider residence, asset location and possible double taxation or credits.
• Plan for liquidity at death so heirs are not forced to sell assets badly.
• Business succession needs a clear successor, valuation and funding plan.
• Show every calculation step and give only the number of responses requested.

Common mistakes

• Treating the whole estate as the probate estate. Fix: Probate covers only assets passing under the will or intestacy. Subtract non-probate assets.
• Assuming the will controls assets with a named beneficiary. Fix: A beneficiary designation or survivorship title takes effect by contract or title, so the will does not change it.
• Applying forced heirship to the whole estate including the surviving spouse's community half. Fix: Settle marital property first. Forced heirship applies only to the deceased's share.
• Saying civil law always has forced heirship and common law never does. Fix: Say 'often' for civil law and 'generally wide freedom' for common law. Check the facts in the vignette.
• Mixing up estate tax and inheritance tax. Fix: Ask who pays. Estate tax is on the whole estate and paid by the estate. Inheritance tax is on each heir's receipt.
• Treating a credit as a deduction from the base. Fix: Deductions reduce the base before the rate. Credits reduce tax after the rate.
• Comparing a gift G with a bequest W instead of using the same starting wealth. Fix: Start from the wealth W the donor spends. Convert W to the gift received first, then compare.
• Mixing up tax-inclusive and tax-exclusive gift tax. Fix: Exclusive: tax is on top, gift = W ÷ (1 + tg). Inclusive: tax comes out of the total, gift = W × (1 − tg). Estate tax is inclusive in effect.
• Saying a revocable trust reduces estate tax. Fix: The settlor keeps control, so assets generally stay in the estate. Its benefits are probate, privacy and incapacity planning.
• Treating irrevocable as costless. Fix: Always state the loss of control and flexibility, and that gifts may carry gift tax.

Exam tips

• When asked what passes under the will, answer from how title is held, not from who the family is.
• Use command words exactly. 'Identify' needs a short list. 'Justify' needs a reason linked to the client's goal.
• Show the sum in a calculation of probate value. A correct number alone earns credit, but working protects you if you slip.
• Always mention the jurisdiction check when a plan involves limits on who can inherit.
• Give only the number of reasons asked, in the order requested.
• Do ownership first, distribution second. Many wrong answers come from reversing the order.
• Use the reserved fraction given in the vignette. Do not rely on memory of any country's actual rules.
• For recommendation questions, name the client objective, the legal constraint and the action in that order.