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To the Editor:
THERE SEEMS TO BE AN ERROR IN THE CALCULATIONS OF "THE NET, NET GIFT" BY MICHAEL S. ARLEIN & WILLIAM H. FRAZIER (AUGUST 2008)-specifically the article's calculations of the actuarial present value of the additional federal estate tax that would be payable if the donor died within three years of the gift and the gift tax paid on the net gift were included in the donor's gross estate under Internal Revenue Code Section 2035. The formulas used in the piece depart from the formulas used by the Internal Revenue Service under Section 7520 in two respects:
(1) The mortality probabilities are not calculated correctly and overstate the probability of death within three years for the hypothetical donor age 86.
In determining the probabilities of death for each year of the three years, the article shows the probabilities of death within one year for persons age 86, 87 and 88. But what is needed are the probabilities of a person age 86 dying in the first year, the second year, and the third year, which is a different calculation.
By basing the probability of death in the second and third years based on the ages at the beginning of those years, the formula used in the article implicitly assumes a 100 percent probability of surviving to those ages and fails to take into account the probability of death for an 86-year-old before reaching those ages.
The correct probability of death in the second year is the probability of death within two years minus the probability of death within one year, and the probability of death within the third year is...