Gifts Made within Three Years of Death

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Gifts Made within Three Years of Death

An estate tax is a tax on the transfer of property following the death of the estate's owner. The tax is calculated on the fair market value of the assets that one owns at the time of his/her death and is imposed on the deceased person’s estate, not on the beneficiary. Assets included in this calculation consists of cash and securities, real property, insurance, trusts, annuities, business interests and other assets.

To reduce the amount of estate taxes imposed on one’s estate at the time of their death, many people make gifts during their lifetime in order to reduce the value of their estate before their death. However, tax law may revoke some gifts and impose an estate tax on them if they are made too close to the date of death.

How Does Estate Tax Law Treat Gifts Made within Three Years of Death?

Since 1981, when a person makes a gift of his/her interest or relinquishes his/her control over his/her property to another, within three years of the date of his/her death, the value of those gifts will be included when calculating estate taxes on the estate.

In order for this rule to apply, the property given away must have been property that would have been included in the estate and subject to estate tax valuation. Thus, if you make a gift within three years of death that is exempt from the estate tax because it does not exceed the annual gift tax exclusion amount ($14,000 for 2014), then the gift will not included in the calculation of estate taxes.

For example: P makes a gift of $5,000 to B on May 1, 2013. P dies on May 1, 2014. Since the gift was excluded from tax when it was made (less than the $14,000 annual exclusion amount), that $5,000 will not be included in the amount of assets P owns at death and thus not subject to an estate tax.

Are There Any Exceptions to the Three Year Rule?

There is an exception to this rule involving the use of a revocable trust. A revocable trust is a trust created during one’s lifetime. Most revocable trusts permit the Settlor to control the assets of the trust during their lifetime. For estate tax purposes, the person making the revocable trust must pay estate taxes on the assets of the trust if he/she continues to control the trust until he/she dies.

The three year rule does not apply, however, if the Settlor of the revocable trust makes a gift of the trust assets to another person. The gift will not be pulled back into the calculation of the estate tax of the grantor, even if made within three years of the Settlor’s death.

Do I Need an Estate Planning Attorney?

Consultation with an estate planning attorney is essential to crafting an estate plan that is sensitive to both your needs and those of your loved ones. A lawyer will know which type of will or trust is right for you and will do their best to limit the tax liability on your estate at the time of your death.

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Last Modified: 02-18-2015 03:32 PM PST

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