Estate taxes are imposed on the amount of assets that a person owns at his/her death. In order to reduce the amount of estate taxes, many people will make gifts during their lifetime in order to reduce their assets as much as possible before their death. However, the tax law may pull back some of these gifts and impose 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? When a person gives away his/her interest or relinquishes his/her control over his/her property without adequate consideration (i.e. money) within three years before the date of his/her death, then estate taxes will generally be imposed on transferred/relinquished property even though the person making the gift does not own or control the property at his/her death. In order for this rule to apply, the transferred/relinquished property must be subject to the estate tax had the gift not been made. Thus, if you make a gift within three years of death that is exempt from tax because it does not exceed the annual gift tax exclusion amount ($11,000 for 2004), then such a gift will not be pull back into the calculation of your estate taxes. For example: P makes a gift of $5,000 to B on May 1, 2004. P dies on May 1, 2005. Since the gift was excluded from tax when it was made (less than the $11,000 annual exclusion amount), that $5,000 will not be included in the amount of assets P owns at death. 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 in which the person who made the trust retains the power to control the assets of the trust. Generally for estate tax purposes, the person making the revocable trust needs to 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 if the grantor (maker) 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 it is made within three years of his/her death. Do I Need an Estate Planning Attorney?Consultation with an attorney experienced in estate planning 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 your tax liability |
