Category: Estate & Gift
Subject: Gifts
Title: Gifts Within Three Years of Death
IRC Sections: 2035(a)
Filename: 1383.html
Date Produced: 04/98

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Background
Taxpayer plans to make a gift of stock with a value of $1 million and a basis of $400,000.

Issues
What is included in the taxpayer's gross estate if he dies within three years of the gift?

Answers
There is no additional inclusion in the gross estate as a result of this transaction.

Discussion
Since 1981, it has been necessary to include in the gross estate the date of death (or alternate valuation date) value of gifts made within three years of death. IRC Section 2035. However, the 1997 Taxpayer Relief Act changed that rule. Now, a gift within three years of death does not give rise to additional inclusion in the gross estate (over and above the gift-tax valuation of the property for uniform transfer tax purposes) unless the transfer is subject to specific lifetime transfers rules--transfers with retained a life interest (Section 2036), transfers taking effect at death (Section 2037), revocable transfers (Section 2038), and certain life insurance transactions (Section 2042).
Here is Section 2035(a) now.

(a) Inclusion of certain property in gross estate.
If...

(1) the decedent made a transfer (by trust or otherwise) of an interest in any property, or relinquished a power with respect to any property, during the 3-year period ending on the date of the decedent's death, and

(2) the value of such property (or an interest therein) would have been included in the decedent's gross estate under section 2036, 2037, 2038, or 2042 if such transferred interest or relinquished power had been retained by the decedent on the date of his death,
the value of the gross estate shall include the value of any property (or interest therein) which would have been so included.

Here is Section 2035(a) before amendment by Section 1310 of P.L. 105-34.

(a) Inclusion of gifts made by decedent. Except as provided in subsection (b), the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, during the 3-year period ending on the date of the decedent's death.

This change is effective for the estates of decedents dying after August 5, 1997.

Accordingly, unless the transaction in question is an incomplete transfer subject to IRC Sections 2036 through 2038 or an insurance transaction subject to Section 2042, it is not necessary to include the date of death (or alternate valuation date) value of the stock in question in the decedent's estate. Naturally, the date of gift value is included in the estate under the uniform lifetime transfer principle.