What is the Three Year Rule?

What is the Three Year Rule?

Certain assets are to be included in your gross estate under Section 2035 of the Internal Revenue Code, if you transferred or gifted those assets within three years of your death. This will naturally increase your gross estate value and can increase estate taxes upon death.

This rule wasn’t intended to deter people from giving gifts or transferring assets to their loved ones. It was intended to prevent taxpayers from trying to unfairly reduce or avoid federal estate tax liability once they became aware that their death is imminent by intentionally (and gratuitously) transferring ownership interest of certain assets to others.

This rule doesn’t apply to all assets but primarily applies to certain insurance policies, transfers effective at death, assets in which the owner retains a life interest and revocable transfers.

Sources: I.R.C. Sections 2035, 2036, 2037, 2038 and 2042.

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