592. When are gifts made within three years of death includable in a decedent’s gross estate under IRC Section 2035?polearyrcline202005-04-08T19:45:00Z2014-06-23T18:02:00Z2014-06-23T18:02:00Z48534866Hewlett-Packard Company40115708142007-10-05T00:00:00ZTaxFactsDefaultArticleSite Map/Life Insurance/Income Taxation/Proceeds/Living/Disposition/Sale or Purchase of a Contract115140262-00-tf1.xml263.00;#2099;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1If the owner of a life insurance or endowment contract sells the contract, such as in a life settlement, what are the income tax consequences to the seller?74200.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T23:41:49Z592. When are gifts made within three years of death includable in a decedent’s gross estate under IRC Section 2035?Gift tax paid by the decedent or his estate on any gifts made by the decedent or his spouse within three years of the decedent’s death is includable in the gross estate in any case, regardless of whether the value of the gift itself is includable under IRC Section 2035 or any other IRC section.Estate of Hester v. United States, 2007 WL 703170, 99 A.F.T.R. 2d 2007-1288 (W.D. Va., 2007), afff’d per curiam, 297 Fed. Appx. 276, 2008 WL 4660189, 102 A.F.T.R. 2d 2008-6714 (4th Cir. Oct. 21 2008), Cert. denied sub nom. IRC Sec. 2035(b); Rev. Rul. 81-229, 1981-2 CB 176; Rev. Rul. 82-198, 1982-2 CB 206. Gift tax paid by decedent’s spouse on a split-gift within three years of decedent’s death was included in decedent’s estate where the decedent had funneled money to his spouse who then transferred the money to a life insurance trust (and to the IRS to pay gift tax); the transfers were treated as collapsed into one transaction under the step-transaction doctrine.Brown v. U.S., 2003-1 USTC ¶60,462 (9th Cir. 2003).Under Section 2035, the value of the gross estate also includes the value of property to the extent a donor gratuitously transferred property within three years of death but retained an interest in that property described in IRC Section 2036 (transfer with a retained life estate), 2037 (transfer taking effect at death with reversionary interest retained), 2038 (transfer with power retained to revoke or amend), or 2042 (incidents of ownership in insurance on life of donor); or if a donor transferred property subject to such retained interests more than three years before death, but relinquishes that interest within three years of death. The three-year rule applies to these transfers whether or not a gift tax return was required to be filed.IRC Sec. 2035(a). The entire value of the property transferred under this exception is includable in the decedent’s gross estate, including the value of the property, if any, transferred by the decedent’s consenting spouse (i.e., a split gift–see Q 654). If the consenting spouse dies within three years of the gift and the entire value of the gift was includable in the donor spouse’s estate under IRC Section 2035, the consenting spouse’s portion of the gift is not an adjusted taxable gift and is not includable in the consenting spouse’s gross estate.IRC Sec. 2001(e); Rev. Rul. 82-198, 1982-2 CB 206. The gift tax paid by the donor spouse or his estate is includable in the donor spouse’s estate, and the gift tax paid by the consenting spouse or her estate is includable in the consenting spouse’s estate.IRC Sec. 2035(b); Rev. Rul. 82-198, above. However, gift tax paid by decedent’s spouse on a gift split between the spouses within three years of decedent’s death was included in decedent’s estate where the spouse did not have sufficient assets to pay the spouse’s share of the gift tax and the decedent transferred assets to the spouse to pay the taxes.TAM 9729005.A transfer from a revocable trust is treated as made directly by the grantor and therefore included in the gross estate.IRC Sec. 2035(e). Such a transfer will generally be subject to the Section 2035 inclusion rule also with respect to gift tax paid within three years of death and for the limited purpose of the second exception below. IRC Section 2035 also applies to increase the gross estate for the purposes of the following: (1)determining the estate’s qualification for (a) IRC Section 303 stock redemptions (redemption of stock held by a decedent at death in an amount not in excess of death taxes and settlement costs under special income tax rules that treat the redemption as a capital transaction rather than as a dividend), and (b) current use valuation for qualified real property (see Q 661); and (2)determining property subject to estate tax liens.IRC Sec. 2035(c)(1). With respect to the IRC Section 6166 extension of the time to pay estate tax (see Q 621), the requirement that the decedent’s interest in a closely held business must exceed 35% of the adjusted gross estate is met by an estate only if the estate meets the requirement both with and without the application of the bringback rule.IRC Sec. 2035(c)(2). An exception to this second exception is that any gifts (other than a transfer with respect to a life insurance policy) not required to be reported on a gift tax return filed by the decedent for the year the gift was made are not includable in the gross estate. Gifts up to the limit of the gift tax annual exclusion and qualified transfers (see Q 654), but not split gifts, do not require the filing of a return. Another exception to the second exception is a gift which qualifies for the gift tax marital deduction (see Q 657).IRC Sec. 2035(c)(3).The Bringback RuleThe three-year rule of IRC Section 2035, referred to above, operates as follows: In general, gifts made by the decedent (in trust or otherwise) which are caught by the three-year rule, are includable in the decedent’s gross estate. Also includable is the amount of any gift tax paid by the decedent or his estate on any gifts made by the decedent or his spouse within three years prior to decedent’s death; the gift tax is includable regardless of whether the value of the gift itself is includable under IRC Section 2035 or any other IRC section.IRC Sec. 2035(b); Rev. Rul. 81-229, 1981-2 CB 176; Rev. Rul. 82-198, 1982-2 CB 206. Where the decedent made a “net gift” (i.e., a gift made on the condition that the donee pay the gift tax–see Q 649), the amount includable in the gross estate is the total value of the property transferred.Let. Rul. 8317010.