Three-Year Rule

DEFINITION of 'Three-Year Rule'

Section 2035 of the tax code, which stipulates that assets that have been gifted through an ownership transfer, or assets for which the original owner has relinquished power, are to be included in the gross value of the original owner's estate if the transfer took place within three years of his or her death. If gifted assets do not meet the necessary requirements, the value of the assets is added to the value of the estate at the time of the original owner's death, increasing its value and the estate taxes imposed on it.

BREAKING DOWN 'Three-Year Rule'

This rule prevents individuals from gifting assets to their descendants or other parties once death is imminent in an attempt to avoid estate taxes. The rule does not include all assets gifted or transferred in that three-year period and is mainly focused on insurance policies or assets in which the deceased retains an interest.

RELATED TERMS
  1. Incidents Of Ownership

    Any interests or rights that an individual maintains in an asset, ...
  2. Gift

    Property, money or assets that one person transfers to another ...
  3. Uniform Transfer Tax

    A combination of federal estate taxes and federal gift taxes. ...
  4. Estate Freeze

    An asset management strategy whereby an estate owner aims to ...
  5. Capital Transfer Tax

    An inheritance tax levied in the United Kingdom on estates exceeding ...
  6. Annual Exclusion

    The amount of money that may be transferred by gift from one ...
Related Articles
  1. Your Clients

    How to Gift Your Way to Lower Estate Taxes

    Estate planning is not just for inheritance. High net-worth individuals, who plan properly, can gift their money and save on taxes.
  2. Retirement

    How Much Will You Owe on Your Inheritance?

    Estate planning can be unpleasant, but in order to get the full benefit of what you've inherited, it’s important to be prepared for the related taxes.
  3. Financial Advisors

    Estate Planning and Elderly and Passed Clients

    By keeping up with new estate tax rules, financial advisors can help elderly clients save big on tax costs.
  4. Taxes

    A Quick Guide to High-Net-Worth Estate Planning

    A quick estate planning guide for high-net-worth individuals to help minimize taxes and costs, protect assets and plan for care.
  5. Financial Advisors

    How Life Insurance Can Help Reduce Estate Taxes

    Inheritance is a double-edged sword, as leaving money can create estate tax burdens. Opting for a life insurance plan can help mitigate those burdens.
  6. Taxes

    Understanding The Insurance Transfer-For-Value Rule

    If you are banking on your life insurance payout being tax-free, you may be in for a surprise.
  7. Taxes

    8 States With Estate Taxes

    Understand the difference between the federal estate tax and state-specific estate taxes. Learn about some of the worst states with estate taxes.
  8. Taxes

    An in Depth Look at How Inheritances Are Taxed

    The tax implications of an inheritance can be complex. Here's what beneficiaries need to know.
  9. Personal Finance

    7 Reasons To Own Life Insurance in an Irrevocable Trust

    An Irrevocable Life Insurance Trust helps minimize estate and gift taxes, provides creditor protection and protects government benefits.
  10. Investing

    Estate Planning for Singles

    Now that singles dominate the population, it's important they understand the essentials of estate planning for indivdiuals.
RELATED FAQS
  1. Can I give stock as a gift?

    Stocks, bonds or any other securities can be transferred as gifts. Giving the gift of stock also has benefits for the giver. ... Read Answer >>
  2. How are life insurance proceeds taxed?

  3. How can a trust lower federal transfer tax liability?

    A trust is an arrangement in which an individual or entity controls property or funds on behalf of someone else without actually ... Read Answer >>
  4. What is estate planning?

    Estate planning involves making plans for the transfer of your estate after death. Your estate is all the property that you ... Read Answer >>
  5. Are there any regulations on transfer pricing?

    Learn about transfer pricing, its role in intra-business calculations, and how the U.S. government regulates transfer pricing ... Read Answer >>
  6. If my son transfers stock to me, I understand that the basis is the stock price upon ...

Hot Definitions
  1. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  2. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  3. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  4. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS ...
Trading Center