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. Financial Advisor

    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 Advisor

    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. Financial Advisor

    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 Advisor

    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. Personal Finance

    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. Personal Finance

    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. Financial Advisor

    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. Financial Advisor

    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. Personal Finance

    Estate Taxes: Who's on the Hook?

    Inheritance taxes can be tricky. Most people have to deal with them at a very inconvenient time. It's better to learn the laws now so you're ready later.
RELATED FAQS
  1. If a parent transferred a house deed to their three adult children, do they need ...

    Currently, only the parents Read Answer >>
  2. How does the gifting process work with a deed transfer?

    My parents own a home that they would like to "gift" to my husband and me. The house is in my parents name and ... Read Answer >>
  3. 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 >>
  4. Are there high capital gains when there's low income?

    My father sold a piece of property that he had inherited in order to pay for assisted living expenses.... Read Answer >>
  5. How can my husband inherit a house deed?

    My mother in law wants to know the best way to leave the deed to her house to her son (my husband). Should it be left in ... Read Answer >>
  6. If my son transfers stock to me, I understand that the basis is the stock price upon ...

Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center