Three-Year Rule

Categories: Trusts and Estates

The time limit for an apology after a terrible wedding toast? How long you can wait before returning that swimsuit you borrowed?

Nope. It's actually a stipulation in the tax code dealing with estate law.

Specifically, the three-year rule states that any gift given within three years of someone's death gets counted as part of the person's estate. So...if your grandma gives you her precious diamond ring in January and then kicks the bucket in June, the value of that ring gets rolled up into her estate. Depending on the size of grandma's overall estate, it can increase the taxes that have to be paid.

The purpose of the rule is to prevent high-net-worth individuals (the kind that might get hit with a hefty estate tax bill) from just giving away their stuff wholesale once they hear a terminal diagnosis. The three-year rule is a way to prevent inheritance tax evasion.

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Finance: What is Gift tax?0 Views

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Finance Allah Shmoop What is gift tax Of those I

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Rs people They ruin everyone's fun You can't even give

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away things anymore without it being taxed Even have some

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t Khun spill into a harbor Boston gift tax party

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Anyone know well so overly Simply as of two thousand

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nineteen you're allowed to give about fifteen grand a year

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with the expectation that this number will rise a bit

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with inflation year after year And on that fifteen grand

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or less there is no tax owed You have to

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declare to the IRS people that you gifted but you

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don't have to write them An incremental check and all

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kinds of little tweaks to the definitions of givers and

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receivers have made the state transfer easier in this country

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For example of Family Khun Gift in multiple directions from

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multiple sources like each year Mama Bear Khun Gift fifteen

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grand to baby bear than fifteen grand too sulky teenager

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texting bear then another fifteen grand Teo the Elder Bear

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for a total of forty five grand gifted from Mama

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Bear tax free Then Daddy Bear can do the same

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for each kid and the elder such that they can

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gift in one year ninety thousand dollars total in gifts

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with no tax And there are other twists They aren't

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limited to gifting Fax like they Khun gift art and

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jewelry and mountain vats of honey or porridge or privately

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appreciated stock like stock they bought for a dollar is

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now trading at fifty and they can give fifteen grand

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worth of that stock So Hugh may reasonably wonder how

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they would determine the value of private stock if it's

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not public or really any of the above None actively

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traded and valued things like jewelry and stuff like that

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Well there isn't a daily market for shares in private

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companies or artwork or jewelry Usually So how do you

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assess the value Well usually value is taken it whatever

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the last round was invested at by professional investors of

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its private stock even if it was five years ago

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and the company has gone up a ton in value

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But if it has well it's likely the company will

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have been required to get a new four o nine

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a valuation which is basically just a few high priced

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lawyers assessing professionally what the company is worth based on

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other similar companies that were sold or funded recently It's

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the best guess of lawyers and accountants and the same

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applies to appraisals of jewelry and art And like if

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your parents are giving that stuff away to you too

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willing to keep it under fifteen grand the arrest I

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won't bug you So you can imagine that a family

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wanted to transfer as much as they possibly could to

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their kids Will The impetus could involve a whole lot

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of downward pressure on valuations such that the fifteen grand

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that was tax free gift herbal might really be worth

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now something more like twenty grand or thirty grand or

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maybe even fifty grand were it to sell that day

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That is private valuations carry all kinds of risks The

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gift ease as well Like if they want to sell

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them like Mama thinks that jewelry a piece that was

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made for her is really worth thirty four thousand dollars

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And he's getting away with something stating It's only worth

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fifteen But then baby there goes to try to sell

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it on eBay and gets like three grand for it

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Well may be discounting private things make sense The key

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notion here is that fifteen grand of value can be

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transferred tax free legally Happily the IRS has no tax

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on that But above there there's all kinds of gift

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tax right So what happens if Mama Bear gives baby

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bear twenty thousand dollars in cash one year You know

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Tio enable the baby or to buy a top of

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the line Dr Braun's porridge warmer Well either Baby bear

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can just pay income tax on the five thousand dollars

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difference like fifteen grand was tax free and then five

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thousand above that that five thousand above it is taxable

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as a gift tax And in fact it's Mama Bear

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who would technically be legally responsible for paying that tax

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on the five grand But baby Bear can do it

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if well you know if she wants or she can

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write Mama bear a check for five grand back and

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it's the net number that the IRS cares about There's

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all kinds of other gift taxes the president's change them

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limits and maximums all the time Currently a family Khun

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Gift in about eleven million dollars in change with essentially

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no estate tax when they died That protects the farms

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in the Midwest from having to be sold When you

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know great Grandpa Joe dies and he on the farm

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for one hundred years That's how gift taxes air set

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up And well if someone gives you a horse isn't

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there a phrase about looking a gift horse in the

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mouth You know be careful with those things by

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