A grandmother gives her granddaughter $250,000 in stock on December 15 and dies January 3. The estate attorney says the IRS will claw it back. A different grandmother funds an irrevocable trust with $250,000 fourteen months before she dies, not a dollar is included. Same amount. Radically different outcome.
Resolving the opener. The first grandmother's stock gift is not pulled into her estate. IRC Section 2035(a) has a targeted three-year lookback: it pulls back a life insurance policy on the decedent's own life transferred within three years of death (Section 2042), and any interest or power given away or released within three years of death that would have kept the property in the gross estate under Section 2036, 2037, or 2038 (a retained life estate, a reversionary interest, or a power to alter or revoke).
A transfer removes property from the gross estate only if the donor truly lets go. Three companion sections pull property back in when strings remain:
Common mistakes
- Confusing carryover and step-up basis. Gifts carry the donor's basis. Inherited property gets a step-up. Recommending a gift of highly appreciated property can create a massive capital gains bill that exceeds the estate tax savings.
- TRAP: If a donor gifts stock with a $50,000 basis and $500,000 FMV, you will see $500,000 as the donee's basis. That is wrong, $500,000 applies only if the donor had died. The correct carryover basis is $50,000.
- Disclaimer violations. The 9-month deadline is absolute. Accepting any benefit disqualifies it. The disclaimant cannot direct where the property goes.
Bottom line
- Lifetime gifts remove the asset and all future appreciation from the taxable estate, but the donee takes a carryover basis
- Gifted property carries the donor's basis (carryover); inherited property gets a step-up, so gifting highly appreciated assets can trigger large capital gains
- Annual exclusion is $19,000 per donee (2026); gift-splitting doubles it to $38,000, and direct-pay tuition and medical are unlimited on top of that
- A qualified disclaimer must be in writing, within 9 months, with no prior acceptance, and no direction from the disclaimant
Exam shortcut
A gift of appreciated property: compare carryover basis to step-up. The exam tests whether you know gifts carry the donor's basis. Disclaimer questions look for the two disqualifiers: already accepted benefits, or filed after 9 months. Power of appointment: the word "self" or "herself" in the appointment clause converts limited to general and triggers estate inclusion.
The full lesson (about 3,658 words, 24 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- G.55
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