Legal Definitions - gross up

The term gross up, in the context of estate tax, refers to a specific rule that requires certain gift taxes paid before a person's death to be added back into their estate for the purpose of calculating estate taxes.

Specifically, this rule applies to gift taxes that were paid by the deceased person (or their estate) on gifts they made, or gifts their spouse made, during the three-year period immediately preceding the deceased person's death. The primary reason for this rule is to prevent individuals from reducing the size of their taxable estate by making large gifts and paying the associated gift tax shortly before they die, thereby avoiding estate tax on the amount of the gift tax itself.

• Example 1: Direct Gift to Children

  Mr. Henderson, a wealthy individual, gives his son $1 million two years before his death. He pays $150,000 in gift tax on this transfer from his personal funds.

  How it illustrates "gross up": When Mr. Henderson passes away, the $150,000 in gift tax he paid will be "grossed up" and added back to his estate when calculating the total value for estate tax purposes. This prevents his estate from being artificially reduced by the gift tax payment made so close to his death.

• Example 2: Gift by Spouse

  Mrs. Chen makes a substantial gift of $800,000 to her niece. Her husband, Mr. Chen, pays the $120,000 gift tax from their joint bank account. Mr. Chen unexpectedly passes away 18 months later.

  How it illustrates "gross up": Even though Mrs. Chen was the direct donor of the gift, because the gift tax was paid by Mr. Chen (the decedent) on a gift made by his spouse within three years of his death, the $120,000 gift tax will be "grossed up" and included in Mr. Chen's estate for estate tax calculation.

• Example 3: Business Succession Planning

  Ms. Rodriguez, the owner of a successful manufacturing company, transfers a significant block of non-voting shares worth $2 million to her daughter, who is taking over the business. Ms. Rodriguez pays $300,000 in gift tax on this transfer. She dies 2.5 years later.

  How it illustrates "gross up": The $300,000 in gift tax Ms. Rodriguez paid on the transfer of company shares will be "grossed up" and added back to her estate. This ensures that the estate tax calculation reflects the full value of her estate, including the gift tax paid on the transfer made within the three-year window before her death.