IRC Section 2035 is the Internal Revenue Code provision commonly known as the three-year rule. It can pull certain property back into a decedent's taxable estate if the property, or certain rights connected with it, were transferred within three years of death. In the life insurance context, Section 2035 is especially important when an insured transfers ownership of an existing policy to an irrevocable life insurance trust or to children, intending to keep the death benefit outside the estate. If the insured dies within three years of that transfer, the death proceeds may still be included in the estate as if the transfer had never occurred. Section 2035 also applies to some gift tax paid on transfers and to property that would have been includible under other estate sections, had the transferor retained it. The rule reflects a policy of discouraging last-minute, deathbed transfers made solely to avoid estate tax. For high net worth clients, IRC Section 2035 highlights the importance of early planning, rather than waiting until health declines, to shift life insurance and other appreciating assets out of the taxable estate.

In practical planning, advisors see IRC Section 2035 when clients want to move an in-force life policy into an irrevocable life insurance trust or transfer ownership to family members late in life. Advisors and estate planning attorneys explain that if the insured dies within three years of the transfer, the value of the policy's death benefit may still be dragged back into the taxable estate under Section 2035, potentially defeating the tax savings that motivated the transfer. This often leads to recommendations that new coverage be purchased directly inside an ILIT, rather than transferring an existing contract when health is already questionable. Advisors also model estate outcomes under different timing assumptions, illustrating estate tax exposure if death occurs inside versus outside the three-year window. For broader wealth transfer strategies, IRC Section 2035 is considered alongside Sections 2036 through 2042 to identify hidden estate inclusion risks, guide the sequence of transactions, and emphasize the benefits of proactive, rather than reactive, estate and life insurance planning.