For as long as there has been an estate tax, people have been trying to avoid it by making gifts. It makes sense to try and give everything away before you die to avoid having any estate tax liability. The IRS caught on to this planning quickly and enacted the gift tax. The gift tax is paid when the donor exceeds their lifetime limit and annual exclusion (both adjusted for inflation annually). If you are the lucky recipient of a gift, the gift itself is excludable from your income. Also, if you receive an asset through inheritance, the value of the asset as of the date of death is excluded. In most situations, the recipient receives a stepped-up basis in the asset received.
You are familiar with the stepped-up basis rule and decide to gift your home, stock, and other valuable assets to your terminally ill grandfather. Your grandfather includes in his will to bequeath these assets back to you when he dies. Is this good tax planning? What is the result if your grandfather dies 13 months after your gift? What is the result if your grandfather dies 11 months after your gift?