This question is about U.S. estate/gift tax law.
Imagine a scenario where a parent gifts an asset to the child, i.e. a $500k house, in an irrevocable grantor trust. It's a "completed gift" in that they file a gift tax return, & use up $500k of their lifetime gift/estate tax exemption. However, the parent also retains a power in the trust that brings it back into their estate at death. Let's say the house is then worth $700k at death. When it's brought back into the estate at death, the amount of exemption used would obviously be based on the new $700k value.
My question: how does this filing of $700k gift/estate tax actually work at death, in practice? i.e. you filed a $500k gift tax return previously, then it's brought back into the estate at a value of $700k. How do you account for ("get credit for?") the previously-filed $500k exemption, which it seems is nullified/replaced by the latter $700k one, so you're not doubling up on the use of exemption for this one asset? i.e. we shouldn't use $500k+$700k for the gifting of this asset - just $700k.
(Details/side points: grantor status in the trust could come from i.e. retaining the power to borrow without adequate security. Bringing it back into the estate could happen i.e. by reserving the ability to delay distribution of income - IRC 2038, & Treasury Regulation 252511-2D says that the mere delaying of the distribution to a beneficiary does not make the underlying gift incomplete. These details shouldn't be relevant to the crux of the question though, which is simply "if the parent completes a gift to the child & files a gift tax return, but something ends up bringing it back into the estate at death, how do you account for the previously filed gift tax return when filing the new one, with the newer/higher value?).
