Lizzie filed a gift tax return for a sizable transfer to her nephew. The value of the gift exceeded the annual gift tax exclusion and used up $1 million of her transfer tax exemption equivalent, so Lizzie’s later gifts and taxable estate would have a more likely chance of being taxed.

Four years later, another relative won a court case against Lizzie and the nephew. Uncle Joe prevailed in showing the court that the gift property was his, not Lizzie’s. It seems that title to the property actually was held by Uncle Joe, not Lizzie, so the property was not hers to give away. Uncle Joe recovered the property and associated income from the nephew. But what about Lizzie?

Is the $1 million of her exemption equivalent now wasted?