When are Pre-death Gifts Out of the Estate?

When are Pre-death Gifts Out of the Estate?

When confronted with imminent death, from cancer or other cause, a person may decide to give money or other assets to favored family members in order to get those assets out of the giver’s estate. If the giver has a substantial estate, this could save estate taxes and assure that the gift recipients get the full value of those assets without loss to taxes.

However, with gifting as with many things, timing is everything and how the gift is made is important. A July 12, 2022 U.S. Tax Court opinion addressed whether certain gifts made by checks shortly before death were effective to remove those funds from the giver’s estate. Under the facts presented, the answer was no.

In the summer of 2015, William DeMuth, Jr.’s health began to fail. By early September of that year, he was in an end-stage medical condition, and he passed away on September 11. Among William’s financial assets was an investment account at Mighty Oak Strong America Investment Co. (Mighty Oak) that featured a checking function. On September 6, prior to decedent’s death, Donald DeMuth (who had William’s durable power of attorney) wrote eleven checks, totaling
$464,000, from William’s investment account. The checks are consecutively numbered 1214 through 1224.

Of these eleven checks, however, only check No. 1216 was paid by Mighty Oak before William’s passing. While checks Nos. 1215, 1219, and 1221 were deposited by the respective payees on September 11, seemingly before William’s death, those checks were not paid by Mighty Oak until September 14 – three days after he passed away. Thus, ten of the eleven checks (totaling $436,000) were not paid by Mighty Oak until after William’s death.

Donald DeMuth, as executor of William’s estate, filed a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, in which he reported that the value of the Mighty Oak investment account was $442,639, which excluded the value of all eleven checks he wrote (on decedent’s behalf) on September 6, 2015. The return was selected for examination and audit.

The Tax Court stated the governing rule from the Internal Revenue Code: “Section 2033 provides: “The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.” Treasury Regulation § 20.2031-5 further specifies that the “amount of cash belonging to the decedent at the date of his death, whether in his possession or in the possession of another, or deposited with a bank, is included in the decedent’s gross estate.” To that end, the value of any check written by a decedent that still belongs to them at their death is includible in their gross estate; however, the funds from such a check no longer belong to a decedent at their death if they executed a completed gift of the check during their life. As such, we must determine whether the checks at issue represent completed gifts.”

The court found that Pennsylvania law allows the drawer of a check to “stop payment of any item drawn on [their] account or close the account by an order to the bank describing the item or account with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on it.” Thus, so long as the drawer of a check can make a stop-payment order on that check, the delivery of the check is revocable. Although the drawer of a check may very well have the intention to invest the payee with the right of disposition beyond recall, if that intention is not coupled with an irrevocable delivery, the drawer has not surrendered dominion and the gift is incomplete under Pennsylvania law. Since Donald could have stopped payment on any of the checks in issue, the Tax Court found that those funds were still in the estate of William at his death and, thus, were taxable.

Estate of DeMuth v. Commissioner of Internal Revenue, T.C. Memo. 2022-72, Docket No. 18724-19 (U.S. Tax Ct. 2022)