By Gene M. Carlino

November 30, 2023

One never knows what corner the grim reaper lies behind. A final illness can often accelerate quickly and deprive a donor of adequate time to complete gifts for tax purposes that he intended to make.

In a recent federal court case, the Third Circuit Court of Appeals (Estate of DeMuth v. Commissioner, 3d Cir. July 12, 2023) affirmed a Tax Court ruling disallowing completed gift status for seven checks drawn and distributed to the gift recipients prior to death but not deposited by the recipients until after the actual date of the donor’s death. The Estate attempted to argue that completed gifts status was obtained when the checks were delivered to the recipients. The IRS argued, and the Court agreed, that the donor retained dominion and control over the gifts at the time of his death because he could have instructed his bank to issue a stop payment and regained control of the money.

What makes this case more frustrating for the estate was that the donor was incapacitated and physically not able to do this. But, because in theory he could have done so, the gifts were held to be incomplete.  The Court noted that although federal estate and gift taxes are governed by federal law, state law is used to determine when property interests effectively transfer. The relevant state law in this case, like the law in many states, provided that unless the check was issued in exchange for property or services rendered (which is never the case with a gift), there would be no repercussions to the donor if he instructed his bank to dishonor the checks.  Some states do recognize a legal theory known as gifts causa mortis, or gifts made in contemplation of death.  This theory requires proof of the donor’s subjective intent at the time of the gift and that he knew his death was impending and intended the gift to provide for the donee because of his impending death. However, proving subjective intent is often very difficult because it requires proof of what a person was actually thinking at the time of the gift. 

As result of decisions like this, the estate lost the benefit of the gift tax annual exclusion, which today is $17,000 per each gift recipient, and the gifts were pulled back into the decedent’s gross estate where they were subject to federal estate tax.  Interestingly, in this case the gifts were made by the donor’s agent under a durable power of attorney document. If the agent had the checks certified and delivered to the donees or transferred the funds electronically, the result may have been different, as under state law, it may have been too late to stop payment on the checks. The moral of the story is: time is precious. Donors shouldn’t wait to make that final gift and donees shouldn’t delay acquiring the funds. Have a question? Don’t hesitate to contact Attorney Carlino at 401-824-5100 or gmcarlino@pldolaw.com.

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