A recent opinion from the 3rd Circuit U.S. Court of Appeals confirmed what should be settled law: deathbed gifts made by personal check delivered before death but deposited after death remain part of the donor’s taxable estate and thus subject to estate tax. A lot of taxes, legal fees, and headache would have been avoided if the gifts had been made by bank check or wire.
In DeMuth v. Commissioner, a donor’s Agent under Durable Power of Attorney signed and delivered seven checks to family members on September 6, 2015. The checks appear to total approximately $330,000. Just five days later, on September 11, 2015, the donor, who had been diagnosed with an end-stage medical condition, died. All of the checks, which were not deposited until after death, were excluded from being reported on the estate tax return. Upon audit, the IRS determined that the entire $330,000 represented by the gift checks should have been included in the estate. The Tax Court agreed, and the estate appealed to the 3rd Circuit U.S. Court of Appeals. The IRS prevailed there, as well, successfully arguing that, at the moment of death, the decedent had the ability to stop payment on the checks and consequently, the gifts were incomplete. As a result, the entire $330,000 was included in the estate, thus increasing the estate tax by more than $130,000.
The estate tried to argue that the gifts were complete under a doctrine recognized by Pennsylvania (the decedent’s home state) known as a gift made in contemplation of death. A gift qualifies as being made in contemplation of death if (1) the donor believes he is about to die and (2) the gift is revocable if the donor survives. A gift by check made in contemplation of death is deemed to be complete when the check is delivered to the recipient, not when the recipient deposits the check.
Critical to the doctrine of gift made in contemplation of death is the donor’s subjective belief. In DeMuth, even though the decedent had been diagnosed with an end-stage medical condition just days before making the gifts, the Court rejected the argument that the gifts were made in contemplation of death because there was no evidence that the donor had a belief he was about to die. Apparently, the decedent’s condition had deteriorated to the point that he could not express his state of mind when the gifts were made. There was no evidence of the donor’s belief at the time the checks were signed and delivered, only what the Agent under Power of Attorney believed.
To ensure that a deathbed gift by check is excluded from the taxable estate, the gift should be made by bank check, not a personal check or a certified check, or by wire. A bank check represents funds already withdrawn from the donor’s personal account, regardless of when the check is delivered to the recipient. In DeMuth, the failure to make the gifts via bank check (or by wire) caused an increase in the estate tax of more than $130,000, plus legal and court fees incurred to litigate this losing argument, as well as nearly eight years of dealing with the IRS and the Courts. The opinion is located here.
