US Court of Appeals: Deathbed checks are included in the estate of the deceased

Time is precious, especially when the giver considers gifts on his deathbed before his eventual passing. Although the time available to the donor to make such gifts is limited, the struggle between the donor’s agents and the Internal Revenue Service can last for years. In a ruling issued on July 12, 2023, the US Court of Appeals for the Third Circuit affirmed a tax court ruling that certain deathbed gifts made by separate check approximately eight years prior could not be included in the total estate of the deceased (Estate of DeMuth v. Commission) , No. 22-3032, 2023 WL 4486739 (3d Cir. July 12, 2023))

Gifts provided by the agent under an official power of attorney

In 2007, William Demuth, Jr. signed a power of attorney agreement appointing his son, Donald, as his agent. After his appointment, Donald gave several annual gifts on behalf of his father to family members between 2007 and 2015. In 2015, William was eventually diagnosed with a medical condition in early September 2015 and subsequently passed away on September 11, 2015. Just five days earlier, Donald had written 11 checks to various family members totaling $464,000. Ten of the checks were not paid from the deceased’s account until after the date of his death.

Prior to the tax court’s decision on this matter, the IRS had agreed to exclude three of the ten checks from the deceased’s estate total but insisted that the remaining seven should be included. The tax court held in favor of the IRS, and the estate appealed to the Third Circuit, holding that the seven checks that were delivered before the deceased’s death, but deposited and paid after his death, should be considered gifts completed between the living (and thus excluded from the deed of the deceased’s total estate).

The effect of state law on federal taxes

For federal estate tax purposes, USC 2031(a) and 2033 Section 26 states that gross estate consists of the value of the decedent’s estate and interests in the property at the time of the decedent’s death. In the case of antemortem gifts of the deceased’s property, under Section 25.2511-2(b) of the Treasury Regulations, such property is not included in the total property if the donor “has relinquished such control and control as to leave him no power to change his position.”

But federal law does not dictate the rules of property law. Ultimately, state law (in this case, Pennsylvania law) governs whether the donor is stripped of all control and control over the property to make the gift “complete”—otherwise, an incomplete gift would be subject to federal estate tax at the donor’s death.

Under Pennsylvania law, a gift between the living is a gift that is given with the intent of being completed while the donor is still alive. For a gift to be complete, there must be an intent to make the gift and a simultaneous delivery of the property (actual or constructive) of a nature sufficient to strip the giver of all control over the property. (Titusville T. v. Johnson, 100a.2d 93, 96 (Penn 1953)).

When it comes to a gift in the form of a check, Pennsylvania law is clear that the drawer of a check is allowed to hold payment on a check until the drawer’s bank accepts, endorses, or makes final payment to it. (See 13 PA Cons Law Sections 3409, 4403(a), and 4303(a)). It follows from this that the delivery of a check alone cannot create a completed gift as the giver may cancel the gift up until the time the check is deposited or cashed.

One feature of Pennsylvania law reviewed by the Third Circuit is the “cause of death” endowment concept. Common law dictates that a gift may be considered complete if the gift-giver believes his death is imminent, and gifts are given as a condition of what was done if death is guaranteed. To determine whether a gift was given because of a cause of death, one must show that “at the time of the alleged gift, the deceased intended to give a gift, the deceased feared death, the value of the intended gift was either actually delivered or constructively and death actually occurred.” (Smith Estate, 694A.2D 1099 (Penn 1997)). Central to this determination is the donor’s state of mind, which can be inferred from the extent of the donor’s illness, illness or injury, physical condition, behaviour, and anything said to and by the donor. Notwithstanding the relevant commercial law, Pennsylvania courts have found that when circumstances support finding a cause-of-death gift, checks that were handed before the decedent’s death but paid after the decedent’s death are considered full gifts.

Checks deposited after the death of the deceased

The Third Circuit’s ruling was based largely on the fact that none of the seven checks involved had been deposited and paid prior to the donor’s death. As such, the donor cannot be deemed to have relinquished dominance and control so as not to leave him any power to change his actions prior to the date of his death. Under Pennsylvania law, the gifts in question were incomplete.

Despite this, the estate attempted to argue that the concept of cause of death should be applied, pointing out that Donald made the gifts because of his father’s impending death. The simple fact that the gifts in question were given in September (compared to December when gifts were historically given on an annual basis) was not enough to show William’s specific and personal intention to have Donald make the gifts on his behalf before he took office. imminent death Therefore, these gifts could not be described as gifts of cause of death, which led to the gifts being treated as “whole” and the value of such gifts removed from William’s total estate.

Time is of the essence

If a practitioner is asked to provide advice on how to conduct deathbed transfers in an effort to reduce the total donor estate, the aspect of gifts completed prior to death should be his first priority. Not only should an effort be made to obtain the title to irrevocably transfer property as quickly as possible, but the practitioner should also be aware of any provisions unique to state law, such as death gifts in Pennsylvania, that might provide relief in the event of Failure to effectively pass ownership prior to death. In DeMuth’s case, the Third Circuit had no choice but to confirm the tax court convened due to the lack of evidence of the donor’s intent.

In modern times, there are many options to transfer cash instantly from the donor account directly to the donor account. All with just a few clicks. Perhaps there will be fewer and fewer such appeals in the future.