Deathbed gift checks

William DeMuth executed a power of attorney appointing his son, Donald as his agent in 2007. From that year through 2014, Donald gifted annually to his brothers and other family members relying upon the annual gift tax exclusion to avoid federal gift taxes. In the summer of 2015, as William’s health began to fail, Donald wrote an additional 11 checks for an aggregate of $464,000 from his father’s brokerage account. (Some checks were for more than one person, so all came within the annual gift tax exclusion.) Four of the donees deposited their gift checks before William died in September 2015, but only one check had been paid by the drawee bank by the date of death.

The estate tax return for William did not include the value of the gift checks, which the IRS spotted upon audit. The Service argued the ten checks that had not cleared before Mr. DeMuth’s death were includible in his estate. However, in its opening brief, the IRS conceded that four checks had been “credited by drawee banks”.

The Tax Court holds that under state law (Pennsylvania), a gift of a check is not complete until it is no longer possible to issue a stop payment order. The Court noted that both the IRS and the taxpayer seemed to confuse the idea of a “depository bank” which accepts the check deposit and the “drawee bank” which pays the funds. Under these facts, only the check that cleared should be excluded from the taxable estate.

However, that early concession made by the IRS, even though it was erroneous, may not be withdrawn. All four of those checks avoid the estate tax, while the other seven will be taxed.

The lesson for others is that when making gifts before death, deposit the checks promptly and allow plenty of time for the checks to clear.

(January 2023)

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