Wait a minute! I thought giving gifts was a great estate planning tool. Conventional wisdom has always said that gifts reduce the size of an estate and therefore, the amount of estate taxes that may be due.
Well, surprise! There is a tiny section of the U.S. tax code that says otherwise and it’s been tested and upheld in court, Estate of William E. DeMuth Jr. v. Commissioner, No. 22-3032, 3rd Circuit.
In this case, a man signed a power of attorney appointing his son as agent. Over the next seven years, the Power of Attorney made annual year-end gifts from the father to family members.
In September of the eighth year, after the father was diagnosed as terminally ill, the son wrote eleven checks from the father to family members totaling almost $500,000. Some checks were mailed. Others were hand-delivered.
Less than a week after the checks were written, the father died. At the time of his passing, ten of the eleven checks were uncashed. The IRS ruled that the value of the ten checks should be included in the estate and they were subject to estate taxes. The Tax Court, and later a federal Appeals Court agreed.
The courts interpreted the tax code this way: When a gift is made by check, the gift is not complete when the beneficiary receives or takes possession of it because the donor can revoke or stop payment on the check until it has been deposited or cashed. That’s why the gift isn’t complete until the check has cleared the bank.
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