The U.S. Tax Court ruled that writing a gift check prior to death is not sufficient to exclude the gift amount from an estate. Rather, the checks must be paid prior to the decedent’s death in order for the amounts to be excluded from the estate.

The ruling stemmed from a case involving William Demuth, who appointed his son Donald Demuth as his agent through a power of attorney (POA). Donald was authorized to give gifts to family members that didn’t exceed the annual exclusion from the federal tax gift.

On September 6, 2015, Donald wrote 11 gift checks, totaling $464,000, from William’s investment account. William died on September 11. Of the 11 gift checks, only one was cashed before William’s death. Three of the checks were deposited on September 11, but were not paid until September 14.

Donald, acting as the estate’s executor, reported the value of the investment account at $442,639, which excluded the value of all 11 gift checks. In 2019, the IRS determined that the investment account, and by extension the gross estate, was understated by the value of the 10 checks not paid out until after William’s death. The understatement totaled $436,000.

In its opinion, the U.S. Tax Court wrote that Treasury regulations provide “that a gift is not considered complete until a donor has ‘parted with dominion and control as to leave him no power to change its disposition.’” To find what constitutes a completed gift, the court turned to Pennsylvania law, which holds that completed gifts are “accompanied by an irrevocable delivery.”

In this case, the investment account did not accept, certify or make final payment of any of the 10 checks until after William had died. Because of this, “a stop-payment order could have theoretically been placed on any of those checks before final payment.” As such, none of the 10 checks represented completed gifts.

Source: “Estate of Demuth v. Commissioner of Internal Revenue,” T.C. Memo 2022-72, U.S. Tax Court.

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