In an ideal world, we would all die amongst our loved ones with well-formed estate plans in place and all of our finances squarely in order. Unfortunately, the reality is that the end often approaches faster than we hope or expect, and in the absence of well-founded plans people scramble to make gifts as they realize the end is near. A “death bed gift” can be beneficial for any number of reasons, but in order to achieve its desired effect a gift must be completed prior to the decedent’s death. A recent federal court of appeals decision shows that determining when a gift is completed is not always as straightforward as it seems.
Estate of DeMuth v. Commissioner
In a recent unpublished opinion, the Third Circuit Court of Appeals affirmed a 2022 Tax Court decision holding that checks issued prior to the decedent’s death, but not cashed until after the decedent’s death were incomplete gifts required to be included in the decedent’s estate. Estate of DeMuth v. Commissioner, 2023 WL 4486739 (3rd Cir. July 12, 2023), aff’g T.C. Memo. 2022-72 (July 12, 2022).
In Estate of DeMuth, five days before the decedent, William DeMuth, died, William’s son, as William’s agent, wrote out 11 checks totaling $464,000 to family members and mailed or personally delivered the checks to those family members. Only one of the 11 checks was deposited by the recipient and cleared William’s account prior to his death. Three others were deposited on the date of William’s death, but did not clear his account until after his death. The remaining seven checks were not deposited by the recipients until after William’s death.
William’s estate took the position that all 11 checks were completed as of the date they were mailed or delivered to each recipient, and excluded $464,000 on the estate’s federal estate tax return. The IRS disagreed, and issued a deficiency notice, taking the position that the 10 checks which had not cleared William’s account as of the date of his death were incomplete gifts and therefore subject to estate tax. (The IRS agreed to exclude the three checks that were cashed on the date of William’s death prior to trial).
The estate appealed the IRS decision to the Tax Court (TC Memo 2022-72). The Tax Court ruled that a gift is not complete when a check is delivered to a donee, because the donor has not “parted with dominion and control” over the check. In the Tax Court’s view, the donor only parts with dominion and control when the account on which the check is drawn pays the check. Thus, the Tax Court ruled that the seven checks that were not deposited or paid from William’s account prior to his death were subject to estate tax at his death.
The Third Circuit agreed that all seven checks deposited and paid after William’s death were part of his taxable estate since William could have revoked them prior to his death (until the checks were deposited or cashed). The estate also argued that the gifts were completed gifts “causa mortis” (in anticipation of death). Depending on applicable state law, the requirements to complete a gift causa mortis are generally relaxed, and a gift causa mortis can be revoked by the donor if he or she survives his or her anticipated death. Under Pennsylvania law checks delivered prior to a decedent’s death, but not paid until after, are considered completed gifts if made causa mortis. Ultimately the Third Circuit rejected the estate’s causa mortis argument because the estate failed to provide sufficient that the decedent actually believed he was about to die. However, in doing so, it implied that the result may have been different if the estate had presented additional evidence.
Similar to Pennsylvania, Washington state distinguishes between ordinary lifetime gifts and gifts causa mortis. Unlike Pennsylvania, there is no Washington case law that expressly holds that checks delivered prior to a decedent’s death, but not paid until after are completed gifts if made causa mortis. Thus, while it may be possible to make a causa mortis argument under Washington law under similar circumstances, the safest approach is certainly to ensure that checks are cashed prior to the death of the donor.
The DeMuth family could have avoided a significant tax liability and years of litigation by making the gifts via instantaneous wire transactions rather than checks sent in the mail. Washington state residents can learn from their mistake and misfortune. When making or receiving gifts, a donor and the donee(s) should both carefully consider what needs to occur to make the gift completely irrevocable. If you receive a gift via a check, the prudent approach is to cash it as soon as possible.
If you would like assistance with preparing estate planning documents, or require guidance regarding gift or estate tax issues, please reach out to Matt Hart, Ryan Montgomery, or any of the estate planning attorneys at Montgomery Purdue.