Time is precious, especially when a donor contemplates making deathbed gifts before their ultimate demise. Although the donor’s time to make such gifts is limited, the conflict between the donor’s fiduciaries and the Internal Revenue Service may continue for years. In a ruling released on July 12, 2023, the U.S. Court of Appeals for the Third Circuit affirmed a Tax Court ruling that certain deathbed gifts made by separate checks nearly eight years earlier are includible in the decedent’s gross estate (Estate of DeMuth v. Commissioner, No. 22-3032, 2023 WL 4486739 (3d Cir. July 12, 2023))
Gifts by Agent under Power of Attorney
In 2007, William DeMuth, Jr. signed a power-of-attorney agreement appointing his son, Donald, as his agent. Following his appointment, Donald made various annual gifts on behalf of his father to family members between 2007 and 2015. In 2015, William was diagnosed with an end-stage medical condition in early September 2015 and subsequently passed away on Sept. 11, 2015. Just five days earlier, Donald wrote out 11 checks to various family members totaling $464,000. Ten of the checks weren’t paid from the decedent’s account until after his date of death.
Prior to the Tax Court decision in the matter, the IRS consented to exclude three of the 10 checks from the decedent’s gross estate but maintained that the remaining seven should be included. The Tax Court held for the IRS, and the estate appealed to the Third Circuit, contending the seven checks delivered prior to the decedent’s death, but deposited and paid after his death, should be considered completed inter vivos gifts (and thus excluded from the decedent’s gross estate).
State Law’s Impact on Federal Taxation
For federal estate tax purposes, 26 USC Sections 2031(a) and 2033 provide that the gross estate consists of the value of the decedent’s property and interests in property at the time of the decedent’s death. In the case of gifts of the decedent’s property before death, under Treasury Regulations Section 25.2511-2(b), such property isn’t included in the gross estate if the donor has “parted with dominion and control as to leave him no power to change its disposition.”
But federal law doesn’t dictate the rules of property law. Ultimately state law (in this case, Pennsylvania law) controls whether a donor has been divested of all dominion and control of the property as to make the gift “complete” – otherwise an incomplete gift will be subject to the federal estate tax on the donor’s death.
Under Pennsylvania law, an inter vivos gift is a gift given with the intention of being completed while the donor is living. For a gift to be complete, there must be both an intent to make a gift and a contemporaneous delivery of the property (actual or constructive) of a nature sufficient to divest the giver of all dominion over the property. (Titusville Tr. Co. v. Johnson, 100 A.2d 93, 96 (Pa. 1953)).
When it comes to a gift in the form of a check, the Pennsylvania law is clear that the drawer of a check is permitted to stop payment on the check until the earliest of the drawer’s bank accepting, certifying or making final payment of the check. (See 13 Pa. Cons. Stat. Sections 3409, 4403(a) and 4303(a)). It follows, therefore, that the delivery of a check alone can’t create a completed gift as the donor may revoke the gift up until the time the check is deposited or cashed.
One quirk of Pennsylvania law reviewed by the Third Circuit is the concept of a gift “causa mortis.” Common law dictates that a gift may be deemed complete if the donor of a gift believes their death is impending, and the gifts are made as a provision for the done if death ensures. To determine whether a gift was given in causa mortis, one must show that “at the time of the alleged gift, the decedent intended to make a gift, the decedent apprehended death, and the res of the intended gift was either actually or constructively delivered, and death actually occurred.” (Estate of Smith, 694 A.2d 1099 (Pa. 1997)). Pivotal in this determination is the donor’s state of mind, which may be inferred from the extent of the donor’s sickness, illness or injury, physical condition, conduct and anything that was said to and by the donor. Notwithstanding the relevant Commercial Code, Pennsylvania courts have found that when circumstances support a finding of a gift causa mortis, checks delivered before but paid after the decedent’s death are deemed to be completed gifts.
Checks Deposited After the Decedent’s Death
The ruling of the Third Circuit depended largely on the fact that none of the seven checks at issue had been deposited and paid before the death of the donor. As such, the donor couldn’t have been deemed to have parted with dominion and control as to leave him no power to change its disposition before the date of his death. Under Pennsylvania law, the gifts at issue were incomplete.
Notwithstanding this, the estate attempted to argue the concept of causa mortis should apply, stating that Donald made the gifts because of his father’s impending death. The simple fact that the gifts at issue were made in September (as opposed to December when the gifts were historically made on an annual basis) wasn’t enough to show William’s specific, subjective intent to have Donald make the gifts on his behalf before his impending death. Therefore, these gifts couldn’t be characterized as gifts causa mortis, resulting in treating the gifts as “complete” and removing the value of such gifts from William’s gross estate.
Time Is of the Essence
If a practitioner is asked to advise on how to make deathbed transfers in an effort to reduce the gross estate of the donor, the aspect of the gifts being completed before death must be top of mind Not only should there be an effort made to have title to property transfer irrevocably as quickly as possible, but also a practitioner must be aware of any unique state law provisions that, like gifts causa mortis in Pennsylvania, might provide relief should the ownership not effectively pass before death. In DeMuth, the Third Circuit had no choice but to affirm the holding of the Tax Court due to the absence of the proof of the donor’s intent.
In the modern age, there are many options to immediately transfer cash from a donor’s account directly to a donee’s account. All with just a few clicks. Perhaps appeals such as these will be fewer and fewer in the future.