Tag: Completed Gifts

Estate of Newman v. Commissioner, 111 T.C. 81 (1998): When Unpaid Checks Do Not Constitute Completed Gifts for Estate Tax Purposes

Estate of Sarah H. Newman, Deceased, Mark M. Newman, Co-Executor and Minna N. Nathanson, Co-Executor v. Commissioner of Internal Revenue, 111 T. C. 81 (1998)

Checks written before but paid after a donor’s death are not considered completed gifts and must be included in the donor’s gross estate for estate tax purposes.

Summary

Before her death, Sarah Newman’s son, acting under power of attorney, wrote checks from her account to family members. These checks, intended as gifts, were not cashed until after Newman’s death. The court ruled that because the checks were not accepted by the bank before Newman’s death, they did not constitute completed gifts. Thus, the funds remained part of her estate for tax purposes. The decision hinged on the principle that a gift is not complete until the donor relinquishes control, and checks do not transfer control until accepted by the bank. This ruling distinguishes between charitable and noncharitable gifts in terms of the “relation-back doctrine,” impacting how estate planners must consider the timing of gift checks.

Facts

Sarah H. Newman appointed her son, Mark, as her attorney-in-fact. Before her death on September 28, 1992, Mark wrote six checks from Newman’s checking account, payable to family members and others, totaling $95,000. These checks were dated and delivered before Newman’s death but were not accepted or paid by the bank until after her death. Newman’s estate argued these checks represented completed gifts and should not be included in her gross estate for tax purposes.

Procedural History

The estate filed a tax return excluding the funds represented by the checks from Newman’s gross estate. The Commissioner of Internal Revenue challenged this, asserting the checks were not completed gifts and should be included. The case was brought before the United States Tax Court, which had to determine if the funds were part of Newman’s gross estate.

Issue(s)

1. Whether the checks drawn on Newman’s account before her death but paid after her death constitute completed gifts, thus not includable in her gross estate?
2. Whether the “relation-back doctrine” applies to noncharitable gifts made by check, which were paid after the donor’s death?

Holding

1. No, because the checks were not accepted or paid by the bank before Newman’s death, she retained dominion and control over the funds, and thus the gifts were not complete.
2. No, because the “relation-back doctrine” does not apply to noncharitable gifts when the donor dies before the checks are paid, as established in prior cases like Estate of Gagliardi and McCarthy v. United States.

Court’s Reasoning

The court applied the legal principle that a gift is not complete until the donor relinquishes control over the property. Under D. C. law, a check is considered conditional payment until accepted by the bank. The court relied on Estate of Metzger, which clarified that a check remains revocable until accepted by the drawee bank. Newman retained the ability to stop payment on the checks, even if practically she might not have been able to exercise this power. The court distinguished this case from those involving charitable contributions where the “relation-back doctrine” might apply, citing Estate of Gagliardi and McCarthy v. United States, where the doctrine was not extended to noncharitable gifts paid after the donor’s death. The court’s decision was influenced by policy considerations to prevent estate tax avoidance, as noted in McCarthy.

Practical Implications

This ruling has significant implications for estate planning and tax law. Estate planners must now ensure that gifts by check are cashed or accepted by the bank before the donor’s death to be considered completed and excluded from the gross estate. The decision underscores the difference in treatment between charitable and noncharitable gifts regarding the timing of payment. Practitioners should advise clients that any noncharitable gift checks outstanding at the time of death will be included in the gross estate, potentially affecting estate tax liabilities. This case also reaffirms the principle that mere possession of the power to revoke a gift is controlling, not the practical ability to exercise it. Subsequent cases have continued to apply this ruling, reinforcing its impact on estate tax planning strategies.

July 28, 1998
Estate of Gagliardi v. Commissioner, 91 T.C. 1243 (1988): Determining the Completeness of Gifts for Estate Tax Purposes

Estate of Gagliardi v. Commissioner, 91 T. C. 1243 (1988)

For estate tax purposes, gifts are only excluded from the gross estate if they are complete under state law at the time of the decedent’s death.

Summary

In Estate of Gagliardi, the Tax Court addressed whether certain gifts made by checks drawn on the decedent’s bank and brokerage accounts should be excluded from the gross estate. The court held that gifts are only excluded if they are complete under state law at the time of death. Checks cashed before death were excluded, but those cashed after death were included in the estate. The court also ruled that gifts made via a brokerage account were only excluded if the instructions to the broker were sufficiently specific and the checks were issued before death. This case underscores the importance of ensuring gifts are completed before death to avoid estate tax inclusion.

Facts

Joseph M. Gagliardi died in February 1982. Before his death, he granted his son Richard a power of attorney to manage his assets. Richard wrote checks from Gagliardi’s bank account to family members on February 4, 1982. Some were cashed before Gagliardi’s death, while others were cashed after. Gagliardi also instructed his broker, Bache, to sell securities and issue checks to family members and their spouses. Some checks were issued before his death, while others were issued after.

Procedural History

The Estate of Gagliardi filed a Federal estate tax return and subsequently filed a revised return. The IRS determined a deficiency, leading to the case being heard by the U. S. Tax Court. The court considered whether the funds represented by the checks should be included in Gagliardi’s gross estate.

Issue(s)

1. Whether funds represented by checks drawn on decedent’s bank account before death but cashed after death are includable in the gross estate.
2. Whether funds represented by checks issued by a broker before and after decedent’s death, pursuant to decedent’s instructions, are includable in the gross estate.

Holding

1. Yes, because under Pennsylvania law, the funds represented by the checks still belonged to the decedent at the time of death.
2. Yes for checks issued after death, because the broker’s authority terminated upon death; No for checks issued before death, because the decedent relinquished all interest in the funds when the checks were issued.

Court’s Reasoning

The court applied Pennsylvania law to determine whether the gifts were complete at the time of death. For the bank account checks, the court followed IRS regulations and state law, ruling that checks cashed before death were excluded from the estate, while those cashed after were included. The court distinguished charitable gifts, which can relate back to the date of the check, from noncharitable gifts, which do not. For the brokerage account, the court found that the gifts were only complete if the instructions to the broker were sufficiently specific and the checks were issued before death. The court emphasized that the broker was acting as the decedent’s agent, whose authority terminated at death. The court quoted from the regulation: “The amount of cash belonging to the decedent at the date of his death, whether in his possession or in the possession of another, or deposited with a bank, is included in the decedent’s gross estate. “

Practical Implications

This decision clarifies that for estate tax purposes, gifts must be complete under state law at the time of death to be excluded from the gross estate. Practitioners should ensure that gifts are completed before death, with clear instructions and delivery of assets. The case highlights the importance of understanding the agency relationship between the decedent and third parties like brokers. It also underscores the distinction between charitable and noncharitable gifts for tax purposes. Later cases have followed this ruling, emphasizing the need for completed gifts to avoid estate tax inclusion.

December 28, 1987
Wilson v. Comm’r, 56 T.C. 579 (1971): Determining Completed Gifts and Estate Tax Inclusions for Joint Bank Accounts

Wilson v. Comm’r, 56 T. C. 579 (1971)

A transfer is not a completed gift for estate tax purposes if the donor retains the power to withdraw the transferred funds.

Summary

In Wilson v. Comm’r, the U. S. Tax Court determined that funds in joint bank accounts and certificates of deposit, where the decedent retained withdrawal rights, were includable in the decedent’s estate under IRC sections 2040 and 2033. The court found that no completed gifts were made because the decedent retained control over the funds. Additionally, the court held that a withdrawal by the decedent’s daughter from one account was not in contemplation of death, thus not subject to estate tax under IRC section 2035. This case clarifies that for a gift to be complete, the donor must relinquish dominion and control over the asset.

Facts

Stella M. Wilson established several joint savings accounts and certificates of deposit with her adult children, Beulah Zurcher and Harley Wilson, between July 1963 and January 1965. She added their names to the accounts but retained her name on them, allowing both parties the right to withdraw funds. She told her children they could use the money but made no withdrawals herself. Beulah withdrew funds from one account on February 2, 1965, ten days before Stella’s death. Stella had not filed gift tax returns for these transfers until after her death.

Procedural History

The Commissioner of Internal Revenue determined deficiencies in Stella’s estate tax, asserting that the funds in the joint accounts and certificates were includable in her estate. The petitioners, as transferees, challenged these determinations. The Tax Court reviewed the case and issued its opinion on June 21, 1971, ruling on the issues related to the inclusion of the accounts in the estate and the contemplation of death transfer.

Issue(s)

1. Whether Stella M. Wilson had a contract right to collect accrued interest from her grandson at the time of her death.
2. Whether Stella M. Wilson made completed gifts to her children of the funds in joint bank accounts and certificates of deposit.
3. Whether the transfer of funds from one savings account to Beulah Zurcher was made in contemplation of death.

Holding

1. No, because Stella had waived her right to interest and her grandson did not owe it at her death.
2. No, because Stella retained the power to withdraw the funds, indicating the gifts were not complete.
3. No, because the transfer was not prompted by the thought of death when the joint account was established in 1963.

Court’s Reasoning

The court applied IRC section 2040, which includes in the estate the value of property held in joint tenancy or in joint bank accounts payable to either party or the survivor. Since Stella retained her name on the accounts and the power to withdraw funds, the transfers were not complete gifts. The court also considered IRC section 2033, which includes in the estate all property in which the decedent had an interest at death. The court found no evidence that Stella intended to make completed gifts when she added her children’s names to the accounts, as she retained control over the funds. For the contemplation of death issue, the court examined Stella’s motives at the time of the account creation in 1963, finding no association with death. The court cited Estate Tax Regulation 20. 2035-1(c) to clarify that a transfer is in contemplation of death if prompted by thoughts of death, which was not the case here.

Practical Implications

This decision underscores the importance of relinquishing control over assets for a gift to be considered complete for estate tax purposes. Attorneys should advise clients to ensure that, if they intend to make a gift, they fully divest themselves of control over the asset. The ruling also highlights that estate tax planning involving joint accounts must consider the donor’s retained rights. Practitioners should be cautious when advising on gifts made close to death, as they may be scrutinized under IRC section 2035. The case has been influential in subsequent rulings involving joint accounts and the completeness of gifts, reinforcing the need for clear intent and action in estate planning.

June 21, 1971