The Problem With Deathbed Giving – Cashing the Check v. Cashier’s Check
By Jeffrey G. Moore
SAALFELD GRIGGS PC
Although some folks say the estate and gift tax seems to be inching its way onto the endangered species list, many others feel that the repeal of the estate and gift tax is no more than election-year politics. Who is right is yet to be determined, but until the repeal materializes into law, we should not lose sight of the laws that are still on the books.
One law that is still on the books, but that often comes as a surprise to the heirs and advisors of a taxable estate, is that the decedent’s deathbed gifts, often made by the decedent’s agent or trustee, did nothing to reduce the taxable estate of the decedent. When death is imminent, a decedent’s agent or trustee might begin whittling down the taxable estate (currently an estate exceeding $675,000 in the year 2000) by gifting the decedent’s $10,000 annual exclusions to donee beneficiaries who would otherwise receive the estate upon the decedent’s death. There is more to this strategy, however, than simply writing, and even cashing, the proverbial deathbed check.
The IRS generally takes the position that if a donor or a donor’s agent makes a gift by check to a noncharitable donee, the gift is not complete until the check is paid, certified, or accepted by the drawee bank, or when the check is negotiated for value to a third party. With respect to a charitable donee, the gift is complete when the check is delivered. In short, the gift to a noncharitable donee is not complete when the check is delivered to the donee. It is complete only when the check clears the drawee bank. The theory behind such a rule is that the donor or even the donor’s agent has the ability, technically, to stop payment on a check until the funds are released from the donor’s account. If the donee does not cash the check until after the decedent’s death, the check amount is clearly includible in the decedent’s estate. This is because the donor or the donor’s agent must lose all “dominion and control” over the gift (i.e., the inability to stop payment) to qualify as a “completed gift,” and in the case of a personal check, several additional requirements must be met.
Once a personal check is delivered and then deposited or cashed, it will be considered a “completed gift” for estate and gift tax purposes only if all of the following requirements are established:
- The check was paid by the drawee bank when first presented to the drawee bank for payment;
- The donor was alive when the check was paid by the drawee bank;
- The donor intended to make a gift;
- Delivery of the check by the donor was unconditional; and
- The check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance. See Rev. Rul. 96-56, 1996-50.
The problem arises not only on deathbed transfers, but also for gifts made over two taxable years and in close proximity of each other. Consider the following scenario:
Donor intended to make annual exclusion gifts of $10,000 each to A and B in 1999 and 2000. Donor wrote two checks in the amount of $10,000 each to A and B on December 31, 1999. On January 1, 2000, Donor wrote two more checks in the same amount. The 1999 checks did not clear until the year 2000. Because the 1999 checks did not clear Donor’s account until year 2000, Donor is deemed to have made a gift of $20,000 to each A and B in the year 2000 as opposed to $10,000 gifts to each over two taxable years. Donor inadvertently burned up $20,000 of his applicable exclusion amount and would now be required to file a 709 Gift Tax return for the year 2000. Two unanticipated results.
The Solutions: There are a couple of solutions to this potential deathbed gift trap.
Cashier’s Check. A cashier’s check is a guaranteed payment upon delivery of the check from the drawee bank. In other words, the donor gives up complete dominion and control of the funds upon delivery of the check. Nevertheless, the donee should cash this check as soon as possible and preferably within the same taxable year as the gift.
Cash Gifts. Instead of issuing a check or draft on the donor’s account, the donor or agent should consider withdrawing the available cash and making the gift in cash. The gift is complete upon delivery.
Cashing the Check. If the other alternatives are not available, the donee should cash the check at the drawee bank immediately upon receipt of the check and within the same taxable year as the gift. This is not the safest method because the posting of the transaction itself on the donor’s account may not be immediate.
In the last several months, we have had estates where tens of thousands of dollars have been included back into the taxable estate because the donee children failed to follow these rules. The moral of the story—don’t sit on that deathbed check!