Articles

Cash Year-end and Deathbed Checks Quickly

A recent case illustrates the importance of cashing year-end and deathbed checks quickly. As the year-end approaches, this is a timely issue to consider in your own estate planning that involves lifetime gifts.

Year-end Gifts. On 12/29/89, the decedent wrote checks in the amount of $9,950 to each of her two children. Those checks did not clear the decedent's bank until 1/3/90. She also gave each of her two children checks for $9,990 on 1/5/90 which cleared on 1/30/90.

The estate treated each of the children as receiving less than $10,000 per year ($9,950 in 1989, and $9,990 in 1990), so the annual gift tax exclusion of $10,000 prevented the checks from counting as taxable gifts. The IRS, however, claimed that all gifts occurred in 1990 due to the fact that the checks written in 1989 did not clear until 1990. The IRS argued that the amount in excess of $10,000 per child counted as a taxable gift, thus increasing the amount of taxes owed.

The question was whether the 1989 checks counted as completed gifts in 1989. Looking at state law (in this case New York), the Court said that checks do not constitute a transfer and delivery of funds until presented at the bank and paid. Prior to payment, the funds remained subject to the donor's control (e.g., the donor can stop payment on a check).

A doctrine referred to as the "relation back doctrine" provides that payment of a check is deemed to occur when the check is presented for deposit at the donee's bank. The IRS has held that delivery of a check is completed on the earlier of:

1. The date the donor can no longer change its disposition under local law.

2. The date the donee deposits or cashes the check, or presents the check for payment.

The second option only applies if:

I. The check was paid by the bank on which it was drawn when first presented to it for payment.
II. The donor was alive when the check was paid by that bank.
III. The donor intended to make a gift.
IV. Delivery of the check was unconditional.
V. The check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a
VI. reasonable time of issuance.

The children claimed they deposited their checks the same day they were written (12/29/89), even though they did not clear until 1/3/90. Because the IRS claimed the checks were not deposited until 1990 there was a factual dispute that precluded the Court from deciding the case on summary judgment.

Deathbed Gifts

The decedent in this same case also issued 43 other checks to family and friends that did not clear until after her death. Because they did not clear until after her death, the relation back doctrine could not be applied. Thus, none of these gifts were considered completed gifts during her lifetime and did not qualify for the annual gift tax exclusion. Instead, they must be included in her taxable estate.

Summary

Developing an annual gift giving program, as well as making deathbed gifts, can be wonderful tax planning that may help preserve more of a family's wealth if done correctly. This case shows the importance of cashing gift checks quickly. Depending on the amount of the gifts, failure to do so could cost thousands of dollars in additional tax.v §