A new case out of Tax Court centers on the question of when a “deathbed gift” is complete for federal estate and gift tax purposes. Clients make gifts to reduce the federal estate tax, or reduce it to a manageable size, especially as we draw closer to 2026 when the estate tax exemption will be a far lower number.
The two tax law provisions affecting this are described in the article “Tax Court Says When Deathbed Gifts Are Complete” from accounting WEB:
Annual gift tax exclusion. A taxpayer may give gifts to recipients under the annual gift tax exclusion without incurring any federal gift taxes. The exclusion, indexed for inflation in $1,000 increments, is $16,000 per recipient in 2022. It’s doubled to $32,000 for joint gifts made by a married couple. Estates can be reduced with planned use of the annual gift tax exclusion. For instance, if a taxpayer and a spouse give the maximum $16,000 to five relatives for five years in a row, they will have transferred $800,000 ($32,000 x 5 x 5) out of their estate, free of taxes. This is enhanced when you make gifts of different assets that can be discounted in value.
Now, every time I write an article about gifting, I always temper it. You’ll noticed from the next paragraph that the estate tax doesn’t apply to too many people, and so may not be advantageous. It is also true that assets not in your estate at your death do not receive a step up in basis. This applies to things like stock, real estate and many other non-cash items, which means gifting may ultimately increase the total tax to beneficiaries instead of reducing it. So, it is worth discussing this with a professional before starting a gifting campaign. See our website for a much broader approach to estate tax planning. https://galligan-law.com/practice-areas/estate-tax-planning/
Unified estate and gift tax exemption. In addition to the annual gift exemption, gifts may be sheltered from tax by the unified estate and gift tax exemption. As of this writing, the exemption is $10 million, indexed for inflation, which brings it to $12.06 million in 2022. It is scheduled to drop to $5 million, plus inflation indexing, in 2026.
Using the exemption during the taxpayer’s lifetime reduces the available estate shelter upon death. These two provisions give even very wealthy taxpayers a great deal of flexibility regarding liquid assets.
In the new case, Estate of DeMuth v. Comm’r, TC Memo 2022-72, 7/12/22, the agent under a power of attorney for a Pennsylvania resident made gifts of the annual gift tax exclusion on an annual basis from 2007 to 2014 to his siblings and other family members, in accordance with the POA.
The father’s health began to fail in 2015 and he passed away on September 11. On September 6, five days before he died, the son wrote eleven checks, totaling $464,000 from the father’s investment account.
Some recipients deposited the checks before the decedent’s death, but others did not. Only one check was paid by the investment account before the decedent’s death.
The question before the Tax Court: are the gifts complete and removed from the decedent’s estate?
According to the IRS, any checks deposited before death should be excluded from the taxable estate, but the Tax Court looked to the state’s law to determine the outcome of the other checks. The Tax Court ruled the checks not deposited in time must be included in the decedent’s taxable estate.
As a fun aside for our Pennsylvania friends, Pennsylvania also has inheritance tax, which attaches to transfers made within a year of death with a $3,000 exemption per recipient. So, the estate would still have to pay inheritance tax on the completed transfers, although the inheritance tax rates are nothing compared to the federal estate tax rates.
The estate planning lesson to be learned? Timing matters. If checks are written as part of the plan to minimize taxes, they must be deposited promptly to ensure they will be considered as gifts and reduce the taxable estate. In all cases, it is better to have, and execute, a plan of action before trying to resolve taxes on your deathbed.
Reference: accounting WEB (Aug. 26,2022) “Tax Court Says When Deathbed Gifts Are Complete”