In Estate of DeMuth, the United States Court of Appeals for the Third Circuit addressed a dispute arising from the Internal Revenue Service’s (IRS) notice of estate tax deficiency. The primary issue revolved around whether the Estate of William DeMuth properly excluded the value of certain checks from its estate tax return. This case was filed on July 12, 2023, following an appeal from the United States Tax Court.

Facts. 

In 2007, William DeMuth, Jr. (Decedent) executed a power-of-attorney agreement appointing his son, Donald DeMuth, as his agent. Over the years from 2007 to 2014, Donald, in his capacity as the agent, made annual monetary gifts to family members. However, in early September 2015, the Decedent’s health deteriorated significantly, and he was diagnosed with an end-stage medical condition. On September 6, 2015, Donald issued 11 checks totaling $464,000 from his father’s investment account with the Mighty Oak Strong America Investment Company (Mighty Oak) to various family members. The Decedent passed away shortly after on September 11, 2015. Ten of the checks issued by Donald were paid from the Mighty Oak account to the respective payees after the Decedent’s death.

Donald, acting as the executor of the Estate, submitted a Federal Estate Tax Return in December 2016. The return excluded the value of the ten checks from the Estate’s assets. The IRS, however, disagreed and issued a notice of deficiency for Federal Estate Tax, asserting that the value of the checks should have been included. After negotiations, the IRS agreed to exclude three of the checks from the total, reducing the deficiency to $131,774. Nevertheless, the Tax Court determined that the funds represented by the remaining seven checks were part of the Estate of the Decedent because, under Pennsylvania law, these checks were not completed gifts before the Decedent’s demise.

Analysis. 

A Federal Estate Tax is levied on the transfer of the taxable estate of a U.S. citizen or resident upon death, and the taxable estate is defined as the gross estate value minus allowable deductions. The gross estate comprises the value of the decedent’s property and interests in property at the time of death, including cash. However, gifts that have been fully completed, where the donor relinquishes all control over the property, are not included in the gross estate.

The completion of gifts in the form of checks is determined by state law. Under Pennsylvania law, to establish a completed inter vivos gift, there must be a clear intention to make the gift along with actual or constructive delivery sufficient to divest the giver of all control. Furthermore, the courts have ruled that the mere delivery of a check alone does not constitute a completed gift because the donor retains the power to revoke it until it is cashed or deposited.

In this case, the seven checks in question were deposited and paid after the Decedent’s death. The court said that there had been no effective delivery that would have divested the Decedent of control, and thus, the checks were still revocable at the time of his passing. Therefore, the court concluded that the checks were not completed gifts, and their value remained part of the estate.

The Estate attempted to argue that these checks should be considered completed gifts causa mortis because they were given in contemplation of the Decedent’s death. To determine whether a gift was given in causa mortis under Pennsylvania law, one must show that “at the time of the alleged gift, the decedent intended to make a gift, the decedent apprehended death, the res of the intended gift was either actually or constructively delivered, and death actually occurred.” However, the court found no evidence to support the Estate’s claim, as there was no indication that the Decedent had directed Donald to distribute the September 2015 checks in anticipation of his death. Therefore, the court concluded that the value of the seven checks was rightfully included in the gross estate.

Comment. 

In summary, the United States Court of Appeals for the Third Circuit affirmed the Tax Court’s decision, agreeing that the seven checks in question were not completed gifts under Pennsylvania law and should be included in the gross estate for federal estate tax purposes. The court’s decision underscores the importance of state law in determining the completion of gifts and, in this instance, reinforces the principle that checks without effective delivery remain revocable and part of the donor’s estate.

This article first appeared in the Estate Planning Journal.

Frank Baldino is an estates and trusts attorney who helps people throughout the greater Washington, DC area protect assets for their families and future generations through careful estate tax planning. For more information, contact Frank at (301) 657-0175 or fsbaldino@lerchearly.com.