A new Tax Court case, TC Memo 2022-72, 7/12/22, addresses the question: when are “deathbed gifts” considered to be complete for estate and gift tax purposes?
Background: There are two powerful tax law provisions that can help most taxpayers completely avoid federal estate tax or, at the very least, cut it down to size.
1. Annual gift tax exclusion: You may give gifts to recipients under the annual gift tax exclusion without incurring any gift tax. This exclusion, which is indexed for inflation in $1,000 increments, is $16,000 per recipient in 2022 (up from $15,000 per recipient in 2021). The exclusion is doubled to $32,000 per recipient for “joint gifts” made by a married couple.
You can reduce your estate significantly by utilizing the annual gift tax exclusion. For example, if you and your spouse give the maximum $16,000 to five relatives for five years in a row, you will have transferred $800,000 ($32,000 x 5 x 5) out of your estate, free of tax.
2. Unified estate and gift tax exemption: Above and beyond the annual gift tax exclusion, gifts may be sheltered from tax by the unified estate and gift tax exemption. Currently, the exemption is a lofty $10 million, indexed for inflation. ($12.06 million in 2022) It is, however, scheduled to revert to $5 million, plus inflation indexing, in 2026.
Note that using the exemption during your lifetime reduces the available estate shelter upon your death. Nevertheless, these two provisions give most taxpayers, even wealthy individuals, plenty of flexibility regarding liquid assets.
Facts of the new case: The decedent, a resident of Pennsylvania, executed a power of attorney (POA) in 2007, appointing his son as his agent. Pursuant to the POA, the son was authorized to give gifts in amounts not exceeding the annual gift tax exclusion. From 2007 through 2014, the son arranged annual gifts to his brothers and other family members in accordance with the POA.
In the summer of 2015, decedent’s health began to fail. By early September of that year, he was in an end-stage medical condition and he passed away on September 11. On September 6, five days before prior to decedent’s death, the son wrote eleven checks, totaling $464,000, from decedent’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.
Are the gifts complete and removed from the decedent’s taxable estate? The IRS conceded that the checks deposited before death should be excluded from the taxable estate, but the Tax Court looked to Pennsylvania law to determine the outcome of the other checks. After an in-depth analysis, the Court ruled that the checks that weren’t deposited in time must be included in the decedent’s taxable estate.
Moral of the story: Timing is everything. Make sure that your clients act promptly to ensure that gifts from a wealthy individual will be sheltered from estate and gift taxes.