written on behalf of Feigenbaum Law
Our blogs sometimes cover cases of estate litigation where family or loved ones of a deceased individual contest that an estate has not been properly distributed or insist that they should have received more from the estate than what they ultimately were given. In today’s blog we want to look at a different area of estate litigation. In a recent opinion from the United States Tax Court, the court was asked to determine whether uncashed cheques written on behalf of the deceased are includible in the estate for tax purposes.
Deceased writes cheques to family members days before passing
The deceased was an elderly man with a family. He died on September 11, 2015 and named his son (“DD”) as executor of his estate. When the deceased began to experience a decline in health, he executed a power of attorney, appointing DD as his agent. He then authorized DD to give gifts to the deceased’s family, with the only stipulation being that the gifts must not exceed the annual exclusion from the federal gift tax. Between 2007 and 2015 DD wrote these cheques as requested.
By early September 2015 the deceased’s health began to fail. On September 6, DD wrote eleven cheques to various family members totaling $464,000, all of which were to be drawn from a chequing account belonging to the deceased. Just five days later, on September 11, 2015, the deceased passed away. At that time, only one of the cheques had been paid out by the bank. Three others had been deposited by their respective payees but had not yet been paid out by the bank. Those three cheques were ultimately paid on September 14. The largest of these cheques, which was in the amount of $240,000, had not been deposited.
Executor deducts value of cheques when filing tax for the estate
As the executor of the estate, DD reported on the value of the deceased’s estate, including the bank account the cheques were written from. He deducted the value of the cheques from the report and indicated it contained $442,639.
The IRS issued a notice of deficiency, which determined that the value of the account as it had been reported was inaccurate. In lieu of what was reported, the account should have contained an additional $436,000, which is the value of all the cheques except for the one that had been cashed. In fact, the largest cheque, valued at $240,000 and making up more than half of the total value of the cheques, was amongst those that had not been cashed.
The laws around the value of an estate stipulate that the value shall include the value of all property, including cash belonging to the deceased at the time of their death if it is in their possession or the possession of their bank at the time of their death.
The court wrote that this calculation must include the value of any cheque written by the deceased but not yet cashed. The only exception to this would be if a cheque is written to complete a gift given during their life.
Can the cheques be considered gifts?
The court stated that Treasury Regulations provide that a gift cannot be considered completed until the person giving it has “parted with dominion and control as to leave [them] no power to change its disposition.” In order to determine this, the court had to look at Pennsylvania law, which states that in order to make an inter vivos gift, there must be a,
“Clear, satisfactory, and unmistakable intention of the giver to part with and surrender dominion over the subject of the gift with an intention to invest the done with the right of disposition beyond recall, accompanied by an irrevocable delivery, actual or constructive.”
When it comes to cheques, individuals who write them are able to stop payment from occurring, which essentially cancels them. This means that until a cheque is deposited or cashed, it is still recoverable. Following this logic, it can be inferred that a cheque cannot be considered a gift until it has been deposited by the person who received it.
There are a series of events that can make it too late to stop payment on a cheque. For instance, the bank paying out the value of the cheque to the person it was given to or certifying the cheque. It may also be too late to stop payment on a cheque once the bank has accepted it, but before the funds have been released.
A stop payment could have applied to the cheques in question
The court determined that in this case the ten remaining cheques had not been accepted, certified, or paid out by the bank until after the deceased passed away. The court said this means a stop payment could have been made on the cheques at that time. As a result, none of the ten cheques in question can be excluded from the value of the estate, including the ones that had been deposited by the people who received them but not yet accepted or paid out by the bank.
However, despite the letter of the law, the court did allow the cheques that were deposited but not yet processed to be excluded from the value of the estate, meaning just the seven remaining were to be included for tax purposes.
Work with the experienced team at Feigenbaum Consulting to properly manage your estate or litigate on your behalf
Feigenbaum Consulting founder Mark Feigenbaum is a deeply knowledgeable and experienced lawyer and tax professional. The firm provides effective estate planning services to help clients avoid the legal and financial risks that can arise in planning for their future. We have extensive experience working with clients who have complex or estates with a significant amount of assets. While the intention of estate planning is to avoid litigation, we also realize that disagreements or tax issues can arise at any point. That why in addition to helping our clients prepare their estates, we also advocate for them when litigation arises. For a confidential consultation on your estate matter, call (905) 695-1269 (toll-free at (877) 275-4792) or reach out online.