House Ways and Means Chairman Bill Archer (R-Texas) has crafted legislation, which he calls the "90-10" Plan, that would set aside 90% of the projected budget surplus to "save" Social Security and use the remaining 10% to cut taxes. The bill, which is expected to clear Ways and Means today and be on the House floor sometime next week as freestanding legislation, would cut taxes by $80 billion over five years.

I know the following is heavy reading but the point is that there is no forgiveness if you do the gifting incorrectly.

The following article was taken from the September issue of Estate Planner's Alert. 9/14/98
Checks to Relatives Weren't Completed Gifts until after Donor's Death.

The tax court has held that gifts made by check to noncharitable beneficiaries were not complete until after the donor's death where the checks weren't presented for payment until after the donor's death. The checks were written on behalf of the decedent by her son who held a power of attorney. (Est of Newman, 111 TC No 3 (1998))

Facts. Sarah Newman died on Sept. 28, '92 when she was a resident of Washington, D.C. Several years earlier, she granted her son, Mark, a written power of attorney. The document conferred a number of specific powers to Mark but made no reference to making gifts.

Mark's name was added to his mother's checking account sometime between Sept. 14, '92 and Oct. 14, '92. Mark drew six checks on this account payable to himself and his wife jointly, his brother, his nieces, and two other individuals. The checks were in the aggregate amount of $95,000. The check to his brother, Paul, was in the amount of $60,000. Mark contended that the check to Paul was to be shared with Paul's children and grandchildren so that each would receive under $10,000. All of the other checks were for $10,000 or less. None of them were accepted or paid by the drawee bank until after Sarah's death.

observation: Mark obviously was trying to use his power of attorney to make annual exclusion gifts to save estate tax on his mother's estate.

Issue for Court. The issue was whether the funds in Sarah's bank account represented by the six checks, which were outstanding at the time of her death, were includible in her gross estate. Mark argued that the amount in question constituted nontaxable completed gifts and should be excluded from his mother's gross estate. IRS, however, argued that the checks didn't represent completed nontaxable gifts and that the value of the underlying funds had to be included in the gross estate. IRS reasoned that since the checks were not accepted or paid by the bank before Sarah's death she maintained dominion and control over the underlying funds until her death with the result that the gifts were incomplete during her lifetime. IRS also disagreed with the estate's argument that the payment of the checks by the bank after Sarah's death relates back to the date on the checks.

Gifts weren't complete. The Tax Court said that a gift is not complete until the donor has parted with dominion and control so as to leave her with no power to change its disposition. Under the law in effect in the District of Columbia in '92, a check generally was considered conditional payment and did not of itself operate as an assignment of any funds in the hands of the drawee available for its payment, and the drawee was not liable on the instrument until he accepted.

The Tax Court pointed out that it interpreted an identical provision involving Maryland law in Est of Metzger, 100 TC 204 (1993), affd 38 F.3d 118 (4th Cir. 1994). In that case, the Court stated that because the donor could revoke the gift by stopping payment on the check or withdrawing the funds before the drawee's acceptance of the check, if a check is intended as a gift and is delivered to the donee, the gift remains incomplete until the donee presents the check for payment and the check is accepted by the drawee.

The estate didn't argue that the DC provision was different from the Maryland statute. Rather, it argued that, because of her condition, Sarah was essentially unable to stop payment on the checks.

The Tax Court rejected this argument for two reasons: (1) There was no evidence that Sarah had absolutely no access to a telephone, which she could have used to call the bank to stop payment; and (2) Mark's name was on the account and he could have ordered the bank to stop payment at his mother's request. Thus, Sarah possessed the power to revoke the checks until accepted or paid by the bank. Because the bank did not accept or pay the checks until after her death, they were not completed gifts under D.C. law.

No relation-back. The estate also argued that, under the relation-back doctrine, the payment of checks by the drawee relates back to the date the checks were issued. The Tax Court acknowledged that it applied the relation-back doctrine under certain circumstances mostly involving charitable donees but also in Est of Metzger. However, in that case, the checks were issued to noncharitable donees in Dec. '85. The donees deposited the checks on Dec. 31, 85; however, they didn't clear the drawee until after the New Year holiday in '86. A critical difference was that the donor was still alive when the checks were paid by the drawee. In addition, the checks were deposited before the end of the year and cleared the drawee bank immediately after the New Year holiday. Metzger held that if a check is delivered to a noncharitable donee, completion of the gift relates back to the date the check was deposited by the donee, provided the check is paid by the drawee bank while the donor is alive and (1) the donor intended to make a gift; (2) delivery of the check was unconditional; and (3) the donee presented the check for payment in the year for which completed gift tax treatment is sought and within a reasonable time of issue.

IRS has since announced its agreement with Metzger in Rev Rul 96-56, 1996-2 CB 161. Under this ruling, the delivery of a check to a noncharitable donee will be complete for transfer tax purposes on the date on which the donor has so parted with "dominion and control" under local law as to leave in the donor no power to change its disposition, or the date on which the donee deposits the check (or cashes the check against available funds of the donee) or presents the check for payment, if it is established that:

(1) the check was paid by the drawee bank when first presented to the drawee bank for payment;

(2) the donor was alive when the check was paid by the drawee bank;

(3) the donor intended to make a gift;

(4) delivery of the check by the donor was unconditional; and

(5) the check was deposited, cashed, or presented in the calendar year for which completed gift tax treatment is sought and within a reasonable time of issuance.

In the current case, Sarah was not alive at the time the checks were presented and paid by the drawee. The Tax Court held that the relation-back doctrine does not apply to checks representing noncharitable gifts that were accepted and paid by the drawee after the donor's death. Accordingly, the checks were not completed gifts during Sarah's lifetime, and the value of the underlying funds is includable in her gross estate.

recommendation: Individuals should make annual exclusion gifts as early in the year as possible. If this hasn't been done and an individual (or a holder of a power of attorney on the individual's behalf) makes deathbed gifts in an effort to save estate tax, certified checks should be used if death is imminent. If regular checks are used, the donees should be instructed to present them for payment immediately.