The Internal Revenue Code imposes a tax on the transfer of the taxable estate of each decedent who is a citizen or resident of the United States. A taxable estate of a decedent does not include a lifetime gift made by the decedent to a donee during any calendar year in which the total gifting does not exceed the then-applicable annual exclusion amount (the 2010 annual exclusion is $13,000). In an effort to reduce their estate tax liability at death, some taxpayers make annual gifts equal to the then-applicable exclusion amount each year to one or more donees.
Commonly, the annual exclusion gift takes the form of a check payable to the donee. Furthermore, these checks commonly are given to the donee(s) around the December holiday season. In what year is the gift considered made if a donor writes a $13,000 check to a donee on December 25, 2010, presents the check to her bank on December 27, 2010, but the check does not clear the bank until January 2, 2011?
For a gift to be complete, the donor must relinquish so much dominion and control so that payment of the gift is not considered conditional. Pennsylvania law provides that a check does not operate as an assignment of funds until the drawee accepts it. While Pennsylvania has not addressed this issue, other states have determined that gift by check is incomplete until the drawee bank accepts the check. This means the December 25, 2010 check is not a gift until January 2, 2011.
However, a Revenue Ruling issued by the Internal Revenue Service followed the Estate of Albert F. Metzger and applied the doctrine of relation back to a fact pattern similar to the one hypothesized herein. This doctrine states that if a check ultimately is accepted by the drawee bank, the check is treated as accepted the date it is presented to the bank by the donee. In the hypothetical, despite the fact the check is not accepted until January 2, 2011, the gift is treated as being made on December 27, 2010.
So what does this mean for you the donor? If you are gifting money via check to take advantage of an annual exclusion gift, the donee must present that check to the bank for deposit by December 31 of the current calendar year. If you’re the donee, get to your bank as soon as possible to avoid agitating the hand that’s feeding you.
*Contributions to this article made by Melanie M. LaSota
Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.
1. I.R.C. §2001.
2. I.R.C. §2035(b).
3. § 25.2511-2(b), Gift Tax Regs.
4. 13 Pa.C.S. §3408.
5. Estate of Albert F. Metzger, 100 T.C. 201 (1993).
6. Id.; Rev. Rul. 96-56, 1996-2 CB 161.