The third circuit ruled in the Estate of DeMuth v. Commissioner that any uncashed checks in his investment account at the time of his death are not completed gifts and thus would be part of his estate.
His son had a power of attorney and wrote 11 checks totaling $464,000 to his family members. Some checks were hand delivered versus others being mailed.
However, 10 of the checks were not cashed until after September 11, 2015, the date of this death. The estate filed an estate tax return without including these checks. The IRS audited the return and indicated that seven of the checks not cashed were part of the estate and issued a $131,774 deficiency. The estate appealed to the Tax Court.
The Tax Court ruled in 2022 that the uncashed checks were part of the estate and thus agreed with the IRS. The estate appealed to the Third Circuit and lost the appeal.
We find that many farmers write checks to their children at year-end for up to the annual gift exclusion amount (currently $17,000). If the check is not cashed before year-end, the gift is not complete until the following year.
This can result in a doubling up of the gifts and a gift tax return being required. There will be no gift tax owed, but it will reduce your lifetime exemption.
Example - Bill and Sue have four children. They each write a check for $17,000 to each child and give it to them at Christmas. Three of their children cash the check in the current year, but one does not. The next year, Bill and Sue do the same and all of the kids cash the check in that year. This results in Bill and Sue each having a $17,000 reduction in their lifetime exemption.
If you are making large gifts at year-end, make sure to tell your kids to cash the check before the end of the year (and not on December 31).
